FedEx to close stores, put off hiring as
demand slumps
FedEx said Thursday it is shuttering storefronts and corporate offices while putting off new hires in a belt-tightening drive brought on by drop-off in its global package delivery business.
The company based in Memphis, Tennessee, warned it will likely miss Wall Street’s profit target for its fiscal first quarter that ended Aug. 31. And it said it expects business conditions to further weaken in the current quarter amid weaker global volume.
Its stock fell more than 16% in after-hours trading following the announcement.
“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.,” FedEx CEO Raj Subramaniam said in a statement. “We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first-quarter results are below our expectations.”
The company’s FedEx Express business was particularly hurt by challenges in Europe and weaker economic trends in Asia, which led to a roughly $500 million revenue shortfall for the segment. FedEx Ground revenue, meanwhile, came in about $300 million below the company’s forecasts.
High operating expenses were also a drag on the company’s results, FedEx said.
In response, it said it will cut costs by closing over 90 FedEx Office locations and five corporate offices, deferring new hires and operating fewer flights.
The company scrapped its forecast for its earnings in its current fiscal year that it had issued less than three months ago.
For the three months ended Aug. 31, FedEx now projects adjusted earnings per share of $3.44 and $23.2 billion in revenue. That’s below analysts’ consensus forecast of $5.14 adjusted earnings per share and $23.6 billion in revenue, according to FactSet.
Subramaniam noted that he remains confident FedEx will achieve its fiscal year 2025 financial targets.
For the current quarter, which ends in November, FedEx expects revenue to range between $23.5 billion and $24 billion, and adjusted earnings per share of at least $2.75. Wall Street analysts had expected adjusted earnings per share of $5.48 and $24.86 billion in revenue, according to FactSet.
The company still plans to buy back $1.5 billion of its common stock in fiscal 2023. It expects to buy back $1 billion of its common stock during the second quarter.
FedEx earnings miss 'the weakest set of results' Deutsche Bank has seen in 20 years
FedEx (FDX) gave investors a stark announcement on how business conditions continue to weaken on Thursday, withdrawing its full-year guidance while CEO Raj Subramaniam warned that global volumes “significantly worsened” and are likely to decline even further.
Wall Street noticed: FedEx stock fell more than 21% on Friday following the pre-earnings announcement. Shares are now down more than 37% year to date.
"FedEx preannounced the weakest set of results we've seen relative to expectations in our ~20 years of analyzing companies," Deutsche Bank analysts wrote in a note to clients.
In a statement, the logistics company said it now expects fiscal first-quarter earnings, excluding some items, to come in at $3.44 per share, 30% below the $5.10 consensus estimate compiled by Bloomberg. The company announced it will cut flights, trim labor hours, and cancel network capacity projects to cushion the expected blow of reduced demand for the next several quarters.
The company's air cargo market has shifted as inflationary pressures, elevated inventory levels in the U.S., the war in Ukraine, and COVID-19 lockdowns in China present ongoing challenges for the market. Air cargo volumes in August fell 5% year-over-year, according to a news release from Clive Data Services last week.
“Based on FedEx's pre-announcement, the biggest hit to margin came in their air express unit, not the ground unit," equity research analyst Jordan Alliger said on the Goldman Sachs "Making Logic of Logistics" webinar on Friday, adding: "That would imply that there could be some downshift — not necessarily absolute drops — in demand, maybe in total."
For FedEx Express, the company’s time-definite delivery segment that uses cargo aircraft, revenue came in $500 million short of its revenue target.
"The company did say that revenue in this segment was $500 million short vs. its forecast; but the decremental margins associated with this should not be 100%," Deutsche Bank added. "This implies a concerning inability to respond with cost mitigation, which we believe is more indicative of operating execution than macro forces. And this is not the first time we've observed weak execution from FedEx, but the magnitude of the numbers in today's release was simply staggering. We simply can't explain it, even after our discussions with the company this evening."
Morgan Stanley research analyst Ravi Shanker said he was expecting a miss but "not of this magnitude." He added that the miss appears to be revenue driven and that this is not likely to be transitory. Although many of FedEx's issues are specific to the company, Shanker believes this is the start of the post-pandemic unwind and cost pressures will add another leg to the risk.
"We believe a discount is merited given the decelerating core and fuel pricing support in Ground and Express, in addition to increasing risks of a recession," JPMorgan’s Brian Ossenbeck wrote in a note. "The stock could trade at a higher multiple if management can deliver on the FY25 financial targets outlined in the 2022 Investor Day although the suspension of FY23 guidance is a step in the wrong direction."
Ossenbeck downgraded shares to Neutral.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
FedEx’s warning is a ‘black mark’
on CEO Raj Subramaniam, strategist says
Argus Director of Portfolio Strategy John Eade joins Yahoo Finance Live to discuss FedEx's dire profit warning and how it affects the CEO's reputation as chief executive.
Video Transcript
BRIAN SOZZI: All right, let's continue to follow this fallout over at FedEx. And let's bring in John Eade over at Argus. John, good to see you. As always, look, this has been this is a disaster quarter. Disaster pre-announcement from FedEx. Total reset of guidance. What should investors be doing here?
JOHN EADE: Well, yeah, Brian, it hurts on the guidance, for sure. But this is also a black mark on the brand new CEO, right? He came on a quarter or so ago replacing the legendary Fred Smith. There was an activist investor, you know, rattling sabers. So the company is gonna be focused more on shareholder returns, less on capital expenditures.
They did a big boost to the dividend. They announced a big share buyback, changes to the board, changes to the compensation policies. All of that really excited investors. And now, here we are a quarter later and it's the Asian economy, its troubles in Europe, it's missing expectations. So it's really the same old, same old for FedEx. And I think that's a big part of the disappointment this morning.
BRAD SMITH: What should some of the customers and business partners expect as FedEx is announcing some of these cost initiatives? You know, is that going to be factored into the prices that customers, and those business partners I was mentioning, are paying? Because that would lead to me, if I'm seeing a reduction in flight frequencies, temporarily parking aircraft, things of that nature that are going to help FedEx, that's also going to be at the detriment to me, the consumer, at the end of the day, too.
JOHN EADE: Absolutely, Brad. If you look at even last quarter, their revenue was up 8% year-over-year. That sounds great. But volume was down 11%. So they're only getting that on higher prices. And now, I think they've said in the announcement this morning that volume trends had weakened at the end of this latest quarter and remain weak going into the current quarter.
So if they're gonna have any growth at all, it's gonna be on higher prices. And as they focus also on that bottom line and cut back on some of the service levels and the capital expenditures, customers are gonna be paying more and maybe getting a little bit less high quality service for the next couple of quarters. That's a tough message.
JULIE HYMAN: John, it may be a tough message. Maybe also still having a buy rating on this is a tough message? I don't know. I mean, you know, you guys are still overweight on this stock, right? You still have a buy on this stock. Are you optimistic that tough message is gonna be accepted by FedEx clients.
JOHN EADE: Well, yeah, good point. And we still do have a buy on it. You know, the news came out last night. We'll be reviewing everything for sure.
But one message that also came out from the company, and this is that they set these five-year goals in June with the new CEO. Five year goals of high teens compound annual earnings growth, 20% shareholder returns every year. And the company said, it remains committed to those goals.
It also is focusing on less capital expenditures. And it's gonna be accelerating its share buybacks. So they didn't make any change to their strategic goals. And if they're gonna be able to hit them, you know, you've got a very low share price to be buying into that program right now. So those are some of the things we're going to be thinking about, you know, as we review our estimates and rating.
BRIAN SOZZI: John, I think a lot of investors right now in our platform are reading the FedEx news as bad for UPS. Is that a fair comparison? Or should these two companies not be put in the same boat anymore because FedEx is not operating that well and maybe UPS is doing a little bit better?
JOHN EADE: I would say UPS is doing a little bit better. And I'd give a lot of credit to the new CEO at UPS, Carol Tomé, who came over from Home Depot and has focused on margins, has focused on the dividends, has focused on the employees and the service level. UPS is-- you know, they're probably gonna come in at the low end of their range, right? It's hard to buck these global volume problems.
But I do think UPS is in a better situation right now, operationally, than FedEx. Although, the FedEx stock might be a better value here, certainly based on the price action this morning.
BRIAN SOZZI: John Eade, Director of Portfolio Strategy at Argus, always good to see you. Have a great weekend.
JOHN EADE: Thank you.
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