FedEx (NYSE:FDX) is scheduled to announce its third quarter results on March 20, 2013. The company reported $11.1 billion in revenues during the second quarter, up 5% y-o-y. Reported operating income declined 8% y-o-y during the same period dragged down by the FedEx Express segment (down 33%). Superstorm Sandy negatively impacted diluted EPS reported at $1.39 by $0.11.
For the third quarter, we expect volume growth in FedEx Ground operations led by record holiday shipments and retail e-commerce growth. FedEx Freight numbers should reflect a positive impact of 2011 restructuring while FedEx Express is expected to report lower revenues primarily driven by unfavorable mix of services.
Below are some of the key trends we would be closely watching in this release. 
FedEx Ground Shipment Volume Boosted By Holiday Season Online Sales
Fedex Ground reported an 11% jump in revenues y-o-y during the second quarter primarily driven by higher volume. The ground segment operations have seen significant growth in the past few years driven by strong growth in online sales. According to a recent investor presentation by FedEx, U.S. online sales have been growing by almost three times as much y-o-y as the retail sales which have tracked the GDP growth rate closely. 
As the market leader in the segment with almost 30% market share, FedEx is expected to benefit the most from this continuing strong trend.  Further growth in the segment is expected form the company’s strong holiday season performance. According to the company’s estimates, 2012 holiday season is expected to boost overall volumes by around 13% y-o-y.  December is the peak of the holiday season, and Q3 results are expected to be boosted by this significant volume growth.
Restructured FedEx Freight Business Model To Drive Operating Income Higher
Since its restructuring in 2011, FedEx’s Freight business has seen a sharp turnaround. Freight revenue increased by around 4% y-o-y during the second quarter while operating income jumped sharply by 90% led by higher yield due to differentiated services and efficient network design. We expect to see the positive impact of this turnaround on consolidated operating income in the third quarter results as well.
Soft Economic Conditions and Efficiency Program Costs To Impact FedEx Express
FedEx Express revenues were up 4% y-o-y in Q2 primarily due to international acquisitions while organic growth was suppressed by weak global economic environment and Superstorm Sandy. Continuing macroeconomic uncertainties in Europe and a slowdown in growth in the emerging economies like China and India have been driving customers away from the high-yield time-bound offerings toward low-yield, more economic options. This trend is expected put pressure on both top-line and bottom-line figures of this segment in Q3 FY2013.
Further, profitability improvement program charges related to staff functions and processes, the growth of International Priority business and a restructuring of delivery routes to improve overall efficiency are expected to negatively impact the bottom-line during during this quarter. 
Overall, we expect Ground and Freight segments growth to drive Q3 earnings growth primarily while earnings growth from the FedEx Express division is expected to be flat-to-negative. Consolidated operating income is also expected to be boosted by the rate changes announced by the company on January 7th, 2013. 
We currently have a $120 price estimate for FedEx, which will be updated based on Q3 earnings announcements.Notes:
- FedEx Q2 FY13 Earnings Release, www.fedex.com [↩]
- FedEx Roadshow Presentation, www.fedex.com [↩]
- Chairman’s Letter, www.fedex.com [↩]
- FedEx Q2 Fy13 Earnings Conference Call, www.fedex.com [↩]
- FedEx Announces Programs Targeting $1.7 Billion In Annual Profit Improvement by End of Fiscal 2016, news.van.fedex.com [↩]
- 2013 FedEx Shipping Rate Changes, www.fedex.com [↩]