Express Weakness Pushes FedEx Shares Lower

FedEx (NYSE:FDX) reported results for the second quarter that failed to meet the average analyst estimate, promoting shares to fall as much as 10% in early Wednesday trade. The miss was driven solely due to soft results in the Express segment.

The management blamed this weakness on negative volume growth and shift to lower yielding products, which more than offset productivity gains from the Drive initiative. FedEx shares were up nearly 62% year-to-date heading into results.

Still, the second quarter also saw improved income and margins for the company. Consolidated operating income increased by 9%, and adjusted operating income rose by 17%. The management attributed these improvements to the implementation of the DRIVE program and a continued emphasis on service and revenue quality.

How Did FedEx Perform in FQ2

FedEx reported revenue for the quarter of $22.2 billion, which marks a decline from the $22.8 billion reported for the same time last year. Analysts were looking for $22.41 billion. The adjusted operating income came in at $1.42 billion, also below the expected $1.49 billion. As a result, the adjusted operating margin missed analyst expectations by 20 basis points.

The Drive program continues to improve profits at FedEx with net income rising to $1.01 billion, nearly $200 million higher when compared to F2Q23. Still, the adjusted EPS was reported at $3.99, widely missing the consensus of $4.20.

“FedEx has delivered an unprecedented two consecutive quarters of operating income growth and margin expansion even with lower revenue, clear evidence of the progress we are making on our transformation as we navigate an uncertain demand environment,” said Raj Subramaniam, FedEx Corp. president and chief executive officer.

On the guidance front, FedEx expects a low-single-digit percentage decline in revenue year-over-year, worse than the previously expected flat revenue growth. It continues to see $1.8 billion in permanent cost cuts from the Drive program.

Earnings per share are seen between $17.00 and $18.50 for the full year, with the midpoint coming in below the consensus of $18.25.

“With demand continuing to pressure the top-line, we are pleased with our ability to deliver stronger operating leverage and improved profitability, enabling us to maintain our fiscal year adjusted earnings outlook,” said John Dietrich, FedEx Corp. executive vice president and chief financial officer.

FedEx said it completed a $500 million accelerated share repurchase plan during the quarter, which benefited second quarter results by $0.05 per diluted share. The company said it expects to buy-back additional $1 billion of its common stock during the fiscal year of 2024. FedEx ended the quarter with cash reserves of $6.7 billion.

Breaking Down FQ2 Disappointment

Looking at the segment level, FedEx Ground experienced a growth in operating income, primarily attributed to improvements in yield, cost reductions, and increased volumes. The cost per package decreased by 2%, influenced by lower line-haul expenses and enhanced productivity in first- and last-mile operations.

FedEx Freight also saw an increase in operating income despite a drop in revenue. This rise in profitability was propelled by higher yield and improved efficiency, FedEx said. These positives were offset by weakness in FedEx Express, which faced a decline in operating income, primarily due to lower revenue.

This decrease in revenue was driven by volume declines, reduced fuel surcharges, lower demand surcharges, and a shift in service mix towards lower-yielding options. The overall impact on operating income was partially offset by reduced operating expenses during the period. The management also blamed this weakness on weak industrial production around the world.

Speaking on the earnings call, FedEx’s management outlined a new restructuring plan for its air network known as the “Tricolor” network design. This strategy aims to enhance asset utilization by optimizing the existing purple-tailed fleet for the fastest express service (Purple).

It involves creating an off-cycle deferred flight network (Orange) to alleviate congestion in hubs and directing freight into Ground and Freight networks. The company also plans to leverage its partner network for flexible capacity (White). The shift from a ‘fly fly fly’ network to a ‘truck fly truck’ model opens up new markets for palletized freight in Freight, expanding beyond the Express network.

Overall, the management anticipates Express margin contraction in FY2024, possibly influenced by a cautious macroeconomic outlook. The Tricolor network design is factored into the company’s full-year outlook.

“We are approaching this network transformation in a deliberately measured manner to ensure we continue to provide our customers with the best service levels in the industry. Simultaneously, as you know, we are executing Network 2.0. Taken together, these efforts will improve our ability to protect profitability and returns through various market environments,” Subramaniam said on the call.

Summary

FedEx shares dropped nearly 10% in early Wednesday trade after the parcel company’s fiscal second-quarter results missed the average analyst estimate. The mid-point of its full-year earnings outlook also lagged expectations while FedEx revised its full-year revenue guidance to the downside. Soft numbers were blamed on the apparent weakness in the FedEx Express segment, which more than offset positives observed in other parts of the company.