Memphis based delivery giant, FedEx (FDX, Financial) recorded third quarter fiscal net profit of $580 million, or earnings of $2.01 per share, a rise of 53% from $378 million, or $1.23 per share, a year earlier. The quarterly earnings topped analysts’ expectations of $1.87 a share and the package delivery company recorded higher package volumes and yields for the quarter.
FedEx’s revenue reached $11.7 billion from $11.3 billion, a year ago, but slightly missed on analyst estimates that stood at $11.79 billion for the quarter. The delivery giant stated that fuel expenses were reduced by 30% in the quarter due to lower oil prices, but such falling crude oil prices did hurt the growth curve of its international business segment. The international business segment’s growth was negatively affected by decreasing fuel surcharges and the strengthening of the dollar. Let’s quickly peek into the major highlights shared by the management on the third quarter of FedEx.
A whopping quarter in overall
In terms of logistics and cost management, FedEx’s main rival, UPS (UPS, Financial) reported low profit numbers, thanks largely to the soaring peak season costs. UPS invested and prepared a workforce and inventory for an expected holiday surge that did not happen, forcing the company to apply surcharges on residential packages for this year's peak season.
Compared to its immediate rival, FedEx has been performing well, which is well reflected by taking a glance at the operating expenses of the two package delivery companies. While UPS’s fourth-quarter expenses rose almost 16%, FedEx’s operating expenses increased just 1% during the third quarter. FedEx stated that package volumes in its international economy business rose just 4%, while daily volumes in the U.S. ground package delivery business improved 7% for the quarter.
During the earnings call on March 18, FedEx executives stated that the whopping improvement in net profit was earned not only due to declining oil prices and a successful holiday season but also due to rampant cost-cutting measures being undertaken by FedEx at its largest business segment- air express. The company is in the process of restructuring its air express division by buying out 3,600 employees and modernizing its fleet of planes. It is interesting to note that this air express division contributes to more than half of FedEx’s total revenue earned in a quarter and such a restructuring plan could boost the revenue from this segment also in the quarters ahead. While revenue of this segment remained flat at $6.7 billion, the operating income literally jumped and doubled to $384 million, post this restructuring program.
FedEx Ground results were also boosted by a splendid performance of the company during the holiday season last December coupled with a new re-pricing strategy brought about in January this year according to which customers would get charged based upon the size of their package instead of weight alone. Besides these factors, lower fuel costs and better weather conditions benefitted this segment which saw revenue increase by 12% to $3.39 billion and operating income rising about 14% to $558 million for the quarter.
Its third business division, freight division, which contributes about 12% to the total revenue, witnessed a whopping increase in operating income that nearly doubled to $68 million, from $35 million reported a year earlier.
The management tone remains highly positive
According to FedEx’s CEO Fred Smith,” What we really sell is cubic space.” He went on to explain during the earnings presentation that the company holds plenty of stories about containers having a “2- or 3-ounce small device in it that just have incredibly bad cubed to weight ratios.” Hence, the new pricing strategy has been brought in place; to get rid of such problems on using the given space effectively.
According to FedEx’s executive vice president of market development, Mike Glenn, the change in pricing has encouraged several customers to rethink on their packaging in order to maximize space utility. While such new pricing strategies do not directly impact revenue, it does so indirectly as it saves space in trucks and leaves room for additional packages to be catered to by the delivery giant.
Overall the management remains positive and the optimism is clearly projected from CEO Fred Smith’s words at the earnings call where he stated, “We had a very successful peak season as volumes grew across all our segments…” But at the same time the management expects the U.S. economy to grow at a slower rate of 3.1% in the years 2015-2016. Hence, the company has reduced its future forecast on earnings for the full year from $8.5-$9 per share to a range of $8.80-$8.95 a share, which is slightly below analysts’ estimates of $8.97 a share for the full year ending May 31.
Parting word
Going forward, temporary headwinds such as the strong dollar and a rebound in oil prices might affect FedEx’s core business lines and lead to a weak fourth quarter ahead. But the management is aware of all this, and thus the earnings guidance have been narrowed down for the full fiscal year and a new pricing strategy is being currently undertaken to perform well in the near future. So, let’s stay tuned for the coming quarter numbers, but one thing stands clear that FedEx’s management is taking active measures to keep the top and bottom lines growing for the delivery company in the next quarters.
