FedEx Q2 2016 Earnings: Company Posts A Solid Quarter Driven By The E-commerce Boom

FedEx (NYSE:FDX) announced solid earnings on December 16th for Q2 2016. (Fiscal years end with May.)  The positive results were driven mainly by the e-commerce boom, supplemented with high package volumes during the holiday season. The Memphis-based shipping giant received more orders than anticipated this quarter. However, in spite of this unprecedented scale, the company succeeded in seeing the orders through. Furthermore, management has assured its investors that they are implementing strategic plans to accommodate the growth in e-commerce, which is quite evidently changing the dynamics of the shipping industry.

Key Financial Highlights:

• EPS recorded for the quarter stood at $2.58 in comparison to the analyst estimate of $2.51 (up about 19% year over year). The company raked in revenues of $12.5 billion.
• The Express segment achieved its best results in almost nine years. Operating margins were recorded at 9.4%. Operating income increased by almost 26%, despite a 6% decrease in revenues.
• The Ground segment saw increased operating income, up at a rate of 13%. Revenues grew by almost 32% to touch $4.05 billion. This growth was primarily driven by growth in e-commerce, changes in the pricing policies and increased market share.
• The International segment saw increased yields of 1%, while revenue per package fell by 9% due to lower fuel surcharges and unfavorable currency exchange rates.
• FedEx’s Freight segment seems to have lagged this quarter. Reduction in manufacturing and weaker economic conditions have proved significant headwinds for Freight’s operations. ^[1]

See our complete analysis of FedEx here

As aforementioned, e-commerce is growing at an unprecedented rate and is anticipated to continue growing in the low double digits in the near term at least. This shift in consumer consumption from buying in retail stores to buying products online has really benefited shipping and transport companies since this changing trend is contributing to significant increases in package volumes. This holiday quarter proved no different.

The company saw higher than anticipated volumes on its busiest days this season, where package volumes were more than double the amount of that handled on an average day. To put this into context, just this Monday, FedEx handled more than 26 million packages worldwide. Previously, the company had mentioned that it expects to ship close to 317 million packages. Considering how things are going this peak season, it seems plausible that the actual number could be significantly higher.

To best accommodate for the large increases, FedEx is changing its operating strategies.

1. The company plans to integrate its Ground and SmartPost segments in an attempt to realize incremental savings in operating expenditures over the coming quarters.
2. In its Ground segment, FedEx is continuing to improve and expand its automation and sort facilities across the world in an attempt to increase efficiency and flexibility. If things go to plan, this strategy could improve the company’s top line quite significantly.
3. Apart from this, the shipping giant also plans to improve on its technologies. The company is deploying a new technology that will help combine Ground and SmartPost packages being delivered to a common address. This will ensure increased efficiencies and productivity, which in turn will aid better overall service quality.

Express and Ground segments have benefited greatly from the e-commerce boom, and FedEx is expecting this growth momentum to continue well into the second half of this financial year.

Apart from the higher package volumes driven by e-commerce, FedEx’s Ground segment has also gained from its renewed pricing policy. The dimensional weight pricing policy has ensured more revenue per package this quarter, which grew by about 10%. Not only does this policy aid the top line, it also helps increase shipping efficiency, by ensuring customers optimize their packaging in an attempt to save money. Ground is FedEx’s top earning segment accounting for 44% of all profits. It is estimated that this number can jump even higher to reach a range of 60-70% in the next quarter. ^[2]

It would also be worthwhile to mention here that FedEx has reported solid numbers despite weak macro economic conditions and unfavorable exchange rates. In particular, the company expects weaker economic conditions to persist even in the next quarter, with GDP forecasted to grow at 2.4% and manufacturing industrial production to grow at 1.5%. However, just as in this quarter, strong business fundamentals, along with further investments in the Ground segment could help steer the company through headwinds going forward.

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1. FedEx Q2 2016 Earnings Call Transcript, www.seekingalpha.com [↩]
2. Strong Upside This Quarter And More Upside Next Quarter, www.seekingalpha.com [↩]