FedEx Profit Rises Less Than Expected on Plane Costs -- 2nd Update

By Laura Stevens 

FedEx Corp. reported that holiday peak shipping volume in November was lower than what retailers predicted, resulting in a slight dip in margins for its ground business as it spent more money to prepare for the holidays.

The company's results come as delays at the ports in the West Coast have disrupted the flow of goods to retailers during the peak holiday shopping season. Goods that would normally clear the ports in two to four days are now taking a couple of weeks, FedEx executives said, putting retailers scrambling to restock items in time for the holidays in a crunch.

"The slowdown in the West Coast ports has been a much bigger deal than people think, and a tremendous amount of inventory was simply not put through the ports in the time frame that the retailers had expected," FedEx Chairman Fred Smith said in a call with analysts. Customers should expect to see a lot of items out of stock, he added.

The results fell short of Wall Street earnings expectations partially because the company--with its fleets of more than 600 aircraft and 90,000 vehicles--didn't benefit much from falling oil prices. FedEx executives said that the drop in oil prices won't have a major effect on future earnings.

Shares of the company fell 4.6% in midday trading to $166.33.

Total profits for the delivery giant increased 23% to $616 million, or $2.14 per share. Analysts polled by Thomson Reuters had expected per-share earnings of $2.22. Ground margins for the quarter ended Nov. 30 dipped to 15.2% from 15.4% as the company invested in expanding its operations to handle the holiday surge but shipped fewer-than-expected packages. Revenue rose 5% to $11.9 billion from a year earlier.

Last year, FedEx and rival United Parcel Service Inc. were hit by a combination of bad weather and a surge in online sales that helped contribute to an estimated 2 million delayed express packages on Dec. 24, according to data from software tracking developer Shipmatrix Inc. This year the companies' on-time rates have been much higher, the firm said.

And even as traditional retailers have improved their Internet sales, Mr. Smith said they're still playing catch up when it comes to processing those orders. That resulted in backlogs in November, and some major retailers were unable to ship those orders, Mr. Smith said.

"So we are seeing a great deal of that traffic now moving into the December time frame," he said.

Executives noted that--as usual--e-commerce trends were something of a surprise. The company hasn't yet experienced the same spikes in volume this year as previous years because holiday shopping has been spread out over a longer period. For example, retailers like Wal-Mart Stores Inc. started their holiday promotions earlier and spread out Black Friday deals over the many days.

"Over the last several peak seasons we have regularly observed situations where volume hasn't always come where we expected it or come when we expected it. But one thing has been certain: It always comes," added Henry Maier, head of FedEx Ground.

Revenue at the company's ground segment increased 8% to $3.06 billion compared with the year-earlier period, while operating income rose 6% to $465 million.

The port delays helped boost volume in the company's air-express division, though executives noted that this was a temporary rather than systemic shift.

In addition to higher volumes, the company's air express division also benefited from the company's continued implementation of its restructuring program, which includes modernizing its air fleet and completed buyouts of 3,600 employees. Gains were partially offset by higher aircraft maintenance expenses.

Operating income in the express division increased 36% to $484 million, compared with the same quarter last year. Revenues increased 3% to $7.02 billion.

FedEx executives also touted their recent acquisitions of two companies that will help the delivery giant to increase its presence in the growing e-commerce space. The company on Tuesday said it acquired privately held Bongo International, adding a provider of services that enable international e-commerce orders and shipments. The deal came a day after FedEx agreed to buy logistics provider Genco, which specializes in returns. Executives said they would disclose the prices for the acquisitions in coming months.

Chelsey Dulaney contributed to this article.

Write to Laura Stevens at [e-mail]

Access Investor Kit for FedEx Corp.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US31428X1063

Access Investor Kit for Wal-Mart Stores, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US9311421039

Subscribe to WSJ: http://online.wsj.com?mod=djnwires