Will Ground Unit's High Costs Mar FedEx's (FDX) Q2 Earnings?

FedEx Corporation’s (NYSE:FDX) Ground unit, which accounts for more than 29% of the company’s total revenues and around 59% of its operating income, is expected to be hurt by high costs when it reports second-quarter fiscal 2020 results (ended Nov 30, 2019). (See more in Will the FedEx Stock Disappoint Again in Q2 Earnings?)

FedEx Ground offers low-cost, day-certain service to any business address in the United States and Canada as well as residential delivery in the United States through its FedEx Home Delivery service.

Highlights of FedEx Ground’s Q1 Performance

FedEx Ground revenues rose 8% year over year to $5.18 billion in the first quarter owing to volume growth and increased yields. Operating income came in at $644 million, down 5% year over year while operating margin contracted to 12.4% from 14.1% in the prior-year quarter.

Segmental operating income declined due to higher costs pertaining to purchased transportation apart from increased staffing expenses incurred for supporting network expansion.

High Costs Likely to be Reflected in FedEx Ground’s Q2 Results

Ground segment’s fiscal second-quarter results are likely to reflect the impact of high expenses due to its steady investment in enhancing capacity, technology and automation. Notably, this particular unit is FedEx’s second-largest revenue-generating unit after the Express division.

Network investments pertaining to the seven-day residential delivery plan, improvements pertaining to handling capabilities of large packages and SmartPost integration are likely to have dented segmental operating income in the fiscal second quarter. Evidently, the Zacks Consensus Estimate for second-quarter operating income at the FedEx Ground unit stands at $548 million, indicating 6.5% year-over-year decline due to high costs.

Additionally, FedEx’s decision to not renew its ground delivery contract with Amazon (NASDAQ:AMZN) might have dented the segment’s performance in the fiscal second quarter.

However, solid e-commerce growth is likely to have boosted second-quarter revenues at the Ground segment. Backed by upbeat e-commerce growth, the Zacks Consensus Estimate for second-quarter revenues at the FedEx Ground unit stands at $5,451 million. In the year-ago quarter, the segment recorded revenues of $5,142 million.

Overall Earnings & Revenue Projections

For FedEx, which competes with United Parcel Service (NYSE:UPS) in the package delivery space, the Zacks Consensus Estimate for second-quarter earnings is pegged at $2.84. This indicates 29.5% decline from the prior-year quarter’s reported figure. For quarterly sales, the consensus mark of $17.57 billion suggests a decrease of 1.43% on a year-over-year basis.

Our Take

While surging e-commerce volumes are likely to have boosted revenues at FedEx Ground, high costs are likely to have dented segmental operating margin in the quarter. The margin compression at this key segment, in turn, might have weighed on this Zacks Rank #4 (Sell) company’s overall second-quarter performance.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Pick

Investors interested in the Zacks Transportation sector may consider Allegiant Travel Company (NASDAQ:ALGT) , which sports a Zacks Rank #1. Shares of Allegiant have gained more than 20% over the past six months.

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