FedEx’s warning reflects both global economy and internal shortcomings

A FedEx employee makes a delivery in Miami Beach, Fla., Sept. 16, 2022.

Joe Ladle | Getty Images

FedEx warned of weakening global transportation demand in last week’s preliminary earnings report, leaving the market to determine whether the problem reflects an internal flaw or a broader economic diagnosis. I’m in a hurry to

CEO Raj Subramaniam pointed to external factors after dropping estimates for Wall Street’s earnings and earnings, telling CNBC’s Jim Cramer on Mad Money that the company is “out of all other businesses.” However, some analysts noted the relative stability of rivals UPS and DHL, and FedEx’s own failure to adapt. also contributed to the performance.

“It’s the second year in a row that FedEx has failed to meet its own Q1 guidance, and I think there’s a bit of frustration among investors,” Moody’s analyst Jonathan Kanalek said.

Kanarek was one of the analysts who looked at the combination of internal and external factors that likely played a role in FedEx’s disappointing results.

confront reality

Some experts see FedEx’s performance as an outdated conflict with market realities stemming from the pandemic, something the company has so far denied.

At Investor Day in June, FedEx announced a bullish 2025 outlook on the back of annual revenue growth of 4% to 6% and earnings per share growth of 14% to 19%.

Bank of America analyst Ken Hexter said, “Large made a big show in June, the first Analyst Day in two years, and talked about a pretty bright environment. But three months later. Here we are. CNBC.

“They didn’t expect the recession, they didn’t factor it in,” Mr. Hoxter said.

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Subramaniam said last week that FedEx shipments have been declining every week since around Investor Day. That’s why the company has pulled back on his 2023 forecast, announcing that it will close offices and halt aircraft to cut costs. The stock price fell more than 21% for him, and he lost nearly $11 billion in market capitalization the day after the report.

Still, FedEx is backing its 2025 forecast, a move Gordon Haskett’s research adviser called “borderline delusion.” FedEx competitors are taking a more pragmatic approach to ending the surge in demand during the pandemic, they said.

FedEx last week reported weak demand in Europe, but UPS gained market share in the region. In its latest earnings call, UPS boasted its best quarterly consolidated operating margin in nearly 15 years, citing its agility amid challenging macroeconomic conditions.

“UPS is two to three years ahead of FedEx in terms of how it looks at post-coronavirus margins,” said Kevin Simpson of Capital Wealth. Closing Bell: Overtime. “FedEx didn’t seem to think the environment would return to normal.”

As part of cost cutting, FedEx said it would cut some ground operations and postpone hiring. Meanwhile, UPS plans to hire more than 100,000 seasonal workers during the holidays.

Pioneer?

Analysts say FedEx’s ground and express shipments are vulnerable to global economic conditions, and the category’s disappointing performance may reflect the economic downturn.

“We haven’t really seen evidence of a widespread slowdown, but clearly FedEx is the frontrunner and we don’t want to deny what they’re saying,” Moody’s’ Kanalek said.

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Bank of America’s Hoexter sees FedEx’s $500 million underperformance in the express category as the first indicator of a broader recession. He said air transportation is so expensive to maintain that a small drop in volume has a big impact on profit margins.

Ground services, which missed the company’s forecast by $300 million, will feel the slowdown next.

According to Bank of America’s Global Research Report, Hoexter’s bi-weekly Truck Shippers Survey reports 11 consecutive quarters in “recession range.” This is because FedEx is reporting lower than expected deals with its top clients. Target and Walmart have both grappled with excess inventory in recent months.

FedEx reported higher profit margins on freight, but Mr. Hoxter noted that the category “has been heavily weighted towards manufacturing and hasn’t felt as much of an impact.” If demand continues to slow and manufacturers need smaller production volumes, Hoexter said FedEx could start reducing freight volumes as well.

holiday fizzle

Whatever the factors causing FedEx’s troubles, the upcoming holiday season probably won’t solve anything. In a statement, FedEx said the cost-cutting measures it announced last week are not expected to affect its services. The company said, “We are confident that we will deliver this holiday season.

However, retailers expect sales to slow down during the holiday season. Many also shipped their goods early, fearing last year’s delays. The Port of Los Angeles said 70% of holiday goods had already arrived on its shores by the end of August.

The overstock that has plagued retailers in recent months could also continue, leading to lower shipments and further pressure on FedEx’s business. According to a KPMG survey, 56% of his retail executives expect to have excess merchandise left over after the holiday season.

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S&P’s Geoff Wilson said FedEx has some cushion if trouble persists. The company has a lot of cash on hand, at about $7 billion as of May 31st. This contrasts with his normal $3 billion to his $4 billion pre-pandemic.He also noted that the company has reaffirmed its share buyback plan of about $1.5 billion.

“This is the best signal management can give about the long-term strength of FedEx,” Wilson said.