Global logistics giant FedEx reported disappointing second quarter financial results on December 19th, sending its shares tumbling in after-hours trading. The company missed Wall Street’s earnings and revenue estimates for the quarter and cut its full-year revenue guidance citing slowing demand.
Q2 Financial Results Disappoint
For the fiscal 2023 second quarter ended November 30, FedEx reported:
- Revenue of $22.8 billion, down 3% year-over-year and missing analyst estimates by $290 million
- Adjusted earnings per share of $3.18, down 21% and missing estimates by $0.32
- Net income of $1.25 billion, compared to $1.04 billion a year ago
“Our second quarter financial results were below our expectations as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.,” said FedEx CEO Raj Subramaniam.
In after-hours trading following the earnings release, FedEx shares plunged nearly 8% reflecting investors’ disappointment with the results.
Weaker Global Volumes Hit Results
FedEx blamed a global slowdown in shipment volumes reflecting dampened economic activity for the earnings shortfall.
In particular, the company called out a sharper-than-expected decline in Asia and service challenges in Europe which constrained FedEx Express air operations. The weakening international environment was compounded by slower growth in the domestic parcel and freight markets.
| Key Operating Metrics | Year-over-Year Change |
|---|---|
| Consolidated average daily volume | -8% |
| FedEx Express average daily package volume | -14% |
| FedEx Ground average daily volume | -2% |
| FedEx Freight average daily shipments | -11% |
This overall reduction in global shipping demand took a heavy toll on FedEx’s top line. Lower volumes also reduced aircraft utilization rates which pressured operating margins.
Cost Control Efforts Ramp Up
In an effort to adapt to the deteriorating business conditions, FedEx said it is accelerating cost reduction initiatives across the organization. This includes previously announced employee headcount reductions as well as optimizing the FedEx Express air network to better match capacity with demand.
During the quarter, the company incurred $170 million in costs related to these restructuring efforts which are expected to drive around $2.2 to $2.7 billion in annualized savings once fully implemented in fiscal 2025.
“While business demand softened later in the quarter, we are proactively managing costs with initiatives aimed at driving long-term margins, cash flows, and returns,” said CFO Mike Lenz.
Full Year Guidance Lowered
Citing expectations for an extended period of below-trend economic growth, FedEx trimmed its full fiscal year revenue projection. The company now sees FY2023 revenue declining 2% to 3% year-over-year compared to its prior view of 1% growth.
FedEx also tightened its earnings guidance range. It now expects full year adjusted EPS of $14.75 to $15.75, down from $15.50 to $16.50 previously.
“Though cross currents persist in the near term, we remain focused on evolving our business to improve revenue quality, adjust our cost base to demand levels, and expand margins,” said Subramaniam.
UBS Cuts Price Target But Remains Bullish Long-Term
Following FedEx’s report, UBS analyst Thomas Wadewitz lowered his 12-month price target on the stock from $240 to $205 but maintained his ‘Buy’ rating.
In a note to clients, the analyst wrote: “The weaker than expected result was driven by international airfreight weakness…[but] we still see a favorable risk reward with potential for stronger volumes once the cycle turns more positive.”
FedEx vs. UPS Year-to-Date Performance
FedEx’s main rival, UPS, has weathered the economic slowdown comparatively better this year. As shown below, UPS stock has declined 6% in 2022 compared to a 36% plunge for FedEx.
| Company | YTD Share Price Change |
|---|---|
| FedEx | -36% |
| UPS | -6% |
UPS is viewed as more defensive given its higher mix of domestic small parcel shipments and larger B2C e-commerce business. It also operates with better margins allowing for greater resiliency during downturns.
Going forward into 2023, analysts expect UPS to continue to outperform FedEx operationally based on its more favorable business mix. However, FedEx trades at a substantial ~25% valuation discount which could make it more attractive for long-term investors.
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