FedEx cuts profit forecast as trade war slows economy
Blaming a weakening global economy, FedEx Corp. sharply slashed its profit outlook, the latest sign that trade tensions are dragging down U.S. corporate titans.
The forecast sent the courier’s shares tumbling late Tuesday and signaled deepening trouble for FedEx as the U.S. and China battle over tariffs — a standoff that has also ensnared manufacturing giants such as Caterpillar Inc. and Deere & Co. FedEx said it would deepen its cost-cutting drive and retire some cargo jets to contend with the diminished expectations.
“The global economy continues to soften and we are taking steps to cut capacity,” FedEx Chief Executive Fred Smith said in a conference call to discuss earnings. The slowdown is being “driven by increasing trade tensions and policy uncertainty,” he said.
President Trump’s trade maneuvers are tormenting Smith, a free-trade advocate and longtime Republican donor who has sounded the alarm quarter after quarter that tariffs would hurt economic growth. Commercial tensions are complicating FedEx’s already costly and slow integration of a European acquisition and putting the company under the microscope of the Chinese government.
The shares tumbled 10% in late trading, wiping out this year’s gain and spurring declines at rival United Parcel Service Inc. and XPO Logistics Inc., a freight broker. FedEx was already trailing the returns this year of UPS and a Standard & Poor’s index of U.S. industrial companies.
The courier’s best-case scenario for adjusted earnings in the fiscal year ending in May was only $13 a share — a dollar short of the lowest of 25 analyst estimates compiled by Bloomberg. The forecast implied at least a 16% drop from the previous year’s level. FedEx had predicted in June a decline of a “mid-single-digit percentage point.”
In the fiscal first quarter, adjusted earnings dropped to $3.05 a share, FedEx said in a statement. That trailed the $3.15 average of analyst estimates compiled by Bloomberg. Sales were little changed at $17 billion. Operating income fell 8.8% to $977 million in the quarter. Operating margins narrowed to 5.7% from 6.3%.
The earnings pressure underscored the hurdles for FedEx as it introduces costly changes to its ground network to handle surging ecommerce deliveries and contend with rising competition from Amazon.com Inc. FedEx is walking away from doing business with Amazon as the e-commerce retailer expands its delivery network.
The move will dent FedEx’s sales since Amazon had accounted for about 1.3% of annual revenue at the Memphis, Tenn., courier. But FedEx is betting that the decision not to renew contracts with the e-commerce giant for U.S. ground and air shipments will boost profit margins because the business fetched below-average prices.
FedEx vowed to continue investing in improved service even as the profit outlook weakens. The company is moving to year-round, seven-day-a-week service in January, investing to handle oversize items and taking on last-mile delivery of more lower-cost packages that used to be carried by the U.S. Postal Service.
But the company will also look to cut costs, including by paring its fleet of cargo aircraft to adjust to the weaker economic outlook. FedEx already announced a $575-million employee buyout program in January.
An economic slowdown in Europe is hampering FedEx’s effort to turn around operations at TNT Express, a Dutch company acquired in 2016 for $4.8 billion. Integration spending will be about $350 million over the 12 months ending in May 2020, FedEx said in June, pushing the expected total to about $1.7 billion by May 2021.
In China, FedEx has been under scrutiny in recent months after Huawei Technologies Co. said documents that it asked to be shipped from Japan to China were instead diverted to the U.S. without authorization.
In another incident, FedEx said it mistakenly rejected a package containing a Huawei phone being sent to the U.S. from the U.K., a claim China rebuffed.
Earlier this month, China said it was investigating FedEx on suspicion of illegally handling a package to Hong Kong containing knives that are controlled by law, the state-run Xinhua News Agency reported.
Black writes for Bloomberg.