News / FedEx profits tumble in 'a year of both challenge and change'

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FedEx today reported a weak set of results: fourth-quarter losses of $1.97bn, against a reported profit of $1.13bn a year earlier.

And full-year reported net profits for its 2019 fiscal year fell 88% to $540m. 

Profits tumbled due to a large $3.8bn one-off related to “retirement plans mark-to-market” adjustments; on a non-GAAP basis they were flattish, while operating cash flows were up by almost $1bn to $5.6bn, against mildly falling capital expenditures (at $5.5bn for the year).

Fourth quarter revenue rose 3% to $17.81bn, which met analysts’ forecasts. For the full year, revenues rose from $65.5bn to a record $69.7bn. 

It was a year of both challenge and change, said founder and president Fred Smith in an earnings call.  

“We faced weakening international revenue growth, driven by the slowdown in global trade, less favourable service mix of TNT Express business after the NotPetya cyber attack and continued rapid growth of e-commerce demand.” 

FedEx Express saw less revenue from international priority packages and operating income slide by 12% on a 1% dip in sales.

FedEx Ground, meanwhile, saw costs rise as it moved to a six-days-a-week operation, to be extended to seven next year. Ground’s income was flat, despite revenue up 11%. 

Chief financial officer Alan Graf said: “FedEx Freight closed the year with another strong quarter; despite weakening industrial production, revenue per shipment increased 4%, operating income increased 15% and operating margin improved to 9.9%.” 

The company added: “During fiscal year 2020 (FY), operating income at FedEx Ground and FedEx Freight is expected to increase due to higher revenues. At FedEx Express, macroeconomic weakness and trade uncertainty, continued mix shift to lower-yielding services and a strategic decision to not renew a customer contract will negatively impact operating income.” 

This no doubt refers to its US domestic business for Amazon, which would be “a near-term headwind, which we expect to reverse to a positive in FY 2021, as we replace the lost volume and optimise the network”. 

FedEx has a desire to be the “low-cost last-mile provider in the industry”, and was redoubling its efforts in e-commerce, it said. 

Mr Smith added: “We intend to substantially grow our e-commerce business and are well aware improved profitability in this market requires greater efficiency in delivering residential packages, and we have sound initiatives to steadily improve our cost to serve this market.  

“To these ends, for example, we recently announced in-sourcing two million SmartPost packages and an agreement with Dollar General for over 8,000 pick-up and delivery onsite locations in sparsely populated rural areas. Over FY 2020, we will announce several additional initiatives in this regard.” 

The group looks to be replacing Amazon with initiatives to deliver for traditional retailers, such as Walmart, Target and now Dollar General. 

Once the Dollar General rollout is complete, the number of retail locations providing staffed FedEx shipping will grow to over 27,000, said Brie Carere, chief marketing officer. 

Analysts also queried the continuing costs and lack of integration of TNT, with one noting that the cost had gone up to $1.7bn. 

Mr Graf said the initial forecast cost was $400m, but added: “That’s an old number that’s never been updated. But it continues to be a problem for us in terms of integration, as we have to basically rebuild a system TNT had and then integrate it with the network we’ve got on the Purple side. And it’s cost us a lot more money and slowed it down. And it’s made it more complex. 

“The good news on that side is that the interoperability will be done by the end of the fiscal year. And that’s when we can start really harvesting the benefits of that low–cost road network and flow to express packages through it seamlessly, without all kinds of double handling, double packaging and everything else.” 

The company also revealed that 1,500 FedEx employees will have left the company via the US employee buyout programme by the end of FY 2020. Approximately 85% left on May 31 this year. 

“We incurred costs of $316m during the fourth quarter, associated with our business realignment activities,” said Mr Graf. “These costs related primarily to severance for employees who accepted voluntary buyouts. Business realignment activities, including the voluntary employee buyout are expected to benefit FY 2020 by approximately $240m. By eliminating open positions, we expect to achieve our savings goal using less severance than we originally forecasted.” 

Mr Smith said steps for this year included “enhancing FedEx Ground capabilities, speed and efficiency; improving FedEx Express hub automation, particularly in Memphis and Indianapolis; finishing the integration of TNT; modernising our aircraft fleet; and reducing unit cost and increasing productivity, especially for e-commerce deliveries.” 

You can see the full results here, while expert analysis on the figures will be available here on Friday.