On Oct. 12, 2021, GXO Logistics Chief Investment Officer Mark Manduca laid out the argument for why the Greenwich, Connecticut-based firm represented a new breed of logistics company.
“This is a hard business to wrap your head around. There is no company out there that is scalable contract logistics,” he told a virtual audience during a Deutsche Bank forum.
Manduca was speaking less than three months after GXO was spun out of XPO. He acknowledged that investors “don’t really understand how to model” the business, which provides contracted logistics services with a focus on technology to manage supply chains and warehousing for its clients.
GXO grows up
One year later, GXO is no longer the new kid trying to prove itself. On Aug. 2, GXO (NYSE: GXO) formally marked its first year in business by ringing the opening bell at the New York Stock Exchange. It also reported banner earnings that exceeded analysts’ expectations. It posted adjusted diluted earnings per share of 68 cents, up from 44 cents per share in the year-earlier quarter, and 5 cents per share above consensus estimates.
Adjusted earnings before interest, taxes, depreciation and amortization came in at $176 million, up from $150 million. Revenue rose 15% to $2.16 billion. GXO said it won $475 million in new business in the quarter, a quarterly record, and 40% of its new business wins came from reverse logistics — a still underdeveloped sector within the e-commerce supply chain.
Watch: GXO’s journey
For the full year, the company raised its guidance for organic revenue growth to 12% to 16%, from 11% to 15%. Adjusted EBITDA guidance was raised to a range of $715 million to $750 million from $707 million to $742 million. Adjusted diluted earnings per share is expected to come in at $2.70 to $2.90 per share, which is unchanged from prior estimates.
The results were cheered by investors.
“This was good news for what we see as an otherwise stable and predictable revenue pipeline relative to other names in our coverage group; sticky, long-term contracts with large, blue-chip customers impart significant resilience to the model,” an analysis written by Stifel noted. “And while e-commerce is a very important part of the growth story, it is less about headline e-commerce sales (which we believe are decelerating), and more about the second derivative of e-commerce business converting to an outsourced solution, which is somewhat counter-cyclical or at least cycle-agnostic, and driven by customers looking for cost savings, in our view.”
New business wins
GXO’s second quarter included several milestones in addition to the new business wins, including the closing of its $1 billion-plus deal to acquire Clipper Logistics, over $1 billion incremental revenue contracted for 2022 and surpassing $2 billion in the sales pipeline.
And the first-year successes have come during a time of great upheaval in the supply chain, from labor, materials and warehouse capacity shortages to port congestion and inflation.
“The environment over the last 12 months has been highly conducive [to business],” Neil Shelton, chief strategy officer for GXO, told Modern Shipper. “GXO is a problem solver. … We aim to make warehousing [more efficient].”
GXO opened 90 sites and 15 million square feet of warehouse space, signed 450 new customer contracts and added 15,000 people to the company in its first year, Shelton noted, adding that organic revenue growth was 20%.
“I think in many ways we’ve overachieved some of our ambitions, but we are not going to stop there,” Shelton said. “We are going to continue to work to deepen our relationships [and invest in talent and grow headcount].”
GXO was named to the Fortune 500 this year.
One of the biggest highlights of the first year was the addition of Clipper in the U.K., but Shelton said the company continues to be on the hunt for the right acquisition targets.
“We’re really excited about using M&A to grow our business in the U.S., but it needs to be a great quality company like Clipper,” he said.
Automation dominates
Of new business won in the second quarter, 60% of the contracts included automation.
“Our customers crave predictability and automation helps drive that in the warehouse,” Shelton said. “It also helps drive efficiency and [better use] of their own labor.”
Shelton noted that automation is increasingly important in e-commerce reverse logistics. Brands are seeing as much as 30% of the items shipping out being returned in some segments.
“Ultimately, GXO is providing a strategic solution in logistics. Reverse logistics is one stepping stone in that,” he said.
Warehouse space has not been a limiting factor for GXO and there is some indication that inventory levels are starting to level off. According to the July Logistics Managers’ Index, inventory levels (68.8) remained in growth mode, but the pace was 3 percentage points lower than in June and well off the February high of 80.2.
“There are signs of a slowdown in what had been out of control inventory growth as the current value is a mere 2.4 points higher than the same time last year,” the report said. “This means that seasonally speaking, inventories are increasing only slightly more quickly than one year ago.”
Real estate investment firm Prologis, in May, said warehouse vacancy rates were near all-time lows of 3.3%. Shelton said GXO’s relationships with large real estate landlords have helped it manage the space needed to meet its customers’ demands.
“The warehouse market has been tight for a good couple of years,” he said. “We see more capacity coming onstream through the course of 2023, so things will get better.”
GXO on the right path
Of concern to many businesses is the economy. Indications are mixed — while retail sales seem to be slowing, hiring remains strong — but Shelton doesn’t see as much exposure for GXO to economic swings as some others might.
“Our growth is being driven by companies planning further forward,” he said. “And we continue to see companies planning further forward to gain e-commerce share.”
Shelton said accelerating technology deployment will continue to be a theme into 2023.
“There will be small changes around what we are doing, but at our heart we will try to drive more predictably, more consistency,” he said. “We are really excited about our growth opportunity. And even if we fast-forward one year, we will still have just scratched the surface of GXO.”
The story of GXO, which began to take shape in August 2021, continues to find its audience, but Shelton remains confident that there are many chapters still to be written.
“What we are seeing here is a growing realization that the brand, the execution and what we have been able to drive is really … resonating in this market,” he said. “Many existing and potential customers are coming [to us] with varying challenges to solve and the team has been able to stand up to those challenges.”
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