By Shares of FedEx took a tumble on Wednesday as analysts scrutinized the company’s financials. While overall praise was given for the company’s cost-cutting measures that aimed to save billions of dollars, attention was specifically drawn to FedEx’s large air-and-ground Express segment as the source of its troubles.
The drop in FedEx’s stock marked its largest percentage decrease since September 16, 2022. On that day, shares plunged 21.4% due to investor concerns about the impact of inflation on the economy and a decline in shipping demand following the e-commerce boom driven by the pandemic.
In response to the stock hit last year, FedEx executives swiftly devised a plan to cut costs. This plan has since evolved into an ambitious goal of slashing $6 billion by fiscal 2027. As a result, FedEx’s stock has seen a significant rebound, currently up 40.7% this year.
However, investors’ optimism took a hit when FedEx reported fiscal second-quarter results that fell short of Wall Street’s expectations. The company also revised its outlook for fiscal 2024, now expecting a “low-single-digit percentage decline” compared to previous expectations of “approximately flat” sales.
According to Evercore ISI analyst Jonathan Chappell, the primary reason behind the bottom-line miss was the impact of macro headwinds on Express volumes and revenue, as well as FedEx’s inability to address costs in that segment quickly enough.
UBS analysts echoed this concern, emphasizing the need to fix Express and highlighting it as a key question for investors during the second-quarter conference call.
Express is FedEx’s largest business segment in terms of sales. It handles expedited air and ground package deliveries worldwide, boasting a fleet of 700 jets and numerous trucks. Unfortunately, revenue, profit, and shipping volumes for the Express business declined during the quarter.
During the company’s earnings call on Tuesday, FedEx executives attributed these challenges to several factors that have hindered the Express segment, outweighing their efforts to streamline operations.
FedEx Faces Challenges in Industrial Production and Shipping Demand
The recent performance of FedEx has been impacted by various factors resulting in weaker industrial production worldwide and lower shipping volumes. Additionally, slower demand in Asia and reduced fuel surcharges have also contributed to the company’s challenges. Furthermore, a shift towards cheaper shipping options and the U.S. Postal Service’s preference for ground shipping over air delivery have further compounded the situation.
CEO Raj Subramaniam suggests that many of these issues are temporary and not indicative of the company’s long-term prospects. Some analysts agree with this sentiment and believe that FedEx’s cost-cutting measures are actually more effective than implied during Tuesday’s earnings call.
For instance, Citi analyst Christian Wetherbee views the recent drop in FedEx’s stock as a buying opportunity, indicating that the trajectory of earning power remains strong through fiscal year 2025. Similarly, Susquehanna analyst Bascome Majors believes that cost reduction efforts have yielded positive results, contrary to the tone of the previous night’s call excluding fuel costs.
However, UBS analysts caution that patience is required for the Express unit to fully recover. They emphasize that in addition to cost reductions, stronger sales are necessary for a complete turnaround. Furthermore, they highlight that the company’s performance will also be influenced by wider factors such as consumer sentiment and overall economic conditions.
UBS analysts acknowledge that FedEx has additional opportunities to improve margins through cost-cutting initiatives like Network 2.0, which aims to streamline delivery infrastructure. They also consider a cyclical lift in both domestic express and international package & airfreight markets to be key drivers for future success.
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