FedEx Profit Pressured by Express Unit's Woes -- Update

By Charlie McGee 

FedEx Corp. said profits were squeezed in its most recent quarter as a global slowdown in trade and a shift by customers to slower and cheaper delivery options continued to weigh on the shipping giant's core Express business.

The company said those factors would contribute to a decline in adjusted profit for the current fiscal year, after Wall Street had been expecting an increase. FedEx had cut its earnings outlook in each of the two previous quarters.

The company has been restructuring its operations to adjust to the rise of e-commerce orders and combat slowing international shipping. It recently ended a key contract with Amazon.com Inc. and announced plans to offer seven-day home delivery and to handle more of the packages it used to route through the U.S. Postal Service.

"We have to be very efficient in delivering to residential -- making residential deliveries, which are an increasing part of the traffic moving through both the Ground and the Express network," FedEx founder and Chief Executive Fred Smith said on a conference call Tuesday.

FedEx's operating income declined less than 1% in the quarter that ended May 31 to $1.32 billion due to lower revenues at its Express air network and higher costs at its Ground business. FedEx said those expenses were partially offset by increased U.S. shipment volumes.

The company said expenses increased as it rolled out six-day ground delivery and offered a voluntary employee buyout program for U.S. workers. Executives said 1,500 people have accepted buyouts. The company's recent decision to move to Sunday delivery will bring further increased costs in the next year, the executives said.

The report came after U.S. markets closed. FedEx shares rose 1% in late trading to $157.60. The stock has tumbled by roughly a third over the past 12 months.

The company reported a fiscal fourth-quarter loss of $1.97 billion, including a large accounting charge for its retirement plan, compared with net income of $1.13 billion in the year-ago period.

Revenue increased about 3% to $17.8 billion. Revenue in its ground and freight segments increased 11% and 5%, respectively. However, revenue declined 1% for FedEx Express, its largest business segment, to $9.5 billion.

FedEx warned of numerous looming challenges to its legacy Express business, including global trade uncertainty and adding more lighter e-commerce packages on its airplanes at lower margins. The company is offering steep discounts to some large shippers to try to get them to switch to its faster air shipping business. FedEx said it hasn't changed its pricing strategy.

"As we go forward and things change, if we don't see any kind of international growth, we will change our approach to the business," Mr. Smith said. "We don't have any sacred cows here."

The company's decision to abandon its contract with Amazon will be a near-term headwind, chief financial officer Alan Graf said, but as FedEx works to replace its resulting loss in volume and improves its network, it expects to reverse that trend in future years.

FedEx during the quarter become entangled in the U.S. government's escalating trade conflict with China. The company misrouted packages intended for Huawei Technologies Co. because of changes FedEx made to comply with the Trump administration's crackdown on the Chinese telecommunications-gear maker. In May, the incident led Chinese officials to say they were opening an investigation into FedEx, which apologized for the mistake.

The delivery giant's involvement in U.S.-China tensions further intensified when it filed a lawsuit Monday against the U.S. Department of Commerce, challenging federal requirements of FedEx to enforce measures taken against Huawei. FedEx said it couldn't inspect every package it handles to ensure the contents don't violate U.S. export rules.

(END) Dow Jones Newswires

June 25, 2019 20:08 ET (00:08 GMT)

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