News / FedEx numbers and its tepid market outlook disappoint Wall Street

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The latest earnings numbers from FedEx were greeted on Wall Street with a drop in its stock value in after-hours trading, despite management holding course through the choppy waters of the quarter ended 31 May.

Over the previous two quarters, FedEx efforts to slash costs and improve operating efficiencies lifted the integrator’s stock value, but the shares dropped 3% after the results for fiscal Q4 and the full year.

Q4 revenues contracted 10.2% year on year, to $21.9bn, operating income was down 21.8% and the operating margin slipped one percentage point, to 6.9%. Net income, however, surged from $558m a year ago to $1.54bn, although on an adjusted basis it dropped from $1.8bn to $1.25bn.

Fhe full year, net profit improved 3.6% year on year, to $3.97bn, despite drops in revenues (-3.5%), operating income (-21.4%) and operating margin (-1.4 percentage points, to 5.4%).

Progress was mixed in its Express, Ground and Freight segments. FedEx Ground was the star performer, producing for the first time in the company’s history an increase in operating income (up 18%) despite a drop in volume of 6% and a 2% contraction in revenue.

The express unit continued to be buffeted by rocky market conditions, primarily in the international arena, which resulted in a 13% decline in revenue. Package volumes sank 7% and yield slipped 3%. On the other hand, the bleeding is slowing, FedEx CFO Mike Lenz reported continuing sequential improvement in operating margins in the sector.

An 18% drop in shipments brought about a 26% decrease in operating income for FedEx Freight, which management attributed to a slow market and stubbornly high inventory levels.

“Freight will see some margin pressure,” Mr Lenz predicted, adding that this should be at its worst in the first quarter of fiscal 2024, and then decrease.

The transformation of the FedEx operating structure and network is building up steam. The company has announced plans to streamline operations in 20 markets and to consolidate its Express and Ground operations, starting next April.

The cost-cutting drive will also continue full throttle in fiscal 2024. In Q4, FedEx took a $70m charge with the retirement of 18 aircraft and 34 associated aero engines, while flight hours fell 12% year on year. In the year ahead another 29 aircraft will be taken out of flight operations.

President and CEO Raj Subramaniam noted that FedEx has no firm commitments on jet aircraft capital expenditure after fiscal 2025.

For the coming year, management aims to cut $1.8bn in costs through its ‘Drive’ transformation programme, and $4bn in savings should be realised in fiscal 2025.

This is a logical strategy in light of management’s outlook for the year ahead, which anticipates tepid market conditions with pressure on revenue growth, which is expected to be flat or rise in low single digits.

“We expect external conditions to remain challenging in the near term,” Mr Subramaniam said, adding that volume declines should continue to decelerate in the Ground and Express segments.

FedEx paid out $2.7bn to stakeholders from stock repurchases and dividends over the past fiscal year and plans to repurchase another $2bn of common stock. It previously announced a 10% increase in the annual dividend rate on its shares. It expects earnings per share to be between $16.50 and $18.50.

Wall Street was not impressed, though, the ensuing drop of FedEx stock suggests.