FedEx Q1 FY 2023 (June-Aug 2022) Earnings Review

Summary

FedEx missed analyst’s expec­ta­tions for rev­enue, adjust­ed oper­at­ing income, and earn­ings per share for 1Q23.  (Note that FedEx’s 2023 Q1 ran from June through August of 2022.) Rev­enue of $23.2b missed con­sen­sus esti­mates by $342m and adjust­ed oper­at­ing income missed con­sen­sus esti­mates by $542m. Adjust­ed oper­at­ing mar­gin declined to 5.3% from 7.2% last year with dilut­ed EPS of $3.49 com­pared to $4.72 last year and con­sen­sus esti­mates of $5.06. YOY rev­enue grew 5.6% while oper­at­ing prof­it declined by 14.8%.

Quarter Overview

Over­all oper­at­ing mar­gin decreased to 5.3% from 6.4% last year as oper­at­ing prof­it at the Express divi­sion declined by 69% with oper­at­ing mar­gin declin­ing to 1.6% from 5.2% last year. Ground oper­at­ing prof­it increased 3% as rev­enue per pkg increased by 11.6%. Oper­at­ing mar­gin was 8.4%. FedEx Freight oper­at­ing prof­it increased by 67% as rev­enue per ship­ment increased 27.1% and oper­at­ing mar­gin increased to 23.9% from 17.3%.

Pack­age vol­ume declined across all FedEx’ oper­at­ing divi­sions with Express vol­ume declin­ing 11.4% world­wide with FedEx man­age­ment point­ing to rapid­ly soft­en­ing demand in August, par­tic­u­lar­ly from Asia and with­in Europe where FedEx expe­ri­enced ser­vice reli­a­bil­i­ty issues. In the US, Express overnight vol­ume declined by 8.1% and Deferred vol­ume declined by 14.5%. At FedEx Ground, FedEx con­tin­ues to deem­pha­size its Econ­o­my prod­uct with vol­ume declin­ing by 37% YOY. B2B vol­ume declined by 1.3% while Home Deliv­ery increased by 4.4%. FedEx Freight report­ed its high­est quar­ter­ly prof­it ($651m) in com­pa­ny his­to­ry despite a 4.9% decline in LTL shipments.

FedEx man­age­ment is focused on cost reduc­tion efforts with plans to reduce costs by $2.2b to $2.7b in FY 2023 with $1.5b to $1.7b in cost sav­ings from reduced flight fre­quen­cies to bet­ter match capac­i­ty with demand. Man­age­ment expects to achieve $350m to $500m in sav­ings at the Ground divi­sion by con­sol­i­dat­ing select sort oper­a­tions and sus­pend­ing some Sun­day deliv­ery oper­a­tions. Man­age­ment also announced the can­cel­la­tion of sev­er­al ground capac­i­ty expan­sion projects. FedEx con­tin­ues to focus on rev­enue improve­ment and announced a 6.9% gen­er­al rate increase on FedEx Express, Ground, and Home Deliv­ery rates as well as a $.50 increase in the res­i­den­tial sur­charge effec­tive Jan­u­ary 2nd 2023.

Key insights

• FedEx believes that the down­turn in demand that it is expe­ri­enc­ing is due to dete­ri­o­rat­ing macro eco­nom­ic con­di­tions and sug­gest­ed a reces­sion is a dis­tinct possibility.
• FedEx announced a 6.9% gen­er­al rate increase along with increas­es to sur­charges and acces­so­r­i­al charges to off­set high­er costs from ongo­ing infla­tion and indi­cat­ed that there will be a strong focus on cap­tur­ing the rate increase from cus­tomers.  This is the high­est gen­er­al increase in FedEx’s history
• FedEx Ground con­tin­ues to deem­pha­size its Econ­o­my prod­uct to max­i­mize rev­enue. Cus­tomers who use FedEx Econ­o­my may need to con­sid­er alter­na­tives and or plan for high­er ship­ping costs by upgrad­ing res­i­den­tial ship­ments to Home Delivery.
• FedEx Ground will be reduce or elim­i­nate Sun­day deliv­ery in select­ed non-metro areas to achieve cost reduc­tion targets.
• Man­age­ment expressed con­fi­dence that the Ground con­trac­tor net­work is ready for Peak Season.

Product-Level Results

The sec­tion below shows changes in vol­ume, rev­enue, and rev­enue per pack­age at the ser­vice lev­el for Q1 FY 23 as com­pared year over year to Q1 FY 22 and sequen­tial­ly to Q4 FY 22