FedEx expects fiscal Q2 earnings to exceed guidance

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FedEx expects fiscal second quarter earnings to exceed guidance

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International and Ground volume growth and cost-cutting measures seen as drivers for earnings growth
Jeff Berman, Group News Editor -- Logistics Management, 12/8/2009

MEMPHIS-Due to better-than-expected growth in International and Ground volumes and ongoing cost-control efforts, FedEx said it expects fiscal second quarter earnings to exceed guidance.

The company will officially announce fiscal second quarter earnings on Thursday, December 17. And FedEx expects to report earnings of $1.10 per diluted share for the fiscal quarter ended November 30, which is down 30 percent from $1.58 per diluted share from the same timeframe a year ago. FedEx said previous guidance for the fiscal second quarter was $0.65 to $0.95 per diluted share.

"Year-over-year growth in our U.S. overnight express and FedEx International Priority services increased each month during the quarter, aided by inventory restocking and our successful sales efforts," said Alan B. Graf Jr., FedEx Corp. executive vice president and chief financial officer, in a statement. "Demand for our international services has improved significantly since the first quarter, particularly in Asia and Latin America."

Parcel industry experts told LM this announcement bodes well for FedEx and future business prospects as the economy shows some glimpses of improvement.

"It is relatively good news," said Doug Caldwell, principal of ParcelResearch. "FedEx noted it had fairly strong international growth, and some of that growth is replenishing seasonal inventories in the U.S. that sold better than some cautious retailers expected."

Other contributors for the positive forecast by FedEx, according to Caldwell, included increasing Ground and SmartPost (its "last mile" delivery service partnership with the United States Postal Service) volumes. He added that package volumes are a leading indicator of the economy, because often times that is the first place where this kind of movement occurs. And he also said it bodes well for FedEx and, subsequently, for retailers not having as bad a holiday season as previously expected.

Jerry Hempstead, president of Hempstead Consulting, said that FedEx is benefiting from the start-up costs associated with all the DHL business that had to convert earlier in the year following DHL Express exiting the U.S. market in January, with FedEx now "maximizing the operational efficiencies inherent in this incremental traffic."

He also cited the DHL@Home activity that had to migrate to FedEx SmartPost by August 2008.

"This business has an incredible upward ramp as we move toward Christmas and the incremental shipping throws off incremental profits," said Hempstead. And Hempstead also noted that this has helped FedEx take an increasing share of ground volume from UPS.

Cost cutting measures: In the last year, FedEx has taken several cost-cutting steps, including: eliminating variable compensation payouts; a hiring freeze; volume-related reductions in labor hours and line-haul expenses; discretionary spending cuts; personnel reductions at FedEx Freight and FedEx Office; and other cost reduction measures to "mitigate the effects of deteriorating business conditions such as base salary decreases effective January 1, 2009, including a 20 percent pay cut for Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, a 7.5 percent to 10.0 percent reduction for other senior FedEx executives, and a 5.0 percent reduction for remaining U.S. salaried employees, as well as a suspension of employee 401(k) company-matching contributions for at least one year.

FedEx said last month that 401(k) will be reinstated in January 2010, and a report from the Memphis Commercial Appeal said they will restore half of the company match. The report also noted that performance-based merit increases averaging up to 2 percent will be brought back.

"FedEx is enjoying some of the incremental earnings that come from lowering everyone's salary and discontinuing the employer match for the 401(k) program, so some of the earnings improvement comes at the expense of the employees," said Hempstead. "[FedEx management] has done what needed to be done in a very tough economic time. This earnings news I believe is additional confirmation that the global recession is behind us. The senior management at Fed made some tough decisions and then they executed quickly to rationalize their network and costs to effectively maintain profitability with rapidly declining volumes. Last quarter they did say that there was modest growth in the domestic products."

Pricing points: Last week, FedEx said it plans to raise standard list rates for its FedEx Ground and FedEx Home Delivery by an average of 4.9 percent, effective January 4, 2010. And on September 17, FedEx announced that it will increase shipping rates by an average of 5.9 percent for FedEx Express U.S. domestic and U.S. export services on January 4, 2010. But the actual rate increase will be 3.9 percent, as it will be offset 2 percent by adjusting the fuel price at which the fuel surcharge begins by two percentage points. This followed a November announcement by UPS, which called for an average increase of 4.9 percent for UPS Ground packages and an average net increase of 4.9 percent on all air express and U.S. origin international shipments, with the rate increase for the latter based on a 6.9 percent increase in the base rate minus a 2 percent reduction in the air and international fuel surcharge index.

Stifel Nicolaus Principal David Ross wrote in a research note that he expects parcel/express pricing to be stronger in CY10 after lapping the anniversary of DHL's exit (of the U.S. package market), as long as volume through the networks does not decline again.

"Rate increases for 2010 have been announced recently by FedEx and UPS, and with volumes rising off what we believe to be the bottom and the U.S. Postal Service losing billions this year, much of the increase should stick, in our view," according to Ross.