FedEx suspends outlook with virus muddying revamp for e-commerce

FedEx Corp. suspended its financial forecasts as the coronavirus pandemic blurred the demand outlook, upsetting a major overhaul at the courier to cut costs and handle a flood of e-commerce packages.While the uncertainty is shutting down daily life in much of the world, FedEx is beginning to see a cargo rebound in China, where the outbreak originated. About 95% of large manufacturers have returned to operations there, FedEx said, and last week the courier made about as many flights as normal to and from the country.

FedEx is also getting a boost from a sharp reduction of commercial airline flights, which carry cargo along with luggage in the belly of the plane. From early February to early March, cargo capacity to China fell about 40% and most of that decline was from the reduction in passenger flights, FedEx said.

“The demand we’re seeing out of Asia right now is quite robust,” Chief Operating Officer Raj Subramaniam said on a conference call with analysts to discuss the company’s fiscal third-quarter results. “Manufacturing capacity is coming back online.”

The shares seesawed after the close of regular trading in New York, surging at first and then slipping 2.1% to $93 later in the evening. FedEx has been hammered in the last month, dropping 40% through Tuesday. FedEx’s main competitor, United Parcel Service Inc., fell 8.6% over the same period.

Sales at the international unit, which makes up more than half of FedEx’s revenue, held up well in the quarter ending February, declining less than 1% to $8.92 billion. Still, the unit’s profit margins sank to 1.5%, less than half their level a year earlier.

Unexpected Boon

Demand is expected to tumble in Europe, where governments are ordering people to stay at home. The extent of the drop is impossible to predict with conditions changing daily, FedEx said. Still, the company will benefit by picking up cargo that’s usually carried by airlines as canceled flights proliferate.

The virus hit during a major transition of FedEx’s U.S. Ground unit to take on Amazon.com Inc. and gain market share for e-commerce deliveries. The company is spending heavily to move to seven-day delivery, increase speed so that 70% of packages are now delivered in two days or less, and take on more residential packages that before were handed off to the U.S. Postal Service.

“We’re already in the midst of this e-commerce revolution and we’ve leaned into it,” said FedEx CEO Fred Smith on the call. “We said at the first of the year that this would be a year of challenge and change. Now you have the coronavirus on top of it.”

Higher costs caused profit margins at Ground, the company’s most profitable business, to drop to 6% from 11% a year earlier. Overall, FedEx’s margins fell to 2.4%, well below its long-term goal of 10% or better.

Even so, the overhaul showed signs of working, with sales jumping 11% to $5.8 billion in the third quarter.

In the end, the results were “better than feared,” said Jack Atkins, an analyst with Stephens, in a note to clients. Quarterly adjusted earnings fell to $1.41, but beat the $1.27 average of analyst estimates compiled by Bloomberg.