FedEx Pre-Earnings: Higher Volumes and Changes in the Pricing Policy Could Boost Revenues

FedEx (NYSE:FDX) is scheduled to release its earnings for fiscal Q2 2016 on December 16th. (Fiscal years end with May.)  Q2 is the most important quarter for the shipping giant because of heavy demand for its services during the holiday season. If all goes well, the company could be handsomely rewarded and could see great gains on its revenues. On the contrary, if FedEx lacks in performance, the results could suffer greatly. Apart from losing revenues, the company also faces the risk of its customers losing confidence in them. However, it seems that the Memphis-based company has learnt from the 2013 holiday season debacle, in which both FedEx and UPS struggled with high demand.

Analysts estimate that this quarter FedEx is going to see 4.4% year-over-year growth in revenues to touch about $12.46 billion. The consensus estimate for adjusted earnings per share is expected to jump by 17% to $2.53. ^[1]

Last quarter’s financial highlights:

• EPS stood at $2.42 (up from $2.12 recorded in the same quarter last year). Operating margins were recorded at 9.3%. The results were positive mostly due to the outperformance of FedEx’s Express segment.
• Revenues at FedEx’s Ground segment were up by 29% year-over-year, mostly due to the inclusion of GENCO’s revenues. The Ground segment also saw a healthy growth in volumes and yield.
• Revenues from FedEx’s Freight segment seemed to suffer as salaries and employee benefit expenses seemed to outweigh the lower than anticipated volume growth.
• Adjusted EPS for FY16 is forecast to lie within the $10.40 to $10.90 range. This outlook does not take operating results and acquisition costs from the TNT deal into consideration. ^[2]

See our complete analysis of FedEx here

The Peak Holiday Season:

As mentioned previously, Q2 is the most important and the busiest quarter for the shipping giant. FedEx expects to deliver about 317 million packages between Black Friday and Christmas Eve. This figure is up a significant 12.4% from last year.

One main reason for the heavy increases in volume is the change in customer consumption. The current trend is seeing a shift from purchasing products in retail stores to buying goods online. This sudden boom in e-commerce is what caught FedEx and UPS off guard in 2013. Currently, the size of the e-commerce market is growing in low double digits, and this trend is likely to continue into the foreseeable future. To put this into perspective, the current size of the e-commerce industry is $1.6 trillion (growth of about 20.4% year-over-year) and accounts for only about 6.6% of total retail sales ($24 trillion). ^[3]

It appears that, so far, FedEx has managed to cope well with the holiday demand this year. If this holds true, this quarter could prove to be the company’s second consecutive successful holiday season. The only thing that is left to be seen is whether revenues from higher volumes are outweighed by expenses incurred by the company to ensure smooth functioning during the season.

Increased Fuel Surcharges and Dimension Based Pricing:

Low fuel surcharge revenues have weighed on overall revenues in the past few quarters. To address this problem, FedEx recently increased the rate of fuel surcharges (effective November 2). The rates for the Express and Ground segments now stand at 2.75% and 4.25%, respectively. The surcharges were increased despite the continuous fall in diesel spot prices.

FedEx and UPS have been struggling with lower-than-expected profits of late. This is primarily due to the fact that consumers are now preferring to email important documents rather than pay the heavy fee of having them delivered overnight. Apart from this, the companies have also been struggling to increase margins from their e-commerce business due to the higher costs incurred in delivering packages to scattered homes. In an attempt to compensate for these costs, FedEx and UPS have decided to increase prices in various capacities. Apart from increasing fuel surcharges, the companies have also worked on improving their dimension based pricing, while charging a higher fee for larger packages. The companies hope that this will force customers to  increase their packaging efficiencies in an attempt to save on shipping. This will allow a higher volume of packages to be moved per truck. ^[4]

Update on the TNT Deal:

FedEx is in the process of acquiring Dutch-based TNT for a sum of $4.8 billion. The company recently received regulatory approval from the EU and the U.S. Both commissions stated that they have no objections to the acquisition. The deal is likely to conclude within the first half of next year. ^[5]

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1. Looking for Clues about Peak Performance, www.fool.com [↩]
2. FedEx Corp’s Q1 2016 Earnings Call Transcript, www.seekingalpha.com [↩]
3. UPS, FedEx and the Holiday Season Risks, www.forbes.com [↩]
4. Fuel Prices Fall But FedEx and UPS Boost Surcharges, www.wsj.com [↩]
5. FedEx gets U.S. Antitrust Approval for TNT Deal, www.wsj.com [↩]