FedEx’s bleak warning may reflect the global economy and the company’s own shortcomings

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A FedEx employee delivers a delivery on September 16, 2022 in Miami Beach, Florida.

Joe Raedle | Getty Images

FedEx last week warned in a preliminary earnings report of a weakening global demand for shipments, as the market struggled to determine whether the problems reflect internal company failures or a broader economic diagnosis.

CEO Raj Subramaniam pointed to external factors after the shipping giant missed Wall Street’s earnings and revenue estimates, telling TBEN’s Jim Cramer of Mad Money that the company “is a reflection of everyone’s business” and that it is experiencing a “global recession.” expected. But some analysts point to the relative stability of rivals UPS and DHL, and said FedEx’s own inability to adapt also contributed to performance.

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“This is the second year in a row that FedEx has missed its own fiscal first quarter guidance, and I think that’s causing some frustration among investors,” said Moody’s analyst Jonathan Kanarek.

Kanarek was one of the analysts who noted the mix of factors – internal and external – that likely played a role in FedEx’s disappointing results.

Facing reality

Some experts view FedEx’s performance as an overdue confrontation with the market realities stemming from the pandemic, which the company previously failed to acknowledge.

On investor day in June, FedEx presented an optimistic outlook for 2025, driven by annual revenue growth of between 4% and 6% and earnings per share growth of between 14% and 19%.

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“Raj put on a big show in June, their first analyst day in two years, and talked about an environment that was quite optimistic. But here we are three months later,” said Ken Hoexter, an analyst with Bank of America. TBEN.

“They didn’t expect an economic downturn and they didn’t build in,” Hoexter said.

Since around the time of its investor day, Subramaniam said last week that FedEx has seen weekly declines in shipping volumes. As a result, the company withdrew its 2023 forecast, announcing that it would close offices and park planes to cut costs. The stock fell more than 21%, wiping out nearly $11 billion in market cap the day after the report.

Still, FedEx stuck to its expectations for 2025, a move Gordon Haskett research advisers called “borderline delusions.” FedEx’s competitors, they say, are taking a more realistic approach to ending strong demand for the pandemic era.

While FedEx reported weakness in European demand last week among its ills, UPS gained market share in the region. In its most recent earnings call, UPS boasted its highest quarterly consolidated operating margin in nearly 15 years, citing agility amid challenging macroeconomic conditions.

“UPS is two to three years ahead of FedEx in the way they look at margins after Covid,” said Kevin Simpson of Capital Wealth of Closing Bell: Overtime. “It’s almost as if FedEx didn’t think the environment would ever go back to normal.”

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As part of its cost-cutting efforts, FedEx said it will reduce some ground operations and delay hiring. Meanwhile, UPS will hire more than 100,000 seasonal workers for the holiday season.

A whistleblower?

Analysts note that FedEx’s ground and express deliveries are nonetheless vulnerable to global economic conditions, and that the underperformance of the categories may reflect a recessionary environment.

“We really haven’t seen any evidence of a general slowdown. But FedEx is clearly a whistleblower and we don’t want to ignore what they say,” Moody’s Kanarek said.

Bank of America’s Hoexter sees the performance of the express category, which came in $500 million below FedEx’s own expectations, as the first indicator of a broader downturn. He said small volume drops have a significant impact on margins because air delivery costs so much to maintain.

Ground service, which came in $300 million lower than the company’s forecasts, is next to feel a slowdown: “When the consumer stops buying, the stores start filling the shelves, you stop replenishing those inventories.” said Hoexter.

Hoexter’s biweekly survey of truck drivers has reported 11 consecutive periods of “recession range” according to the Bank of America’s Global Research report. That’s because FedEx is reporting that things are not going as well as expected for top customers Target and Walmart, both of which have struggled with excess inventory in recent months.

FedEx reported strong freight margins, but Hoexter noted that the category is “more production-weighted, which hasn’t felt as much of a burden.” If demand continues to slow and manufacturers require less production, Hoexter says FedEx could also see freight volumes decline.

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Holiday fizz

Regardless of the factors causing FedEx’s problems, the upcoming holiday season is unlikely to bring relief. In a statement, FedEx said the cost-cutting measures it announced last week are not expected to affect the service. “We are confident we can deliver this holiday season,” the company said.

But retailers expect moderate holiday sales. And fearing last year’s delays, many had shipped items earlier. The Port of Los Angeles said that by the end of August, 70% of the holiday goods had already reached the coast.

Inventory surpluses that have plagued retailers in recent months may also persist, leading to lower shipping volumes and further dampening FedEx’s business. A KPMG survey found that 56% of retail executives expect to be left with surplus merchandise after the holidays.

FedEx does have some cushioning if the problems persist, notes S&P’s Geoff Wilson. The company is sitting on a lot of money — nearly $7 billion as of May 31 — as opposed to the roughly $3 to $4 billion it normally had before the pandemic. He also noted that the company has reaffirmed its approximately $1.5 billion share repurchase plan

“This is the best signal management FedEx can give in the long run,” Wilson said.

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