FedEx Lowers Guidance, Again
FedEx's (NYSE: FDX) fiscal third-quarter earnings report was anything but uneventful. Management lowered expectations for full-year revenue and earnings, citing a weakening macroeconomic environment, rising cost pressures at FedEx Ground, and yield declines at FedEx Express. There's a lot going on, so let's look at the details and numbers from the quarter.
FedEx third-quarter earnings: The raw numbers
Here are the headline numbers from the quarter:
- Total revenue grew 3% year over year to $17 billion.
- Total operating income increased 6% year over year to $911 million.
- Operating income margin expanded to 5.4% from 5.2% in the same period last year.
The numbers reveal mediocre growth, and CEO Fred Smith didn't mince words. "Our third-quarter financial results were below our expectations," Smith said in the press release, "and we are focused on initiatives to improve our performance."
FedEx's guidance
Given the weakness in the results and the fact that FedEx is now already in its fourth quarter, it's hardly surprising that management lowered expectations for the full year. In fact, it marks the second consecutive quarter that it has lowered guidance. During the second-quarter earnings call, management cited a weakening macroeconomic environment in Asia and Europe, in particular, and the lingering effects of the NotPetya virus attack on TNT Express, a major European delivery company it acquired in 2016.
Those issues appear to have extended into the third quarter, as reflected in the change in full-year outlook:
- Smith outlined that he now expects full-year 2019 revenue to increase by just $4.5 billion, versus a previous estimate for a $6 billion increase.
- Full-year adjusted diluted EPS is now expected to be $15.10 to $15.90, compared with a previous estimate of $15.50 to $16.60. (Management had started fiscal 2019 forecasting $17 to $17.60.)
As Smith explained on the earnings call, FedEx is "a leverage business" whereby "the last few percentages of revenue points go to the bottom line at a very disproportionate rate." As such, if revenue expectations are reduced -- management again largely blamed the weakening economic environment in Asia and Europe, along with slowing trade growth -- it's reasonable to expect a significant lowering of earnings guidance.
Turning to the fourth-quarter outlook, CFO Alan Graf said he expects earnings to decrease year over year at FedEx Express due to lower yields and continued softness in international volume, largely due to the weakening economy.
Meanwhile, Graf said, revenue growth at Ground "is expected to remain strong in the fourth quarter," but higher operating costs are expected to continue hurting results.
Segment details
As you can see in the table below, the problems in the third quarter were mainly felt at FedEx Express. Don't get too excited by the double-digit growth in operating income at Express, because it's a GAAP number that includes TNT integration expenses, and since expenses were greater in 2018, the growth looks better. If you take out the impact of the TNT expenses, adjusted operating income in the segment only rose 5.7% year over year, from $403 million to $426 million.
| Segment | Q3 Revenue |
Year-Over-Year Growth (Decline) |
Q3 Operating Income |
Year-Over-Year Growth |
|---|---|---|---|---|
| Express |
$9 billion |
(1%) |
$370 million |
17% |
| Ground |
$5.26 billion |
9% |
$577 million |
(6.4%) |
| Freight |
$1.75 billion |
8% |
$97 million |
98% |
| Total Company |
$17.01 billion |
3% |
$911 million |
6% |
The weakness in Express is a consequence of slightly different conditions in the U.S compared to the segment's international operations. In the U.S., Express package volume increased 6%, but yield fell to $17.93 per package versus $18.29 per package in the same period last year. Graf put it down to "expansion of our e-commerce solutions," which imply "lower weight per shipment and service mix changes."
Total international export package volume grew just 2%, with revenue per package falling to $50.12, compared with $52.85 in the same period last year. As you can see in the table above, the declining yields hit revenue growth even as total Express package volume growth was 2.1% in the quarter.
Looking ahead
Management discussed the weakening economy. But there's the issue of the successful integration of TNT Express and dealing with the margin pressures inherent in an expansion of e-commerce deliveries -- both at Express and Ground. There's not a lot management can do about faltering trade growth, but investors will be hoping that FedEx can better deal with yield and margin pressure, particularly in Europe, in future quarters.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FedEx. The Motley Fool has a disclosure policy.