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FedEx Corp. on Tuesday said it planned to slash an extra $1 billion in costs beyond what it outlined in September, amid what management called a “weaker demand environment” that led to softer-than-expected sales for its second quarter.
Still, shares rallied after hours, as investors and analysts focused on the parcel-delivery service’s profit forecast. And the company still managed to squeeze more consumer dollars out of each delivery as package volumes slipped — helped by the surcharges that carriers tack on to bills to offset rising fuel costs.
The company reported earnings as investors looked for clues about holiday spending in an economy where just about everything is more expensive, and as FedEx
FDX,
prepares to raise shipping prices next month.
During FedEx’s conference call to discuss its results, executives described an environment where global demand fell further in the second quarter than it did during a particularly harsh first quarter that sank its stock. While they said package volumes, comparatively, would improve later on in the fiscal year, they said they hadn’t seen much of a change in business yet in China, even as the economy there reopens after pandemic-related lockdowns.
Meanwhile, they said the U.S. was still recalibrating after consumers loaded up on electronics, furniture and other goods bought online during the pandemic.
“I think the main macro issue in the United States is really the e-commerce reset,” Chief Executive Raj Subramaniam said during the call.
The extra billion in savings brings FedEx’s total expected cuts to roughly $3.7 billion for the fiscal year, which ends in May. In September, the company announced up to $2.7 billion in cost cuts for the fiscal year ahead as concerns grew about stalled shipping demand in an inflation-scarred economy.
FedEx also lowered its fiscal 2023 capital spending forecast by $400 million and unveiled a new long-term cost-saving program, called DRIVE, which it hopes will bring more than $4 billion in annualized structural cost savings by fiscal 2025. The company said more details on DRIVE would come during a conference call in the first half of the next calendar year.
Subramaniam said some of FedEx’s cuts would come from digitization and automation in the U.S. and Europe, and other technology that helps trucks deliver more packages per trailer. FedEx has already grounded jets and reduced flights in its large, internationally-focused Express segment, which offers expedited air and ground deliveries. Cuts elsewhere will come from halting Sunday operations in its ground service, where trucks ship goods in the U.S. and Canada, and closing locations that offer copying and printing services, FedEx said in September.
Subramaniam on Tuesday also said that service issues that hurt the company’s results in the prior quarter had improved, and that hangups at Charles De Gaulle airport in Paris had been “largely alleviated.”
For the full year, FedEx forecast earnings per share of $13 to $14. For the full fiscal year, FactSet forecast adjusted earnings of $13.93 a share, with revenue of $94.358 billion.
“While modestly below consensus at the mid-point . . . our sense is that this is in line with (or maybe a bit better than) buyside expectations,” Stephens analyst Jack Atkins said in a note Tuesday, adding that the outlook included the $3.7 million in reductions.
“Net, with most investors sitting this quarter out and the company issuing an outlook that was likely better than some feared, we think the stock reacts positively to these results tomorrow,” he continued.
Shares rose 4.8% in after-hours trade.
FedEx reported fiscal second-quarter net income of $788 million, or $3.07 a share, compared with $1 billion, or $3.88 a share, in the same quarter last year. Revenue slipped to $22.8 billion, compared with $23.5 billion in the prior-year quarter.
Adjusted for costs related to “business optimization,” FedEx earned $3.18 a share, compared with $4.83 the same quarter in 2021.
Analysts polled by FactSet expected FedEx to report adjusted earnings of $2.81 a share on sales of $23.7 billion.
“The FedEx team moved with urgency to make rapid progress on our ongoing transformation while navigating a weaker demand environment,” Subramaniam said in FedEx’s earnings release. “Our earnings exceeded our expectations in the second quarter, driven by the execution and acceleration of our aggressive cost-reduction plans.”
Management said that its Express segment suffered a 64% decline in operating income, as global package volumes fell. But yields — or sales per package, and a measure of how high a price FedEx can charge — rose 8%. Higher fuel surcharges helped that yield figure.
The company’s Ground division, where trucks ship packages in the U.S. and Canada, got a 24% boost in operating income. Cost cuts and a 13% increase in yields helped there, even as package also volumes slipped.
FedEx stock has fallen 35% this year. By comparison, the S&P 500 Index
SPX,
is down around 19%.
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