Ground Segment Offsets Express Losses for FedEx

FedEx (NYSE:FDX) announced results for its second quarter ending November 30, 2014, reporting higher revenues and earnings per share. Revenues were up 3% year over year to $11.4 billion and earnings per share rose 13% to $1.57. ^[1] (Fiscal years end with May.)  Net profit improved by 14% from $438 million to $500 million, owing to the unfavorable impact that superstorm Sandy had on last year’s results.

Growth in revenues was mostly driven by the increase in customers moving away from premium and overnight services, and opting for cheaper means of shipping packages. For FedEx, this change in customer preference translated into an increase in revenues for its Ground segment but a decrease for its Express segment. Revenues for FedEx’s Ground segment grew by 10%. The decline in FedEx’s Express segment can also be attributed to the drop in volumes for its international shipments. Major profitability improvements including shifting to fuel efficient aircraft and lower pension expenses have helped FedEx increase its profits.

FedEx raised its full-year earnings per share growth forecast to 8%-14% from last year’s adjusted results on the grounds of recent repurchase activities. The growth forecast was 7%-13% previously. ^[1]

We currently have a Trefis price estimate of $139 for FedEx, in line with the market price.

See our complete analysis of FedEx here

FedEx Express Revenues Are Down But Operating Income Shows Vast Improvement

Revenues for FedEx Express declined slightly owing to shift in customer preference towards slower but cheaper shipment options. In a stark contrast, operating income increased 42% compared to last year due to various profitability improvements. The major contributing factor has been its accelerated fleet replacement program, which helped reduce fuel and maintenance and repair costs. Though cost reduction strategies have improved profits for the segment, FedEx also needs to aim for top line growth for Express since it is the major contributor to its overall revenues.

In a bid to increase revenues of its Express segment, FedEx has tried to focus on international markets, but this strategy performed poorly. Pricier offerings and weak foreign currencies have eroded revenues from FedEx’s international freight shipments. Growth of 10% in its International Economy shipment revenues was not enough to offset the decline in other international shipments. FedEx’s decision to not participate in distribution of new product releases this year had resulted in a decline of revenues in the International Priority shipments. Segment revenues were also affected by customers choosing to wait for a day or two more for the delivery of international shipments since it costs much less. FedEx’s focus on yield improvement in International Priority proved to be a success as evidenced by the 3.2% increase in revenue per package. ^[1]

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.

FedEx’s Ground Segment Shows Double-digit Growth In Revenues

Benefiting from consumer shift towards cheaper logistics services and the holiday season, FedEx’s Ground segment reported growth in revenues by 10% year on year to $2.9 billion. ^[1] Within the segment, revenues from FedEx Ground and FedEx SmartPost increased 10% and 6% respectively, because of strong growth in volumes during the holiday season. The volumes could have been higher if ‘Cyber Monday’ fell in November like last year. Cyber Week (the company’s parlance)  contributes more than 25% to FedEx’s ground segment volumes during the holiday season. Operating income for the segment increased from $412 million to $424 million.

Operating margin declined by 1% year-on-year due to expansion and maintenance costs incurred in order to cater to the increased volumes during the holiday season. FedEx believes that, had the sales for Cyber Monday been in November, the margins would have been better since the expansion activities were undertaken taking into account the sales for Cyber Monday. The impact of Cyber Monday sales will now be seen in the fiscal third quarter for this year. The result would be higher margins and revenues when compared on a year-on-year basis.

We expect the ground segment to see further growth in the lower double-digit regions as a result of price increase which will be in effect from January 2014. FedEx announced plans to build 3 to 5 new hubs over the next couple of years to help the growth in demand for the Ground segment.

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1. FedEx Corp Second Quarter Earnings Release, December 18 2013, www.fedex.com [↩] [↩] [↩] [↩]