The Memphis-based package delivery giant also cut its full-year revenue forecast, sending shares tumbling 9.8%. The company’s most extensive Express business saw demand from the U.S. Postal Service drop, pushing more packages to lower-margin ground services rather than higher-cost air options. The company said it would take “quite some time” to improve profitability at that unit as it works through a contract renewal process and higher costs for fuel.
FedEx’s earnings report also came as the peak holiday shipping season began. The company’s chief customer officer, Brie Carere, acknowledged that “demand trends have shifted slightly from last year, and we are not where we want to be.” But she reassured investors that they were not yet at the “worst of the economic cycle.”
Analysts were split on whether that meant things could get better or worse for the shipping giant. Raymond James slashed its price target on the stock to $270 from $280 while maintaining an Outperform rating. Oppenheimer’s Scott Schneeberger, meanwhile, lowered his rating to neutral from outperform. Schneeberger said he expects that the headwinds facing FedEx will decrease but that it will see meaningful improvement next year.
Overall, the company’s profit fell to $1.1 billion in the quarter, or $1.42 a share, from $740 million, or $1.42 a share, in the same period a year earlier. Revenue sank to $22.2 billion from $25.8 billion, as higher operating expenses were offset by cost-cutting and higher efficiencies.
Revenue at the company’s air division fell nearly 7%, and its ground unit was down 4.4%. But operating income rose at the firm’s freight division, including the unit that delivers to businesses, resulting from improved yield and efficiency gains.
FedEx now sees an adjusted profit of $6.25-$6.75 a share for the full fiscal year, compared with an earlier estimate of $6.35-$6.75. That new midpoint is below analysts’ expectations of $6.36 a share.
The global delivery firm has been working to boost margins by cutting costs and increasing efficiencies. In the latest quarter, operating expenses declined 5% as the benefits of these efforts were realized, but revenues sank, and it needs to be clarified when things will turn around.