FDX FedEx Corp

By Paul Ziobro 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 18, 2019).

FedEx Corp. cut its earnings targets for the fourth time in 2019, as the delivery giant struggles to adapt to a world where fewer packages are being flown around the globe and more are being delivered to people's homes from warehouses.

Profit has been sapped by a global slump in air shipments -- FedEx's core business -- and a surge in e-commerce deliveries to residences -- a service the company is expanding at considerable cost. The challenge has become acute as Amazon.com Inc. flips from FedEx customer to formidable competitor.

On Tuesday, FedEx executives said the company had experienced higher-than-expected expenses in the quarter that ended on Nov. 30 and cautioned costs would be elevated during the peak shipping season now testing its limits. The company plans to take new steps to rein in spending, including grounding aircraft, eliminating some international flights and restricting hiring.

"We continue to be in a period of challenges and changes," FedEx founder and Chief Executive Fred Smith said on a conference call. He cited "a significant bow wave of expenses to handle volumes that will largely fall" in the next quarter and a drag on the industrial economy from trade disputes and tepid business-to-business shipping.

FedEx shares, which were trading above $250 last year, fell more than 6% in late trading Tuesday to around $153.

For its just-ended fiscal second quarter, FedEx posted a 40% drop in profit and a 3% decline in revenue. It continues to deal with the loss of Amazon's shipping contracts, which totaled $900 million in annual revenue, and a slump in global trade that has damped demand for air shipments. FedEx said the pricing environment is more competitive as well.

Rival United Parcel Service Inc. has capitalized on FedEx's cutting ties with Amazon. UPS has spent heavily in recent years to expand and automate its network to handle more online orders. In recent quarters, it has significantly expanded its air shipments to carry more packages, including from Amazon. In October, UPS posted higher quarterly profit and revenue, and backed its earnings targets for the year.

Both FedEx and UPS are absorbing higher costs in the U.S. as they modernize sorting centers and shift to seven-day residential delivery, not just during the holidays but year round. FedEx is also beginning to keep in its network more of the packages it had sent to the U.S. Postal Service for last-mile delivery.

The goal is to shift FedEx's delivery network, designed primarily for shipments between businesses, to one that can deliver more individual packages to residences to capitalize on the relentless growth of online shopping.

The latest quarter shows that the changes FedEx is making to its Ground network "are costing them more than they had realized," said Satish Jindel, president of the parcel research firm SJ Consulting Group Inc.

FedEx executives admitted that they underestimated how much it would cost to expand to seven-day delivery, which started in early November. "Clearly, we didn't do the greatest job of forecasting our cost," Mr. Smith said.

Finance chief Alan Graf added that FedEx has had to pay higher-than-expected wages in some areas given the tight labor market.

Both FedEx and UPS have acknowledged some problems making all their deliveries during the holiday season. They said winter storms slowed operations in some areas during Cyber Week, the busy shipping period after Thanksgiving. They are also facing a truncated calendar this year with six fewer days between Thanksgiving and Christmas.

For FedEx, this calendar shift pushed Cyber Week into the company's fiscal third quarter. That added costs to the second quarter without the revenue bump.

Amazon hasn't just stopped using FedEx's service. It is also ramping up its own delivery capabilities, including leasing cargo planes and buying thousands of vehicles. Analysts estimate Amazon will handle nearly half of its own package deliveries this holiday season.

This week, Amazon prohibited its third-party sellers from using FedEx's Ground network for Prime shipments citing poor delivery performance. The online retailer said it won't allow merchants to resume using FedEx for such orders until service improves.

For its second quarter, FedEx reported a profit of $560 million, compared with net income of $935 million a year earlier. Excluding integration expenses and aircraft impairment charges, per share earnings were $2.51 -- below Wall Street's expectations.

Revenue fell 3% to $17.3 billion, including a 5% decline in its Express segment and a 3% increase in its Ground business. Analysts polled by FactSet expected $17.6 billion in quarterly revenue.

For the current fiscal year, FedEx is now forecasting per share earnings of between $10.25 and $11.50 before pension accounting adjustments, compared with its forecast of $11 to $13 issued in September.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

December 18, 2019 02:47 ET (07:47 GMT)

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