FedEx Pinched by Retail Shift During Holidays
March 21 2018 - 10:12AM
Dow Jones News
By Paul Ziobro
Some retailers gambled on slower shipping options during the
holidays, depriving FedEx Corp. of higher-priced express shipments
until the crunchtime before Christmas.
The move paid off for shippers, as FedEx's ground network
delivered more than 54 million packages a day earlier than
expected. But FedEx's express business, which had spent big on
aircraft and staffing anticipating higher volumes, posted a steep
drop in operating income in the latest quarter. The unit incurred
$170 million in extra costs during the December-to-February
quarter, including for added costs during the peak shipping
period.
"We saw customers stay in the ground system longer this year,"
Alan Cunningham, head of the express unit, said on an earnings call
Tuesday evening. Instead, there was a "more concentrated surge" in
express shipments in the final few days before Christmas.
The dynamic shows that FedEx is still trying to strike the right
balance between dialing up spending during the busiest time of year
and figuring out where and when the volume will come. During the
2016 holiday season, FedEx said a surge of packages from several
large shippers didn't arrive, hurting its bottom line due to
anticipated spending to handle the crush.
FedEx said investments to automate its ground network in recent
years have sped up service, which likely gave shippers more
confidence to use it during the 2017 holidays.
The performance of the ground business rescued FedEx's overall
performance. The Memphis-based company reported a slight drop in
operating income to $1 billion despite a 10% increase in revenue,
to $16.5 billion.
FedEx's income in its express business fell 24% to $424 million,
while the ground unit's profit surged by a similar percent to $634
million.
FedEx said it was able to pick up "significant business" among
small- and medium-size shippers last year as it chose not to copy
United Parcel Service Inc. in imposing surcharges on residential
packages delivered during the holidays. Those customers' accounts
tend to be more profitable for FedEx than large shippers, who can
demand better rates for shipping large amounts of volume.
FedEx did raise its profit outlook for the remainder of the
fiscal year, as it expects better margins during the final quarter,
which ends May 31. "The fourth quarter is going to be gangbusters,"
FedEx Chief Executive Fred Smith said.
Citi analyst Christian Weatherbee said the "not great" third
quarter results "should be trumped by a better outlook aiding
shares." He also notes that FedEx is lowering its capital spending
budget slightly for the year, which may signal that FedEx's
significant investments to upgrade its network may soon end.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
March 21, 2018 09:57 ET (13:57 GMT)
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