FedEx soars after profit surprise on costs, health shipments

FedEx Corp. soared after a surge in health-equipment deliveries and an efficiency drive aimed at home deliveries propelled earnings beyond Wall Street’s expectations.

The courier said it held costs in check with a mix of job cuts, reduced incentive compensation, aircraft retirements and delays to some investment projects. Those actions and a drop in fuel costs helped offset $125 million needed to protect workers from the Covid-19 pandemic, FedEx said in a statement Tuesday as it reported earnings for the three months ending May 31.

FedEx’s better-than-expected results underscore the company’s efforts to shore up its profit margins amid pressure from soaring residential deliveries, which are typically less profitable than commercial shipments. The company’s pre-pandemic moves to extend service to seven days and add capacity for large packages at the Ground unit helped ease the strain from the surge of packages going to customers in lockdown.

“The trends we experienced during the quarter validated, or rather, put an exclamation point on the importance of our strategic initiatives that directly address e-commerce,” FedEx Chief Operating Officer Raj Subramaniam said on a conference call with analysts. “In many ways, the macro trends accelerated to meet our existing strategy and what we expected to happen over a few years happened in a matter of a few months.”

Topping Estimates

FedEx jumped 9.4% to $153.35 after the close of regular trading in New York. The shares haven’t closed above $150 since late February, just before a U.S. stock-market rout caused by the pandemic’s spread. United Parcel Service Inc. and XPO Logistics Inc. also climbed in late trading.

While FedEx’s adjusted earnings dropped by about half to $2.53 a share for the fiscal fourth quarter, the performance surpassed Wall Street’s expectations. Analysts had predicted $1.53, according to the average of estimates compiled by Bloomberg. Sales slipped 2.2% to $17.4 billion.

Looking ahead, FedEx said it has seen week-over-week improvement for business packages since the end of April. But the company said there was too much uncertainty to provide financial forecasts for fiscal 2021.

To conserve cash, FedEx is slashing capital expenditures by $1 billion to $4.9 billion in the coming year and doesn’t plan to contribute to its U.S. pension plan. In each of the last two years, it contributed $1 billion to the plan.

The company’s Express air-cargo unit picked up volume as the government and corporate customers air-lifted personal protective equipment and other essential goods to combat the worldwide pandemic. Some cargo that otherwise would have been transported by passenger planes was shifted to freight couriers when air travel crumbled. It will take a least 18 months for that airline freight capacity to return, FedEx said.

That helped make up for a decline from businesses that were closed to stem the virus from spreading. Still, the Express unit’s sales fell almost 10% to $8.6 billion and margins dropped by more than half to 3.9%.

Residential Rush

Sales at FedEx’s Ground unit soared 20% to $6.4 billion from a year ago, driven by consumers ordering items online instead of venturing out to stores. Home deliveries accounted for 72% of the division’s sales, compared with 56% in the same period a year earlier.

The surge of residential packages and decline of more lucrative commercial packages hurt the Ground division’s margins, which fell to less than 11% from 15% a year earlier. Home deliveries tend to include a limited number of packages per stop, making them less profitable than shipments to businesses.

Still, the Ground operation’s margins and volumes were stronger than expected, said Bloomberg Intelligence analyst Lee Klaskow. The unit also will benefit as the economy reopens.

“FedEx provided reason for optimism,” Klaskow said in a note.

FedEx managed to protect its profitability more effectively than expected. For the company as a whole, the adjusted operating margin of 5.2% surpassed the 3.4% level predicted by analysts.

Profitability should get a boost from surcharges that FedEx applied beginning in June to the pandemic-fueled surge in parcels from the company’s largest e-commerce customers. FedEx said it also plans to apply surcharges for the peak November and December shipping season.