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In a tough economy, FedEx isn’t delivering, and that’s worrying Wall Street.
Fewer packages were processed in the most recent quarter due to “softening economic conditions,” and FedEx Express’ operating income fell 69%, according to FedEx’s latest earnings report released on Thursday.
Spending at its ground carrier increased, and now the company plans to increase its fares by an average of about 7%.
The news follows a surprise warning last week that the company was struggling. Following that announcement, FedEx’s stock price fell more than 20%, and some of its peers, including UPS and XPO Logistics, also lost ground.
The global economy — the “macro climate” — is to blame for the company’s shocking downturn, CEO Raj Subramaniam told CNBC’s Jim Cramer last week. Cramer asked the executive whether he expected the world to slide into an economic recession.
“I think so,” Subramaniam replied.
On Thursday, FedEx outlined key steps to get back on track.
The company will retire some of its planes and reduce deliveries on Sunday. It also intends to close nearly 100 retail locations and, like many companies right now, plans to take a hiring pause until economic uncertainty around the world dissipates.
Beyond fast deliveries, the world sees FedEx as the economic leader
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What’s unsettling investors is that FedEx is seen as a front-runner.
“We mirror everyone’s business,” Subramaniam said.
In last week’s warning, which came in the form of a business update, FedEx withdrew its earnings forecast. It’s unable to predict what money will come in as it’s in “an ongoing volatile operating environment.”
FedEx also says it faces “service challenges” in Europe, where a recession is likely, and “macroeconomic weakness” in Asia, which also continues to struggle under strict COVID lockdowns.
Because of its size and the fact that its business deals with moving goods, FedEx “can tell us very clearly what’s going on with warehouse moves and general business activities,” said J. Bruce Chan, who oversees transportation and logistics companies for Stifel.
While it makes good reading for two important parts of the economy, it also serves as a reliable indicator of what could be along the way. FedEx earnings fell in a similar fashion during the last three recessions — 2020, 2009 and 2001, according to analysts at Barclays.
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Today, FedEx has a huge global footprint. Operating in more than 200 countries, the Memphis-based company’s half-million employees process more than 15 million shipments daily.
During the pandemic, as shoppers ordered books, electronics, and furniture from their homes, shipping volumes soared, and with it, FedEx’s stock price.
But as the United States and many other countries eased their COVID protocols, people shifted to spending more on services rather than goods. As a result, FedEx and its competitors are handling fewer shipments.
“They’re not collapsing, but they’re going down,” said Amit Mehrotra, an analyst at Deutsche Bank, adding that the current slowdown needs to be managed with “very, very good cost management.”
“This is where we think FedEx failed quite dramatically,” Mehrotra said.
Like other Wall Street analysts who follow the company, Mehrotra says FedEx’s performance can tell us a lot about the state of the world economy, but the company can’t attribute all of its woes to it alone.
“This was much more of a company-specific story…than anything that can be explained by a macroeconomic slowdown,” he said.
Decide if the culprit is really the economy, the company, or both
FedEx is in the midst of a critical transition. Subramaniam became CEO about four months ago, succeeding Fred Smith, who founded the company in 1971.
After reviewing last week’s business update, analyst Ken Hoexter, who covers FedEx for Bank of America, wondered how much of the company’s predicament is due to its current executives setting unrealistic goals.
“I think what you had here was a setup that was unattainable from the start,” he said.
Things may have gotten worse economically, “but FedEx-specific issues have crept in,” he added.
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So was the sell-off justified?
According to Stifel’s Chan, there’s a lot that could worry investors and everyone else.
“Right now there is a lot of debate about the direction of the global economy,” he said.
By missing the profit mark so badly and offering such an uncertain outlook for the future, FedEx “gave people who might have been riding the fence what they needed to move toward caution,” Chan said.