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FedEx Stock Surges After Benefiting From Rivals’ Woes

Published 09/21/2023, 07:12 AM
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  • FedEx delivered a significant quarterly profit beat that surprised investors
  • The solid FQ1 performance was attributed to the company's effective cost-cutting measures
  • Shares rose after the management said it expects to maintain recent market share gains
  • FedEx (NYSE:FDX) reported a mixed set of results for its first fiscal quarter. However, its shares still rose about 5% in early trade after the shipping company raised its full-year profit outlook.

    The results showed that FedEx has continued to experience benefits from its DRIVE initiatives, which, along with increased volumes from diverted freight and effective cost management, contributed to its overall solid performance.

    How FedEx Performed in Q1

    FedEx said its revenue fell 6.5% year-over-year to $21.7 billion, worse than the expected decline of 5.8%. Adjusted operating income was reported at $1.59 billion, a significant improvement related to the $1.23 billion reported for the same period last year.

    Shares were also boosted by a larger-than-expected margin expansion. FedEx reported an adjusted operating margin of 7.3%, up 200 basis points from the year-ago period and above the 6.1% expected by analysts.

    On the bottom line, adjusted net income was reported at $1.16 billion, another improvement considering the $905 million reported last year. Finally, the company’s adjusted EPS of $4.55 crushed the analyst expectations of $3.70.

    “We started fiscal 2024 with strong momentum as our global transformation actions take hold and drive improved results,” said Raj Subramaniam, FedEx Corp. president and chief executive officer.

    Looking across the company’s three business segments, FedEx Express reported an 18% increase in operating income despite a 9% decline in revenue. FedEx Ground also saw a significant increase in operating income, with a growth of 59% during the quarter.

    On the other hand, FedEx Freight reported a 26% decrease in operating income for the quarter. FedEx blamed this decline on lower fuel surcharges and shipments, although it was partially offset by improvements in base yield.

    “FedEx Ground had an outstanding quarter which, when combined with improved earnings at FedEx Express and expense controls across the organization, led to our better-than-expected overall financial performance. FedEx is well-positioned to continue to deliver improved profitability while becoming an even more flexible, efficient and data-driven organization,” Subramaniam.

    On the guidance front, FedEx now expects full-year EPS in a range of $17.00 to $18.50, up from the prior forecast of $16.50 to $18.50. The new midpoint of $17.75 came in ahead of the average analyst estimate of $17.50.

    On the top line, FedEx anticipated flat YoY revenue, an improvement compared to the prior forecast of flat to low-single-digit-percent revenue growth. The shipping company reiterated its guidance that sees $1.8 billion in permanent cost reductions from its DRIVE transformation program.

    FedEx also said it expects to buy back an additional $1.5 billion in stock during fiscal 2024 after saying it completed a $500 million accelerated share repurchase transaction during the quarter. Cash on hand as of August 31 was $7.1 billion, the company added.

    Rivals’ Woes Help Boost FedEx Market Position

    Subramaniam became the new CEO last June and has been credited with the cost reductions and transformation efforts that contributed to the better financial performance of the shipping company.

    Some of the actions that FedEx implemented to drive profitability included structural flight reductions, aligning staffing levels with volume, parking aircraft, and transitioning to one delivery wave per day in the U.S.

    “The FedEx team is working tirelessly to implement its transformation initiatives, which are driving efficiencies and reducing expenses. As we look ahead to the rest of the year, my highest priority is building on this momentum to improve margins and returns,” said John Dietrich, FedEx Corp. executive vice president and chief financial officer.

    Speaking on the earnings call, the management said that FedEx benefited from labor negotiations at direct competitor United Parcel Service (NYSE:UPS), as well as from the bankruptcy of trucking firm Yellow. These have created opportunities for market share expansion within the U.S. transportation industry.

    More precisely, UPS executives disclosed recently that their customers had redirected approximately 1 million packages per day to alternative providers, resulting in approximately $200 million in lost sales.

    In contrast, FedEx reported an increase of around 400,000 to its average daily volume by the end of August, which indicated that it had successfully captured some of the diverted package traffic from UPS. FedEx also said it added about 5,000 average daily shipments following the bankruptcy of Yellow (OTC:YELLQ).

    “Our priorities were clear: protect our customers, deliver outstanding service, and focus on high-quality revenue. While the captured upside as a result of these one-time events, we were highly discerning in terms of the business we accepted in keeping with our goal to drive high-quality revenue. Importantly, we expect to maintain the majority of the volume we added in the quarter,” Subramaniam said on the call.

    FedEx also recently announced demand surcharges for the holiday shopping season, which the CEO said will help the company to “stay well positioned relative to the market.” The shipping company also announced a 5.9% general rate increase effective this coming January.

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    Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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