Fedex warns of economic uncertainty that will slash freight demand

Fedex Express. Photo: LukeSharrett/BloombergNews/Phaata

Shares of FedEx Corp. fell more than 5% in after-hours trading Thursday after the company cut its full-year profit forecast for the third straight time due to growing macroeconomic pressures and uncertainty in the U.S. industrial economy. These factors are weighing on its high-margin business-to-business services.

FedEx (NYSE: FDX) forecasts revenue to be flat or slightly down from the previous year, a change from its previous forecast of flat revenue. Earnings per share (EPS), excluding certain costs, are expected to be between $18 and $18.60, down from the previous forecast of $19 to $20.

A key uncertainty that could weigh on FedEx's earnings is the rapid escalation of tariffs and tariff threats from the United States, which have led to the risk of retaliation and concerns that consumer demand will decline due to higher prices.

Fiscal Q3 Financial Performance

In the third fiscal quarter ended February 28, FedEx reported revenue of $22.2 billion, up 1.9% year over year, and recorded adjusted operating income of $1.5 billion, up 11% year over year. This was despite a compressed shipping season and the impact of extreme weather events such as wildfires and snowstorms in North America.

It was also the first time FedEx has seen revenue increase since the new fiscal year began in June.

Although adjusted earnings per share were 12 cents below Wall Street's average estimate, they were up 17% from the year-ago period. Revenue, meanwhile, beat forecasts by $320 million.

Three factors driving earnings

FedEx said the earnings improvement was driven by three key factors:

1. Efficiency from its Drive transformation program, which cut $4 billion in fixed costs, including $2.2 billion in the current fiscal year, and improved customer service.

2. Higher shipping rates across its transportation segments.

3. Volume growth at FedEx Express.

Driving $600 million in savings in the quarter alone.

Business Unit Performance

• FedEx Express, which is integrating with FedEx Ground, reported a 17% increase in adjusted operating income to $1.4 billion, despite the loss of the domestic air freight contract with the United States Postal Service (USPS). Express also achieved growth in domestic and international export volumes, driving revenue up 2.7% to $19.2 billion.

• FedEx Freight, which is being spun off as a separate LTL (less-than-truckload) transportation company, was pressured by lower fuel surcharges, lower freight weights per trip and fewer trips. Operating income fell 23% to $261 million.

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Source: Phaata.com (According to Freightwaves)

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