FedEx 1Q Results Mixed, Lowers Fiscal 2016 Outlook

FedEx reported disappointing results for its latest quarter, and the delivery giant cut its full-year profit forecast on weaker demand for freight services and higher costs in its ground division.

The company also said it plans to hire more than 55,000 seasonal workers for the year-end shopping season, an increase of at least 5,000 over last year’s plan.

FedEx Corp. said that it expects to earn between $10.40 and $10.90 for the fiscal year that ends next May, down 20 cents from an earlier prediction. Analysts expected $10.84, according to a survey by FactSet.

The reduced outlook comes despite cost-cutting moves, growth in online commerce and upcoming price hikes. Rates for express, ground and freight shipments will rise by an average of 4.9 percent on Jan. 4, and surcharges for oversized packages will go up in November, before the peak year-end shopping season.

Chairman and CEO Fred Smith said the Memphis, Tennessee-based company was “performing solidly given weaker-than-expected economic conditions, especially in manufacturing and global trade.”

Smith blamed the earnings miss and the lower profit forecast on FedEx raising its set-aside for self-insurance as its drivers cover more miles in more trucks.

“The whole thing about the quarter is one issue; it’s a self-insurance reserve,” he said on a conference call with analysts. “All the rest of the stuff is just noise and various issues inside the operating company.”

Analysts pointed out that the self-insurance reserve has hurt results two straight quarters. FedEx did not provide a figure for the higher insurance reserve, but a spokesman said it was included in a line for “other” costs that totaled $453 million in the quarter, an increase of $201 million from a year earlier.

Smith also complained that FedEx didn’t set earnings targets; analysts did. The company could be paying the price for being a long-time Wall Street favorite.

“When you become beloved by the Street, the downside is it’s harder and harder to meet those elevated expectations,” said Logan Purk, an analyst with Edward Jones. “That’s part of the reason that FedEx has missed (earnings forecasts) the last couple quarters.”

Purk said in an interview that the company must boost margins in its ground business, which have been hurt by a low-margin acquisition, and would be helped by any improvement in the global economy and trade.

The hiring plans for the year-end shopping season were announced a day after rival UPS said that it plans to hire 90,000 to 95,000 extra workers, about the same that it hired last year.

FedEx executives said they expect a record year-end shopping season and have been talking to retailers to smooth out peak delivery days. In recent years, free-shipping promotions right up to the last week of December have encouraged consumers to shop online later and make it harder for FedEx and UPS to predict and plan for the busiest days.

In the quarter that ended Aug. 31, FedEx earned $692 million, up 6 percent from a year earlier. Earnings per share amounted to $2.42, short of the $2.44 per share average forecast of 12 analysts surveyed by Zacks Investment Research.

Revenue rose 5 percent, to $12.3 billion. Six analysts surveyed by Zacks had expected $12.23 billion.

FedEx has been hit in recent years by a decline in priority international shipping, which has caused revenue in its Express unit to stagnate. But the boom in online shopping has boosted results at FedEx Ground.

In the latest quarter, ground revenue rose 29 percent but operating income was basically flat on higher costs for larger packages and self-insurance. The express unit saw higher income because of higher base rates, while income fell in the freight business on higher labor costs.

A Citi analyst said results in the express business were much better than he had expected. A Cowen and Co. analyst said investors were expecting better results due to higher ground-shipping volumes.

In trading Wednesday, FedEx shares fell $4.37, or 2.8 percent, to close at $149.63. The shares have dropped 14 percent for the year and 19 percent since hitting a record high on June 11, as investors are concerned that a sluggish global economy will hurt demand for delivery services.