It was not a world-beating quarter for FedEx Corp. But it was more than adequate to give analysts and investors hope that the worst of the staffing shortages and operating problems plaguing the company for months were mostly behind it.
FedEx’s (NYSE: FDX) fiscal 2022 second-quarter results, which were announced late Thursday, had more good news than bad. Adjusted operating income rose more than 11% to $1.68 billion, and adjusted diluted earnings per share of $4.83 were well above median estimates of $4.25 to $4.28 per share. Revenue climbed by nearly $3 billion year-over-year.
The company’s FedEx Express air and international unit posted $1 billion in operating income along with an 8.8% operating margin. LTL unit FedEx Freight, which a decade ago was a problem child for the parent, posted another stellar quarter with year-on-year operating income up 33%, operating margin up 14.7% and revenue rising 17%.
Domestic yields, including the effect of fuel surcharges, rose 9.1% year-over-year, FedEx said. International express yields jumped more than 12% as FedEx Express benefited from higher volumes and a capacity-constrained market for air capacity that will persist through 2022 and not return to pre-pandemic levels until 2024. The company said it is aggressively repricing customer contracts to include higher renewal rates and is capturing most of its delivery surcharge revenue instead of it being negotiated away.
In what FedEx hopes will be viewed as a sign of confidence in its near- to intermediate-term outlook, its board of directors authorized a $5 billion share repurchase program, which would accompany a 25 million share buyback authorized in 2016 that is almost fully wound down. The company also said it plans to expedite the purchase of $1.5 billion worth of its shares.
In addition, FedEx said it plans to host an analysts meeting next June in Memphis. Typically, companies don’t schedule an event like this unless they have bullish news to share.
What kept the quarter from being close to world-beating were the ongoing problems at FedEx Ground, the U.S. ground delivery unit that handles much of the company’s e-commerce deliveries. For the second straight quarter, the unit was beset with staffing shortages that, in turn, led to higher costs and operational disruptions. FedEx Ground accounted for more than 60% of the $470 million in additional expense the parent incurred to hire and retain scarce labor, purchase more third-party transportation at premium rates and cope with the network challenges arising from the dearth of qualified staff. In addition, the unit absorbed a $90 million cost for network expansion initiatives.
Despite a 13% revenue gain, the unit posted a $70 million drop in operating income and a 5.8% operating margin, its lowest in about two decades. CFO Mike Lenz said labor availability, and by extension network fluidity, should improve over the rest of FedEx’s fiscal year as the company hires more people. It has hired 10,000 to 12,000 per week since the quarter ended at the end of November. However, the higher wage levels will become part of the permanent landscape, Lenz said.
President and COO Raj Subramaniam predicted that the ground unit will return to double-digit operating margins throughout the fiscal year’s second half as costs abate and revenue remains solid.
Analysts were willing to give FedEx the benefit of the doubt on the results. Tom Wadewitz at UBS said in a note he believes FedEx can get on top of its labor availability issues during the back half of its fiscal year. Hiring and retaining workers is key to boosting the Ground unit’s operating margins, said Wadewitz, who revised downward his 12-month price target to $343 per share from $369 a share, but still well above Friday’s close of $250.32 a share. FedEx shares rose 5% during an otherwise down day on Wall Street.
Todd Fowler of Key Banc Capital Markets said the Ground unit should benefit from sequential improvements in the labor situation, while the Express unit continues to have the macro wind at its back. Combined with a firm pricing environment and historically low valuation metrics, FedEx shares are poised to strongly advance, Fowler said. The analyst has a 12-month target of $325 a share and an overweight rating on the shares.
Amit Mehrotra of Deutsche Bank said the overall results were “better than feared” and that the company has “cleared a significant hurdle” that will offer clarity on better operating margins in the back half of the fiscal year. Mehrotra has a 12-month target of $310, with the chance of higher levels should Ground margins get back on track.