FedEx posts profit that tops estimates, raises forecast on cost cuts

FedEx Corp. rose in early trading Thursday on profit that topped analyst estimates and an increase to the low end of its earnings forecast. The company credited cost cuts, strong pricing and customers who switched to the courier from its main rival on concern over a potential strike.

Adjusted earnings were $4.55 a share for the quarter that ended Aug. 31, FedEx said Wednesday after the close of regular trading in a statement. That’s up from $3.44 a year ago and higher than a prediction of $3.73 from the average of 25 estimates compiled by Bloomberg. Sales fell about 6% to $21.7 billion; analysts had expected $21.8 billion.

“We started fiscal 2024 with strong momentum as our global transformation actions take hold and drive improved results,” Chief Executive Officer Raj Subramaniam said in the statement.

FedEx has won over investors in 2023 with a multiyear restructuring plan to cut costs and improve efficiency by $6 billion, which should help underpin earnings even while package demand declines. FedEx got a boost this quarter from United Parcel Service Inc. customers who shifted volume on concern of a potential strike that was resolved only days before an Aug. 1 deadline. 

FedEx’s Freight unit also picked up some volume from trucker Yellow Corp., which declared bankruptcy in early August.

FedEx shares rose 5.7% to $264.83 as of 9:33 a.m. Thursday in New York. The stock is up more than 52% so far this year.

The company raised the lower end of its guidance for annual adjusted earnings per shares to $17 to from $16.50 that it had forecast in June. The company left the top end of its outlook at $18.50. FedEx lowered its outlook for revenue in 2024 to no gain amid “ongoing demand weakness.” Earlier, it had predicted sales would be between no gain and a low-single-digit percentage increase.

“We expect FDX to outperform UPS and the industrial sector in near term after a significant earnings beat that came a year after the company infamously slashed guidance only a few months after the company’s first investor day in ten years,” Brian Ossenbeck, an analyst with JPMorgan Chase, wrote in a research note.

Earnings in the quarter were helped by an 8.4% reduction in operating expenses from a year ago. That helped the company to boost its adjusted operating profit margin to 7.3% from 5.3% a year earlier. 

The higher-than-expected earnings were driven mostly by improvements at the Ground unit, said Jairam Nathan, an analyst with Daiwa, in a note.

“FedEx is benefiting from UPS and Yellow woes while delivering on cost actions, as shown by the strong 1Q margins,” Nathan wrote. “However, the guidance increase was below expectations, reflecting continued pressure on volume and yields.”

The Express unit had a sales decline of 9.4% as package volume dropped 2.2% and revenue per package fell 3.3%. Air-freight demand has declined from pandemic highs after supply chains healed and passenger flights, which can also carry cargo, rebounded. Volume was also hurt as the US Postal Service decreased its use of FedEx to carry express packages by air. 

Sales at the Ground unit rose 3.2%. Package volume gained 0.6% while revenue per package 2.8%. Even with extra business from Yellow, Freight posted a year-on-year sales drop of 16%, the third straight quarter of declines amid a US cargo recession.

Taking UPS Customers

Because of the strike threat at UPS, FedEx added about 400,000 packages per day from new customers by the end of the quarter and only signed on shippers who signed long-term contracts. FedEx expects to retain the majority of those new customers, Subramaniam said. The Yellow bankruptcy drove 5,000 daily shipments of business to FedEx. 

“While we captured upside as a result of these one-time events, we were highly discerning in terms of the business we accepted in keeping with our goals of driving high-quality revenue,” Subramaniam said. 

Under the transformation plan, in June 2024 the company will consolidate its Express, Ground and Services units into one entity called Federal Express Corp., he said.