Higher Volumes At Ground Boost FedEx’s Third Quarter Revenues

FedEx (NYSE:FDX) announced results for its third quarter ending February 28 (fiscal year ending May 31), reporting higher revenues and earnings per share.  Revenues were up 3% year-over-year to $11.3 billion, driven by higher volumes in the Ground segment. ^[1] Net profits improved 5% year-over-year from $361 million to $378 million and earnings per share increased 9% to $1.23.

Despite having suffered from severe weather during the winters, FedEx managed to improve its operating income by 9% to $641 million. Operating income is the difference between the revenues and operating expenses. FedEx’s operating expenses increased 3% year-over-year driven by higher purchased transportation costs, rentals and landing fees, and maintenance and repairs which were partially offset by lower fuel expenses.

During its second quarter meet, FedEx revised its earnings per share guidance to $6.73-$7.10. However, in the third quarter, it has lowered the guidance to $6.55-$6.80 on account of the harsh weather conditions FedEx faced during the third and early fourth quarters. ^[2] Separately, FedEx announced that it will open a FedEx Express North Asia-Pacific regional hub next month in Kansai International Airport in Osaka. This hub will help cater to traffic between the Asia-Pacific and U.S. trade route by offering enhanced capacity.

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FedEx Ground Benefits From Higher Volumes And Rate Increase

Revenue for FedEx’s Ground segment grew 10% to $3 billion driven by higher volume and revenue per package. ^[1] The increase in volume can primarily be attributed to two factors. Firstly, the general shift in customer preference towards more economical services. In order to save money, customers opt for lower priced services offered by FedEx such as FedEx Ground and SmartPost, even if it means waiting longer for their packages to get delivered. Secondly, volume had a favorable impact from Cyber Monday sales in the third quarter. Generally, Cyber Monday sales would be a part of the second quarter.  An additional operating day also had a positive impact on volume. Within the segment, revenues from FedEx Ground and FedEx SmartPost increased 11% and 5% respectively.

FedEx increased the rates for its Ground segment by an average of 4.9% on January 6. ^[3] This helped in increasing the segment’s revenue per package for the third quarter. A 2% increase in expenses for the segment led to a 1.3% decline in the segment’s operating income despite the increase in revenue. The increase in expenses can be attributed to measures undertaken to cater to higher volumes and operate during the harsh weather conditions.

We expect the ground segment to see further growth in the lower double-digit regions in the fourth quarter as a result of price increase, which came in effect from January 2014.

FedEx Express Revenues Remain Stagnant

Revenue for FedEx’s Express segment remained stagnant as gains in U.S. and international package business were offset by declines in freight revenue and lower fuel surcharges. The segment posted $6.67 billion in revenues. ^[1] The segment’s operating income improved 14% on account of lower fuel expenses and the absence of business realignment costs which were incurred last year. The additional operating day in the third quarter also had a favorable impact on the operating income.

Volumes for FedEx’s International Economy service increased 8% whereas for the International Priority service it declined 5% as customers shift towards slower but economical shipment options. This led to a 2% decline in revenue from International Priority services.

If FedEx wants to see an increase in its revenues from international markets, it needs to focus more on top line growth for International Priority shipments, since it forms a major part of its international revenues and commands higher prices for premium services. Additionally, improving upon revenue per package will be beneficial for the segment. Despite a rate increase of an average of 3.9% on January 6, the revenue per package remained relatively stagnant at $20.98 in the third quarter.

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1. FedEx Corp Third Quarter Earnings Release, March 19 2014, www.fedex.com [↩] [↩] [↩]
2. FedEx Corporation’s CEO Discusses F3Q14 Results – Earnings Call Transcript, March 19 2014, www.seekingalpha.com [↩]
3. 2014 FedEx Shipping Rate Changes, www.fedex.com [↩]