A FedEx worker makes a delivery on September 16, 2022 in Miami Beach, Florida.
Joe Raedle | fake images
FedEx warned of weakening global shipping demand in a preliminary earnings report last week, leaving the market struggling to determine whether the problems reflect internal company deficiencies or a broader economic diagnosis.
CEO Raj Subramaniam pointed to external factors after the shipping giant failed to miss Wall Street earnings and revenue estimates, saying CNBC’s Jim Cramer on “Mad Money” that the company is a “mirror of everyone else’s business” and that he expects a “global recession”. But some analysts note the relative stability of rivals. UPS and DHL, saying FedEx’s lack of adaptation also contributed to its performance.
“This is the second year in a row now that FedEx has failed its own guidance for its fiscal first quarter, and I think that creates a bit of frustration among investors,” said Moody’s analyst Jonathan Kanarek.
Kanarek was among the analysts who noted the combination of factors, internal and external, that likely played a role in FedEx’s disappointing results.
Some experts view FedEx’s performance as a belated confrontation with market realities arising from the covid pandemicthat the company did not previously acknowledge.
At its investor day in June, FedEx set a bullish outlook for 2025 fueled by 4%-6% annual revenue growth and 14%-19% earnings per share growth.
“Raj came out with a big show in June, his first day as an analyst in two years, and he talked about a pretty bullish environment. Yet here we are three months later,” said Bank of America analyst Ken Hoexter. CNBC.
“They did not expect, nor had they built in, an economic downturn,” Hoexter said.
Since the time of investor day, Subramaniam said last week that FedEx has seen weekly declines in shipping volumes. That’s why the company withdrew its 2023 forecast and announced it would close offices and park planes to cut costs. Its shares fell more than 21%, wiping nearly $11 billion from its market capitalization the day after the report.
Still, FedEx met its expectations for 2025, a move Gordon Haskett’s research advisers called “borderline delusional.” FedEx’s competitors, they say, are taking a more realistic approach to the end of the pandemic-era surge in demand.
While FedEx reported weak European demand among its ailments last week, UPS gained market share in the region. In its most recent earnings call, UPS boasted its highest quarterly consolidated operating margin in nearly 15 years, citing agility amid difficult macroeconomic conditions.
“UPS is two to three years ahead of FedEx in terms of how they view post-Covid margins,” said Kevin Simpson of Capital Wealth. over the closing bell: overtime. “It’s almost as if FedEx didn’t think the environment would ever go back to normal.”
As part of its cost-cutting efforts, FedEx said it will scale back some ground operations and postpone hiring. Meanwhile, UPS will hire more than 100,000 seasonal employees for the holiday period.
Analysts note that FedEx ground and express deliveries are, however, vulnerable to global economic conditions, and the disappointing performance of the categories could reflect a recessionary environment.
“We haven’t really seen evidence of a broad-based slowdown. But obviously FedEx is a benchmark and we don’t want to discount what they’re saying,” Moody’s Kanarek said.
Bank of America’s Hoexter sees the performance of the express category, which came in $500 million below FedEx’s own expectations, as the first indicator of a broader recession. He said small declines in volume significantly impact margins because air delivery costs a lot to maintain.
The ground service, which was $300 million below the company’s forecasts, is the next to feel a slowdown: “When the consumer stops shopping, stores start seeing full shelves, you stop replenishing those inventories,” he said. Hoexter.
Hoexter’s biweekly survey of truckers has reported 11 consecutive periods in “recession range,” according to Bank of America’s Global Research report. That happens when FedEx reports lower-than-expected business with major customers. Goal Y walmartwhich has they both struggled with excessive inventory In recent months.
FedEx reported strong freight margins, but Hoexter noted that the category is “heavier in manufacturing, which hasn’t been affected as much.” If demand continues to slow and manufacturers require less production, Hoexter said FedEx could start to see cargo volumes shrink as well.
Regardless of the factors causing FedEx’s troubles, the upcoming holiday season likely won’t 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 expect low Christmas sales. And fearing last year’s delays, many shipped items early. The Port of Los Angeles said that 70% of the Christmas products had already reached the shores by the end of August.
The inventory gluts that have plagued retailers in recent months may also persist, leading to lighter shipping volumes and further hurting FedEx’s business. A KPMG survey found that 56% of retail executives expect to be left with excess merchandise after the holidays.
FedEx has some protection if problems persist, says S&P’s Geoff Wilson. The company is sitting on a huge amount of cash, nearly $7 billion as of May 31, compared to the roughly $3 to $4 billion it normally had before the pandemic. He also noted that the company reaffirmed its about $1.5 billion share buyback plan.
“This is the best signal management can give about FedEx’s long-term strength,” Wilson said.