Transport giant FedEx Corp. (NYSE:FDX) late today reported weaker-than-expected fiscal 2019 second-quarter results, weighed down by a rapid deceleration of Eurozone and U.K. economies and a less-profitable mix of traffic from TNT Express, the Dutch delivery firm that FedEx acquired for US $4.8 billion in mid-2016.
No one expected the results to be stellar given a build-up of evidence showing a significant slowdown in continental Europe, the U.K. and China. However, the suddenness and magnitude of the slowing and its impact on FedEx’s business sent its shares plunging in after-hours trading. As of 7 pm ET, shares were down $11.26 a share, a 6 percent drop from the market’s close.
FedEx’s results were also impacted by disproportionate growth in TNT Express’ palletized freight business, which operates with narrower margins than does parcel. FedEx’s “international priority” product, consisting mostly of profitable parcels with rapid delivery turns, barely grew in the quarter, while its “international economy business,” largely made up of the heavier weighted shipments not as time-sensitive, grew by 9 percent.
Not surprisingly, FedEx Express, the company’s air and international unit, bore the brunt of the subpar overall results as parcel demand was the main casualty of the slowdown in Europe, FedEx executives said. US operations performed well, a reflection of continued strength in the domestic economy throughout the autumn, FedEx said
The narrative during tonight’s call was a sharp departure from three months ago when FedEx reported its fiscal first-quarter results. Then, there was little, if any, discussion about global weakness. Since then, however, there have been riots in France that have spread to other countries, a slowdown in German GDP, continued uncertainties over Italy’s precarious fiscal situation, and the UK’s problematic exit—if it occurs at all-from the European Union. UK demand has fallen off significantly since the end of the first quarter, the company said.
Executives said they were pleased with TNT’s performance in its freight business, noting that it offers a solid value proposition to those customers. However, they are clearly not happy about the traffic mix. In addition, the largest, costliest and most complex chapter in the multi-year TNT integration is still ahead, with the largest customers and countries still to be integrated.
As a result of all this, FedEx acknowledged that its goal of increasing FedEx Express’ operating income by $1.2 billion to $1.5 billion over FY 2017 levels will not be achieved in fiscal 2020, which begins June 1. 2019. Alan B. Graf, Jr., FedEx’s CFO, declined to comment on a timetable for hitting that target.
In the meantime, FedEx will do what it has always done when it hits a rough patch: Batten down the spending hatches. It will reduce international network capacity, accelerate its voluntary employee buy-out program, curtail discretionary spending, and limit staff hiring. FedEx’s 2019 CapEx budget is $5.6 billion, though Graf said those plans are under review.
For the quarter, revenue hit $17.8 billion, with non-adjusted operating income at $1.17 billion. Net income hit $935 billion, with earnings per share at $3.51 a share. Both numbers were non-adjusted. For the full year, earnings per share will be in a range of $12.65 and $13.40 per diluted share, down from the prior forecast of $15.85 to $16.45 per diluted share. The full-year figures include a number of adjustments—considered non-recurring expenses that don’t affect the company’s long-term operations—notably the costs of the remaining TNT Express integration program.
While the company finds itself in the midst of numerous uncertainties, there is one aspect of the business they are sure of: That e-tailer amazon.com, Inc.’s buildout of a transportation network (NASDAQ:AMZN) poses little threat. “We don’t see them as a peer competition at this point,” said Chairman and CEO Frederick W. Smith, adding that it is doubtful Amazon will ever be a bona fide rival.
Smith, who replied to the question about Amazon with a weary chuckle reflecting someone answering the same query for the thousandth time, said the idea that Amazon could disrupt FedEx’s business is “fantastical.