FedEx Profit Drops Less Than Investors Feared

December 19, 2012

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FedEx's profit fell 11.9 percent in the second quarter, less than investors had feared, as the No. 2 US package delivery company struggled to improve results at its air freight business.

Demand for air express shipments has fallen as customers turn to slower, less costly methods of delivering goods. Those declines were partly offset by strong growth at the company's unit that ships goods by truck.

"Over the last couple of years... customers have opted to trade a bit of speed for a lower price," chief executive Fred Smith told investors on Wednesday. "We're moving it on the ground more as opposed to flying it as much."

As part of a restructuring plan announced in October, the company plans to shed some staff; it has extended a buyout offer that it expects thousands of US workers to accept as it bids to trim costs at the air express unit, where profit slumped about 33 percent.

FedEx reported fiscal second-quarter earnings of USD$438 million, compared with USD$497 million a year earlier.

"It's mostly a continuation of the trends that we've been seeing, that is solid execution in the face of customers downshifting from premium products to more economy products," said Morningstar analyst Keith Schoonmaker, referring to a shift away from air express deliveries. "But we have to accept that today's economy products are yesterday's premium products. Sometimes getting it in two days by truck is fast enough."


The company's ground business, meanwhile, is taking market share from larger rival, United Parcel Service, a FedEx executive said.

"There is no question that with our value proposition that we are taking some level of share," said David Rebholz, who heads the company's ground operation, which generates about a quarter of FedEx sales. "We're absolutely winning the game over the long run."

Revenue grew 4.7 percent to USD$11.1 billion from USD$10.6 billion a year earlier.

The company held steady its profit forecast for 2013 - it expects to earn $6.20 per share to $6.60 per share for the fiscal year to May. In September, FedEx had cut that forecast by about 10 percent.

That forecast does not account for the costs of buying out thousands of workers, which could total USD$550 million to USD$650 million, the company said. At the end of its last fiscal year, FedEx employed about 300,000 people worldwide, according to a filing with the US Securities and Exchange Commission.

Its forecast also presumes that leaders in Washington will reach a deal soon to avert the "fiscal cliff" - steep spending cuts and tax increases that come into effect in 2013, executives said.

"Our outlook... assumes that the US does not go off the fiscal cliff and into a recession," said Chief Financial Officer Alan Graf.

FedEx said shipments relating to the holiday shopping season - a key period for US retailers - were on track to set a record.

FedEx shares have gained about 9 percent over the past 12 months, outperforming the 5 percent rise in shares of rival UPS. Still, both companies have under-performed the broader US market.