FedEx Hits "Bottom" In Fiscal 2020 Second Quarter

FedEx Corp. FDX has become a next-decade story.

It will not happen this year. In fact, the fiscal 2020 second-quarter numbers were so bad that the C-suite didn't bother to attempt to sugarcoat them. "We have reached the bottom," said longtime CFO Alan B. Graf Jr.

The bottom may hang until late spring. Due to higher-than-expected expansion costs, the company had to lower its fiscal 2020 earnings guidance to a range of $10.25 to $11.50 a share, from the last public read, which was at $11 to $13 a share. The lower full-year range also includes 51 cents a share in tax benefits due to a lower tax rate, the company reported. FedEx's fiscal year always ends on May 31.

The second quarter was ugly across the board. Revenue came in at $17.3 billion, $500 million below the fiscal 2019 first-quarter level. Operating income of $684 million was about half the year-earlier levels, or about $300 million less than analysts expected. Net income of $660 million was well below last year's mark of $1.08 billion. Operating margins shrank to 3.9% from 7.5%. Earnings per share of $2.51 were nowhere near the $2.79 estimate by 10 analysts polled by Barchart.

It didn't get better upon drill-down. Earnings misses were reported at all three business units: Express, Ground and Freight, according to Amit Mehrotra, analyst for Deutsche Bank. Ground delivery margins clocked in at 6.4%, about half that from the 2019 fiscal year. Chairman and CEO Frederick W. Smith said that ground margins should be back in the teens by the fiscal fourth quarter as costs fall away and the company has a better handle on density in the business-to-consumer segment, which is driven by e-commerce.

International air volumes, especially on the non-e-commerce front, remained weak. In response, FedEx will cut 6% to 8% of what it referred to as "global flight hours" from its air network. U.S. business-to-business traffic, long an important and profitable part of the company's mix, has been hampered by the yearlong decline in the country's industrial production. Integrating the operations of TNT Express, which FedEx acquired in 2016 for $4.8 billion, has become a $1.7 billion chore. The company said the physical integration should be complete by fiscal 2022.

The long-term weakness in industrial demand has been offset somewhat by e-commerce growth. Costs, on the other hand, have ballooned much faster than anticipated. Supporting six- and seven-day-a-week deliveries, the more frequent handling of larger online orders and the in-sourcing of millions of parcels once handled by the U.S. Postal Service (USPS) is not coming cheap. The profitable revenue needed to effectively pay for that investment has so far proved elusive. The quarterly results were not helped by missing the "Cyber Monday" buying extravaganza, the results from which will be tallied in FedEx's fiscal third quarter.

FedEx will maintain a $5.9 billion annual CapEx budget, and Smith said the company will not implement large-scale layoffs. The projected acceleration in demand will require knowledgeable people to support it, he argued. The impact of high capital costs will be lessened over the coming quarters, he said.

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