FedEx Hit by Trade Tensions and Split With Amazon
Date: Wednesday, September 18, 2019
Source: The Wall Street Journal
Delivery giant says global economic uncertainty and split with Amazon cut into profit at its struggling Express division
FedEx Corp. FDX -0.36% sharply cut its profit forecast for the year as it faces higher costs to expand services, lower revenue from cutting ties with Amazon.com Inc. AMZN +0.69% and a worsening economic backdrop, sending shares of the delivery company plummeting 10% in after-hours trading.
The Memphis, Tenn., company expects per-share earnings to fall between 16% and 29% in the current fiscal year, compared with an expectation of a mid-single-digit percentage decline issued in June. FedEx also lowered its revenue outlook.
The profit warning comes after the company posted an 11% drop in fiscal first-quarter profit driven by weakness in its Express unit, which delivers packages by jets and is being hampered by global trade disruption.
Meanwhile, FedEx’s Ground unit, where revenue is growing largely due to carrying more e-commerce packages, is spending heavily on additional transportation costs and equipment rentals to keep up with that demand.
The company said it is taking more cost-cutting steps to try to offset the weaker environment, including retiring planes and grounding others after the holiday shopping season.
“The global macro economy continues to soften, and we are taking steps to reduce capacity,” FedEx Chief Executive Frederick Smith said on Tuesday’s earnings call.
One of the challenges to FedEx’s business is the lack of a trade deal with China, which has reduced the movement of goods internationally. Mr. Smith said the company initially expected a trade resolution as it entered its current fiscal year. “We were hopeful of a trade deal and some sort of return to normalcy and that has not taken place,” he said.
For the first quarter ended Aug. 31, FedEx reported a profit of $745 million, or $2.84 a share, compared with $835 million, or $3.10 a share, a year earlier. Excluding expenses related to its integration of TNT Express, per-share earnings were $3.05.
Revenue declined slightly to $17.05 billion.
Analysts polled by FactSet expected earnings of $3.15 a share and $17.06 billion in revenue.
Earnings for the fiscal year ending in May are expected to be between $11 and $13 a share before mark-to-market accounting adjustments and integration expenses.
Last year, FedEx posted adjusted earnings of $15.52 a share.
The weaker outlook comes as shippers and carriers gear up for the holiday shopping season, when planning and upgrades will be put to the test as the number of packages surges.
It also comes as FedEx is in the midst of major reshuffling in the delivery marketplace as demand rises for e-commerce shipments.
It will soon start delivering packages seven days a week throughout the entire year instead of just during the holidays and will bring into its own network nearly all of the two million packages it once handed off to the U.S. Postal Service for delivery to doorsteps. Those added costs are weighing on FedEx’s bottom line.
FedEx will also be trying to expand its e-commerce business without delivering packages for the largest online player in the U.S., Amazon.com. FedEx in recent months ended its two major shipping contracts with Amazon, forgoing about $900 million in annual revenue. Instead, FedEx is aligning itself with retailers like Walmart Inc. and Target Corp. , as well as other online businesses that compete with Amazon. FedEx recently signed on Dick’s Sporting Goods Inc. as a customer, for instance, to deliver the retailer’s online orders.
FedEx is continuing to raise prices to offset the higher costs associated with all of the online orders to homes. Next year, it plans to raise rates an average of 4.9% on packages sent through its Express and Ground networks, while imposing a 5.9% rate increase on Freight shipments.
Despite the weakness in the Express division, FedEx continues spending heavily to modernize its air fleet and some processing facilities.