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In a challenging economy, FedEx is not delivering, which worries Wall Street.
It processed fewer parcels last quarter due to “weakening economic conditions,” and operating income at FedEx Express fell 69%, according to FedEx’s latest earnings report, released Thursday.
Costs at the land carrier rose and now the company plans to increase rates by an average of about 7%.
The news follows a startling warning last week that the company has been in trouble. Following that announcement, FedEx’s stock price fell more than 20%, and some of its rivals, including UPS and XPO Logistics, also lost ground.
The global economy – the “macroclimate” – is responsible for the company’s shocking downturn, CEO Raj Subramaniam told CNBC’s Jim Cramer last week. Cramer asked the director if he expects the world to sink into an economic recession.
“I think so,” replied Subramaniam.
On Thursday, FedEx outlined key steps to get back on track.
The company plans to take some of its aircraft out of service and reduce deliveries on Sunday. In addition, it plans to close nearly 100 retail locations and, like many businesses at the moment, plans to suspend hiring until economic uncertainty around the world has subsided.
Beyond Fast Deliveries: The World Sees FedEx as an Economic Factor
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What worried investors is that FedEx is seen as a whistleblower.
“We are a reflection of everyone’s business,” said Subramaniam.
In that warning last week, which came in the form of a company update, FedEx withdrew its earnings forecast. It is unable to predict how much money will come in because it is in “a persistently volatile business environment”.
FedEx also says it faces “service challenges” in Europe, where a recession appears likely, and “macroeconomic weakness” in Asia, which also still suffers from tight COVID lockdowns.
Because of its size and the fact that its business deals with the movement of goods, FedEx can “tell us very clearly what’s going on with inventory movements and general business operations,” said J. Bruce Chan, who manages transportation and logistics companies for Stifel covers.
While it gives a good idea of two important parts of the economy, it also serves as a reliable indicator of what’s ahead. According to Barclays analysts, FedEx revenues have contracted in a similar fashion during the last three recessions, in 2020, 2009 and 2001.
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Today, FedEx has a massive global footprint. It operates in more than 200 countries and the Memphis-based company’s half-million employees handle more than 15 million shipments every day.
During the pandemic, as homebound shoppers ordered books, electronics and furniture, the number of shipments soared and so did the FedEx stock price.
But as the United States and many other countries eased their COVID protocols, people started spending more on services, not goods. The result: FedEx and its competitors process fewer shipments.
“They’re not collapsing, but they’re declining,” said Deutsche Bank analyst Amit Mehrotra, adding that the company must navigate the current slowdown with “very, very good cost management.”
“That’s where we think FedEx has failed quite dramatically,” Mehrotra said.
Like other Wall Street analysts following the company, Mehrotra says FedEx’s performance can tell us a lot about the state of the global economy, but the company can’t pin all its problems on that alone.
“This was much more of a company-specific story… than something that can be explained by a macroeconomic slowdown,” he said.
Determining if the culprit is really the economy, the business, 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 company update, analyst Ken Hoexter, who covers FedEx for Bank of America, wondered how much of the company’s predicament is due to current executives setting unrealistic goals.
“I think you had a setup here that was unattainable from the start,” he said.
Things may have gotten worse economically, “but FedEx-specific problems are creeping up on them,” he added.
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So, was the sale justified?
According to Stifel’s Chan, there is enough to alarm investors and everyone else.
“At the moment there is a lot of discussion about the direction of the global economy,” he said.
By missing profits so badly and offering such an uncertain view of the future, FedEx “gave people who might be on the fence what they needed to be careful about,” Chan said.