A FedEx employee delivers a delivery on September 16, 2022 in Miami Beach, Florida.
Joe Raedle | beautiful pictures
FedEx warned of weakening global shipping demand in last week’s preliminary earnings report, leaving the market scrambling to determine if the problem reflects the company’s internal shortcomings or a broader economic diagnosis. .
CEO Raj Subramaniam pointed to external factors after the shipping giant ignored Wall Street earnings and revenue estimates, saying CNBC’s Jim Cramer on “Mad Money” that the company is “a reflection of everyone else’s business” and that he expects a “worldwide recession”. But some analysts note the relative stability of rivals UPS and DHL, and said FedEx’s failure to adapt also contributed to its operations.
“This is the second year in a row that FedEx has missed its own guidance for its fiscal first quarter, and I think that has created a bit of a disappointment for investors,” said Moody’s analyst Jonathan Kanarek. invest”.
Kanarek was one of the analysts who noted a combination of factors – internal and external – that could have played a role in FedEx’s disappointing results.
Facing reality
Some pundits see the FedEx operation as an overdue confrontation with the emerging market reality Covid pandemicwhich the company had not previously acknowledged.
At its investor day in June, FedEx gave its 2025 growth outlook thanks to 4% to 6% annual revenue growth and 14% to 19% growth in earnings per share.
“Raj came out with a big show in June, their first analyst day in two years, and talked about a pretty upbeat environment. Yet here we are three months later,” said Ken Hoexter , an analyst at Bank of America, told CNBC.
“They don’t expect, nor do they believe in, a recession,” Hoexter said.
Since the investor-day period, Subramaniam last week said FedEx has seen a weekly decline in shipping volumes. That’s why the company withdrew its 2023 forecast and announced it would close offices and aircraft parking to cut costs. Its shares fell more than 21%, wiping nearly $11 billion off its market capitalization the day after the report.
However, FedEx still lived up to its expectations in 2025, a move Research Advisor Gordon Haskett calls “the boundary illusion”. They say that FedEx’s competitors are taking a more pragmatic approach to ending a surge in demand during the pandemic.
While FedEx reported falling European demand amid the ailing last week, UPS has been gaining market share in the region. In its most recent earnings report, UPS boasted its highest quarterly consolidated operating profit margin in nearly 15 years, citing agility amid a difficult macroeconomic backdrop.
Kevin Simpson of Capital Wealth said: “UPS is two to three years ahead of FedEx in terms of how they view post-Covid margins.” on “Closing Bells: Overtime.” “It doesn’t seem like FedEx thinks the environment will return to normal.”
As part of a cost-cutting effort, FedEx said it would reduce some ground operations and delay hiring. Meanwhile, UPS will hire more than 100,000 seasonal workers for the holiday season.
A bell?
Analysts note that FedEx’s ground and express delivery is however vulnerable to global economic conditions, and the disappointing performance of these categories may reflect a recessionary environment.
“We haven’t really seen evidence of a widespread slowdown yet. But clearly FedEx is a general company and we don’t want to refute what they’re saying,” said Moody’s Kanarek.
Bank of America’s Hoexter sees the performance of its express category, which was $500 million below FedEx expectations, as the first indicator of a broad-based downturn. He said the small drop in volume had a significant impact on margins because air freight costs too much to maintain.
“When consumers stop making purchases, stores start to see shelves fill up, you stop replenishing that inventory,” says Hoexter.
As Bank of America Global Research reports, Hoexter’s biweekly truckload survey reported 11 consecutive periods of being in a “recession range”. It happened when FedEx reported lower-than-expected business to top customers Target and Walmartyes both struggle with excess inventory in recent months.
FedEx reported strong shipping margins, but Hoexter noted that the category “has more production weight, which doesn’t feel as heavy.” If demand continues to slow and manufacturers require less production, Hoexter said FedEx could start to see less cargo volume.
Holiday season
Regardless of the factors that led to FedEx’s troubles, the upcoming holiday season is unlikely to bring any relief. In a statement, FedEx said the cost-cutting actions it announced last week are not expected to affect service. “We are confident in our ability to deliver this holiday season,” the company said.
But retailers are expecting holiday sales to be muted. And fearing last year’s delays, many had items shipped early. The Port of Los Angeles said 70% of holiday cargo had arrived at the port by the end of August.
The inventory shortages that have plagued retailers in recent months may well persist, resulting in lighter shipping volumes and further denting FedEx’s business. A survey by KPMG found that 56% of retail executives expect to leave behind excess merchandise after the holiday season.
S&P’s Geoff Wilson noted that FedEx has some cushion if problems persist. The company is running a lot of cash — nearly $7 billion as of May 31 — as opposed to the roughly $3 to $4 billion it typically had before the pandemic. He also noted that the company has reconfirmed its plan to buy back shares of about $1.5 billion
“This is the best signal management that can bring lasting power at FedEx,” says Wilson.
