FDX FedEx Corp

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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