FedEx Hit by Trade Tensions and Split With Amazon -- 2nd Update
September 17 2019 - 7:10PM
Dow Jones News
By Paul Ziobro
FedEx Corp. sharply cut its profit forecast for the year as it
faces higher costs to expand services, lower revenue from cutting
ties with Amazon.com Inc. and a worsening economic backdrop,
sending shares of the delivery giant plummeting in after-hours
trading.
The Memphis, Tenn., company expects per-share earnings to fall
between 16% and 29% in the current fiscal year, compared with an
expectation of a mid-single-digit percentage decline issued in
June. FedEx also lowered its revenue outlook.
The profit warning comes after the company posted an 11% drop in
fiscal first-quarter profit driven by weakness in its Express unit,
which delivers packages by jets and is being hampered by global
trade disruption.
Meanwhile, FedEx's Ground unit, where revenue is growing largely
due to carrying more e-commerce packages, is spending heavily on
additional transportation costs and equipment rentals to keep up
with that demand.
The company said it is taking more cost-cutting steps to try to
offset the weaker environment, including retiring planes and
grounding others after the holiday shopping season.
"The global macro economy continues to soften, and we are taking
steps to reduce capacity," FedEx Chief Executive Frederick Smith
said on Tuesday's earnings call.
Shares of FedEx fell more than 9% in after-hours trading
Tuesday.
For the first quarter ended Aug. 31, FedEx reported a profit of
$745 million, or $2.84 a share, compared with net income of $835
million, or $3.10 a share, a year earlier. Excluding expenses
related to its integration of TNT Express, per-share earnings were
$3.05.
Revenue declined slightly to $17.05 billion.
Analysts polled by FactSet expected earnings of $3.15 a share
and $17.06 billion in revenue.
Earnings for the fiscal year ending in May are expected to be
between $11 and $13 a share before mark-to-market accounting
adjustments and integration expenses. Last year, FedEx posted
adjusted earnings of $15.52 a share.
The weaker outlook comes as shippers and carriers are gearing up
for the holiday shopping season, when planning and upgrades will be
put to the test as the number of packages surges.
It also comes as FedEx is in the midst of major reshuffling in
the delivery marketplace as demand rises for e-commerce shipments.
It will soon start delivering packages seven days a week throughout
the entire year instead of just during the holidays, and will bring
into its own network nearly all of the two million packages it once
handed off to the U.S. Postal Service for delivery to doorsteps.
Those added costs are weighing on FedEx's bottom line.
FedEx will also be trying to grow its e-commerce business
without delivering packages for the largest online player in the
U.S., Amazon.com. FedEx in recent months ended its two major
shipping contracts with Amazon, forgoing about $900 million in
annual revenue. Instead, FedEx is aligning itself with retailers
like Walmart Inc. and Target Corp., as well as other online
businesses that compete with Amazon. FedEx recently signed on
Dick's Sporting Goods Inc. as a customer, for instance, to deliver
the retailer's online orders.
FedEx is continuing to raise prices to offset the higher costs
associated with all of the online orders to homes. Next year, it
plans to raise rates an average of 4.9% on packages sent through
its Express and Ground networks, while imposing a 5.9% rate
increase on Freight shipments.
Despite the weakness in the Express division, FedEx continues
spending heavily to modernize its air fleet and some processing
facilities.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
September 17, 2019 18:55 ET (22:55 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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