FedEx shares jump on quarterly profit beat, bullish outlook

[DALLAS] FedEx Corp shares climbed after it posted strong profits on higher prices and elevated e-commerce, providing a springboard for accelerated growth expectations as the US economy recovers from the pandemic.

The company said surging package volumes and pricing gains offset increased labour costs and weather-related expenses during the three months ended in February. It also provided a bullish forecast for the full year - the first guidance it has issued since suspending its outlook 12 months ago amid uncertainty about the pandemic.

"We have great momentum coming out of Q3," Brie Carere, the courier's marketing chief, said on a conference call with analysts.

FedEx rose 4.4 per cent in after-hours trading in New York after closing down 0.9 per cent to $263.51. As of the close Thursday, the stock had risen less than 2 per cent so far this year. It rallied 72 per cent in 2020.

Winter storms cut operating income by US$350 million after severe snowfall locked up most of the southern US, including FedEx's largest hub in Memphis, Tennessee, for about a week in mid-February. But record package volumes and less air-freight competition from airlines allowed the company to lift prices.

Adjusted earnings for the quarter came to US$3.47 a share, beating analysts' expectations of US$3.22, FedEx said in a statement Thursday.

The results show FedEx is benefiting from a turnaround in the broader recovery as the pandemic wanes, Matt Arnold, an analyst with Edward D Jones & Co, said in a telephone interview.

More importantly, the courier is proving to investors it can make money on residential deliveries, which rose to 70 per cent of ground volumes from 62 per cent a year earlier.

"They're making some good progress on finally improving profitability through a combination of getting the pricing they need as well as taking the cost per delivery lower," Mr Arnold said.

E-COMMERCE SURGE

FedEx said e-commerce will grow faster than it projected just six months ago when the company saw US domestic deliveries across the industry reaching 100 million packages per day in 2023 - three years earlier than it had previously forecast. It now estimates hitting 101 million packages per day in 2022, with 86 per cent of that growth from e-commerce.

Fuelled by expectations for continued demand, the company issued an earnings outlook for its fiscal year ending in May of US$17.60 to US$18.20 per share, which is above analysts' estimates for US$17.40.

FedEx's ability to weather the pandemic was helped by moves it made starting in early 2019. Chief Executive Officer Fred Smith overhauled the company's ground unit to be more efficient making residential deliveries and he invested in automated sorting hubs allowing it to expand service to seven days a week from five. The company also built stand-alone facilities to handle oversize packages and took back parcels it had been handing off to the US Postal Service for final delivery.

The changes helped FedEx deal with an onslaught of online shopping as virus-wary consumers shunned brick-and-mortar stores. Sales climbed 23 per cent to US$21.5 billion in the quarter, led by a 37 per cent gain in revenue from standard ground operations to about US$8 billion. Express delivery sales rose 21 per cent to US$10.8 billion.

'DECLERATION' RISK

The company anticipates rising sales and profit margins for ground, express and freight in the current quarter that ends May 31, citing the US government stimulus checks as a contributor to higher demand. Commercial airlines, which also carry cargo, won't recover fully until as late as the end of 2024 and e-commerce will remain a growth engine, it predicted.

Still, Ms Carere warned of a "potential for a short-term deceleration" for online shopping after the pandemic subsides.

High volumes have allowed FedEx and rival United Parcel Service to increase prices even as they limit capital spending. FedEx lifted its forecast for capital expenditures by US$600 million to US$5.7 billion for the year ending in May to boost capacity at its ground unit and to move up some aircraft payments. That's still lower than the US$5.9 billion it spent last year.

Operating margins of 4.9 per cent fell short of analyst expectations for 5.9 per cent, but showed marked improvement over the paltry 2.8 per cent FedEx reported a year ago as Covid-19 triggered business shutdowns.

BLOOMBERG