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FedEx Q1 Earnings Rise, Miss Wall Street Estimates – Supply Chain 24/7

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FedEx Q1 Earnings Rise, Miss Wall Street Estimates – Supply Chain 24/7

Transportation and logistics titan FedEx reported solid results for the first quarter of fiscal year 2016.

Quarterly net income at $692 million was up 5.6 percent annually, and revenue at $12.3 billion was up 4.9 percent. Operating income at $692 million was up 5.6 percent.

Quarterly operating margin – at 9.3 percent – saw a 2.2 percent annual gain, and earnings per share of $2.42 were up 6.7 percent but were below Wall Street estimates of $2.45 per share.

“FedEx Corp. is performing solidly given somewhat weaker-than-expected global economic conditions, especially in manufacturing and global trade,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, on the company’s earnings call this morning.

“Our profit improvement plan is on track and delivering impressive results, well done to the Express team. FedEx Ground and FedEx Freight had several anomalies in the first quarter. Overall FedEx service levels are excellent, our culture remains strong, and our balance sheet is solid.”

T. Michael Glenn, FedEx executive vice president, market development and corporate communications, said on the call that FedEx sees moderate economic growth in the global economy, with a U.S. GDP forecast of 2.5 percent for 2015 and 2.8 percent for 2016, led by gains in consumer spending in the near term. And he added that FedEx expects industrial production growth of 1.6 percent in 2015, which is 60 basis points below the company’s previous estimate in June, and 2.6 percent in 2016, with a global GDP growth forecast of 2.5 percent in 2015 and 2.9 percent in 2016.

“The prognosticators of Wall Street will most likely be unkind to FedEx” said Jerry Hempstead, president of parcel consultancy Hempstead Consulting.

Jerry Hempstead, president of parcel consultancy Hempstead Consulting

“FedEx is doing great, so shippers should not be concerned”Jerry Hempstead, President, Hempstead Consulting

“Earnings per share, the index by which firms are measured, failed to meet most street estimates for the quarter.”

“Adding additional pain, FedEx has once again lowered its forward looking estimates of future earnings, blaming the economy.”

“Perhaps FedEx has run through the one time benefit from the thousands that received early separation bonuses.”

“That usually fixes the books for four running quarters but then comps become difficult and history says that the field organization begins to add incremental full time headcount and the productivity struggle begins again.”

The great news for FedEx, said Hempstead, was that domestic air express was up, and the bad news was that international express exports was down, and of greater interest is that ground packages and LTL were lackluster.

“Fedex has a highly disciplined sales force and if managements wants to excite growth in ground packages they can,” he explained. “[I am] still uncertain about the acquisition of TNT as I believe most observers underestimate the leverage DHL has in Europe and they are actively lobbying to prevent the deal from consummation. We can also assume that UPS is arguing against the deal as well. FedEx is doing great, so shippers should not be concerned. They settled their negotiations with the pilots and they have their network in great shape to take care of business as we approach the tsunami of packages in the holiday season.”

Individual unit quarterly performances: FedEx Express quarterly revenue was down 4.0 percent at $6.59 billion, with an operating margin of 8.3 percent, up from last year’s 5.5 percent and an operating income of $545 million for a 45 percent annual increase. FedEx said that revenue declined due to lower fuel surcharges and “unfavorable” currency exchange rates that more than offset improved base rates. It added that U.S. domestic package volume was up 1 percent, spurred by growth in deferred box and overnight envelope, with revenue per package down 3 percent due to lower fuel surcharges and partially offset by strong base rates. FedEx International Economy volume and FedEx International Priority volumes were up 4 percent and down 5 percent, respectively, with International export revenue per package off 7 percent.

Revenue at FedEx Ground was up 29 percent at $3.83 billion, with an operating margin of 14.0 percent, down from 18.4 percent last year, and an operating income of $537 million for a 1 percent annual decrease. FedEx attributed revenue gains to including results from its acquisition of GENCO, the recording of FedEx SmartPost service revenues on a gross basis compared to the previous net treatment, and higher ground revenue per package and volume. FedEx Ground average daily volume, including FedEx SmartPost shipments, were up 4 percent in the first quarter due to ongoing growth in FedEx Home Delivery. And FedEx Ground yield was up 11 percent due to the recording of FedEx SmartPost revenues on a gross basis, higher dimensional weight charges and increased rates, partially offset by lower fuel surcharges.

FedEx Freight, the company’s less-than-truckload (LTL) unit had revenue that was basically flat compared to last year at $1,.60 billion, with operating income down 21 percent at $132 million, and operating margin down to 8.2 percent from 10.4 percent last year. FedEx cited weak industry demand as the culprit for the 1 percent decline in average daily LTL shipments, while revenue per shipment was also off 1 percent with higher rates from yield initiatives were more than offset by lower fuel surcharges. And it added that operating results dropped, due mainly to expenses related to salaries and benefits exceeding the lower than expected volumes.

Rate increases: Late yesterday, FedEx said rate increases will take effect for FedEx Express U.S. domestic, U.S. export, and U.S. import services, effective January 4, 2016. FedEx Express will increase shipping rates by an average of 4.9 percent for U.S. domestic, U.S. export and U.S. import services, and FedEx Ground and FedEx Home Delivery will increase shipping rates by an average of 4.9 percent. FedEx SmartPost rates will also change. And FedEx Freight will increase shipping rates by an average of 4.9 percent.

Peak Season received a fair amount of attention on today’s earnings call, with Glenn saying that it is well prepared for what it expects to be another record peak holiday season.

“We are not slowing or adjusting our service commitments heading into Peak,” he said. “We have been closely working with our customers all year to understand their Peak shipping needs and are ready to deliver. We expect to add more than 55,000 seasonal positions throughout the network to help the holidays arrive this year.”

In its full-year outlook, FedEx said that it now expects adjusted fiscal 2016 earnings to be $10.40 to $10.90 per share, assuming moderate economic growth and not including any operating results or costs related to TNT Express, with the capital spending forecast for 2016 still at $4.6 billion.

FedEx EVP and CFO Alan Graf said in a statement that this outlook is modestly lower than its initial forecast because of weaker LTL industry demand and higher than expected self-insurance reserves and operating costs at FedEx Ground.

 

Source: Jeff Berman

Supply Chain 24/7