Fedex Ground Segment Revenue Likely To Grow Driven By Rate Increase And E-commerce Package Volume

FedEx(NYSE:FDX) is set to release its fourth quarter (fiscal year ending May) earnings on June 18. In the third quarter, its 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.

On account of the bad weather during the third quarter and beginning of the fourth quarter, FedEx revised its earnings per share guidance from $6.73-$7.10 to $6.55-$6.80. ^[2] We believe that FedEx may be expecting a carryover of costs into the fourth quarter as a result of the weather. However, continued growth in e-commerce and rate increases will help drive FedEx’s Ground segment revenue and healthy international trade should help bolster its Express segment.

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Rate Increase And Growing E-commerce Will Drive FedEx Ground Revenues

In the third quarter 2014, FedEx’s Ground segment reported 10% growth in revenues to reach $3 billion. ^[1] Higher package volume driven by online holiday season sales and an increase in rates for the Ground segments helped drive the segment’s revenue.

In the fourth quarter, we expect to see growth in Ground revenues driven by the rate increase which were effective from January 6, 2014. ^[3] Additionally, continued growth in e-commerce should help boost volumes during the quarter. As more and more e-retailers choose cheaper shipment alternatives such as FedEx Ground and FedEx SmartPost in order to keep their logistical costs low, the volumes for these services should grow boosting the Ground segment revenues.

The shift in preference towards more economical services is not just limited to e-retailers. This trend has been seen across all different types of customers. Customers are opting for lower priced services offered by FedEx even if it means having to wait a few extra days for packages to get delivered. Though this shift in preference has been favorable for FedEx’s Ground segment, it has not been kind to FedEx’s Express segment.

Express Segment May Continue To Be Impacted By Change In Customer Preference

In the third quarter, volumes for FedEx’s International Economy service increased 8% whereas for International Priority, the volume declined 5% as customers shifted towards slower but economical shipment options. ^[1] This led to a 2% decline in revenue from International Priority services. FedEx’s Express segment revenue was stagnant on account of gains in the U.S. and international package business getting offset by declines in freight revenue and lower fuel surcharges.

We believe that the shift towards economical services will continue to impact the segment in the fourth quarter, leading to low revenue and revenue per package. Decline in world trade will also add to the pressure on the segment’s revenue. In March 2014, world trade declined 0.5% following a 0.7% decline in February 2014. Also, Q1CY14 world trade declined 0.8% year on year. ^[4] However, there may be some respite due the rate increases for the segment which were effective from January 6 and 17, 2014.

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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 [↩]
4. CPB World Trade Monitor (including March 2014), April 2014, www.cpb.nl [↩]