FedEx Earnings Preview: E-Commerce Growth Will Continue To Drive Ground Segment

FedEx (NYSE:FDX) is set to release its fiscal second quarter earnings on December 17. For the second quarter, we expect to see continued growth at FedEx’s Ground segment driven by e-commerce volume growth, partially offset by loss of volumes from one customer for FedEx’s SmartPost service. Declining fuel prices will likely impact the company’s top line and margins.

In the first quarter, FedEx’s revenues grew 6.0% year-on-year to reach $11.7 billion. ^[1] Strong volume growth across all three segments – Express, Ground and Freight – contributed to the revenue growth. Higher fuel surcharges and profitability improvement programs boosted net profits by 24%. FedEx’s earning per diluted share for the quarter increased 37.2%, to reach about $2.10, due to the increase in net profit and buyback of 5.3 million shares of FedEx common stock, which added $0.15 per diluted share.

In its fourth quarter earnings release, FedEx reaffirmed its guidance of $8.50-9 earnings per diluted share in the fiscal year 2015, a growth of 26-34% from fiscal year 2014. ^[2] The capital spending forecast for fiscal year 2015 remains $4.2 billion.

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E-Commerce Will Continue To Drive FedEx Ground

We expect to see continued growth in e-commerce sales to drive FedEx’s Ground revenues in the second quarter. According to preliminary estimates by the U.S. Census Bureau, e-commerce sales grew 16.2% in the three months ended October. ^[3] Since FedEx’s second quarter ends November, it will also benefit from holiday season e-commerce sales, which are expected to increase 16.6% in November and December. ^[4] However, similar to last year, Cyber Monday or Cyber Week sales, which historically has accounted for around 25% of FedEx’s holiday season sales, will not be a part of the second quarter. The Ground segment should receive a favorable boost from the rate increase which was effective from the beginning of the year.

FedEx’s Ground segment will likely suffer from the loss of a large customer of its SmartPost service. The service, which uses the U.S. Postal Service to make final delivery to any residential address or PO Box in the U.S., saw an 10.2% decline in volumes in the previous quarter. ^[2] FedEx’s management believes that they will be able to replace the lost volume. However, a lack of information regarding any development in the service makes us believe that SmartPost volumes may decline in the second quarter as well.

Fuel Prices To Affect Revenues and Margins

In the previous quarter, FedEx’s revenue and yields received a considerable boost from rising fuel prices, which helped increase fuel surcharge for the company. However, for the second quarter, FedEx’s fuel surcharge revenue may decline due to the falling price of diesel and jet fuel. FedEx Ground’s fuel surcharge is based on the two month lagged average price of the U.S. on-highway diesel fuel, which declined 1.9% year-on-year in the 3 months ended September 2014. ^[5] FedEx Express’ fuel surcharge is based on the two month lagged U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel, which declined 5.1% year-on-year in the 3 months ended September 2014. ^[6] Though the decline in fuel surcharge is likely to temper revenues, FedEx may benefit from lower fuel expenses, which should help drive improvement in margins.

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1. FedEx Q1 FY15 Statistical Book, September 17, 2014, www.fedex.com [↩]
2. FedEx Q1 FY15 Earnings Release, September 17, 2014, www.fedex.com [↩] [↩]
3. U.S. Census Bureau Quarterly E-commerce Report, www.census.gov [↩]
4. Beacons Land on Retailers’ Holiday Wish Lists, September 16, 2014, www.emarketer.com [↩]
5. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), www.eia.gov [↩]
6. U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB, www.eia.gov [↩]