In a market-moving announcement last week, FedEx FDX withdrew its FY23 earnings forecast, citing a volatile operating environment.
The original guidance came just three months ago in June, perhaps raising valid questions about the new management team. It’s important to note that long-time CEO Fred Smith stepped down from his position earlier this year in that same month.
Obviously, the announcement has enormous implications.
Market participants took the news hard; FedEx shares closed down more than 20% the following trading day.
In response, another notable transportation company, United Parcel Service UPS, also experienced adverse price action.
Below is a chart illustrating the performance of both companies in 2022, with the S&P 500 blended in as a benchmark.
Image Source: Zacks Investment Research
With the company already slashing its guidance, it raises a very valid question – what is going on with FedEx?
Let’s take a closer look.
Preliminary Q1 Results
The company forecasts quarterly EPS of $3.33, penciling in a steep 25% decline from year-ago quarterly earnings of $4.37 per share.
Revenue is forecasted to come in at $23.2 billion, reflecting a 5.5% Y/Y uptick.
The company stated that its Q1 results were heavily affected by global volume softness that picked up in the final weeks of the quarter, which is definitely not a good sign.
FedEx’s Express segment was impacted by an overall weak macroeconomic backdrop in Asia and services challenges in Europe, leading to roughly a $500 million revenue shortfall relative to company forecasts.
Further, FedEx’s Ground revenue is expected to come in roughly $300 million below company expectations.
FedEx stated that it took swift and immediate action to mitigate costs, but operating expenses still remained high relative to overall demand.
Raj Subramaniam, CEO of FedEx, says, “Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.”
In addition, FedEx has laid out many cost initiatives, including a reduction in flight frequencies and temporarily parking aircraft, consolidation of certain sort operations to drive productivity, deferral of staff hiring, and the closure of over 90 FedEx Office locations.
To put it simply, FedEx had a rough quarter.
TNT Integration Headaches
Flipping the pages back a few years, FedEx acquired TNT Express in May 2016 in a deal valued at $4.8 billion.
The acquisition was expected to spur growth across Europe, but the company’s integration has been complicated for FedEx and has cost them millions.
FedEx’s Express global air network, paired with TNT’s intra-European road system, was envisioned as a worldwide one-stop shipping hub for European and non-European companies.
Further, the acquisition pushed United Parcel Service out of the bidding for TNT, essentially giving them a leg-up on one of its main rivals.
Issues surfaced almost immediately.
TNT’s information technology and physical infrastructure were reportedly outdated, and the company’s sales were weak around the acquisition time. A shrinking top line was attributed to a sluggish European economy in the decade’s second half and low-income types of freight pushed by TNT.
Integration of TNT is still an ongoing headache for FedEx, with the air network finally expected to be fully integrated in 2022.
UPS Also In Trouble?
While it’s nearly impossible to ignore FedEx’s preliminary quarterly results, it’s important to note that a management shakeup and unfavorable acquisitions are their own problems.
UPS reported its quarterly results in late July, exceeding the Zacks Consensus EPS Estimate by 5% and beating revenue projections by a marginal 0.2%.
Below is a chart illustrating the company’s revenue on a quarterly basis.
Image Source: Zacks Investment Research
In addition, the company reaffirmed its full-year 2022 financial guidance and even raised targeted share repurchases to a mighty $3 billion for 2022.
The company’s average daily volume declined by 4%, attributed to actions taken to optimize overall network volume.
Further, in a challengingglobal market the company’s operating profit increased to $1.2 billion, and revenue per piece increased by nearly 15%.
Carol Tomé, CEO of UPS, says, “While the external environment is ever-changing, our better not bigger strategic framework has fundamentally improved nearly every aspect of our business, enabling greater agility and strong financial performance.”
It appears that United Parcel Service’s “better, not bigger” strategy is paying off.
All in all, FedEx has faced many unfavorable dynamics over the last several years, including the poor integration of TNT Express and long-time CEO Fred Smith leaving the company earlier in the year.
Now, the company has entirely cut its previous FY23 guidance.
On the contrary, United Parcel Service UPS posted a notably strong quarter in its latest print and even reaffirmed its 2022 guidance in the face of harsh business environments.
FDX’s recent disheartening guidance surely warrants some concern. However, to put it simply, many of the issues FedEx is facing seem to be their own problems.
On another note, it doesn't seem likely that FedEx was caught off guard by any means; geopolitical issues have been prevalent all year, and the Fed started its tightening cycle in the same month the previous guidance was given.
Operating issues have been prevalent within FedEx FDX for years.
(NOTE: We are reissuing this article to correct a mistake. The original version, published 9/20/22, should no longer be relied upon.)
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