FedEx falls as rising costs cool market hopes
FedEx failed to keep up with Wall Street’s soaring expectations as a jump in costs at the Ground unit crimped profit margins and spurred doubts about the extent of a bonanza from record package deliveries.
The Ground unit, which carries most of the company’s U.S. ecommerce business, had margins of 7.5 percent in the fiscal second quarter, down from 11.8 percent in the previous quarter, FedEx said Thursday.
The division’s higher spending on wages and purchased transportation dragged down FedEx’s overall margins from the previous three-month period, even as profit surged from last year.
The cost squeeze is poised to weigh on FedEx despite the courier’s push to raise prices and boost efficiency. A flood of ecommerce parcels is expected to continue even after this year’s gains from the coronavirus pandemic.
Since dropping off packages is more expensive at homes than at businesses, the shift threatens FedEx Ground’s effort to restore profit margins to the teens, which it enjoyed when commercial deliveries predominated.
The Ground unit’s profitability in the quarter ending Nov. 30 was “a negative surprise,” Allison
Landry, an analyst with Credit Suisse Group, said in a note to clients. The margins were “below our expectation and fell short of what we thought were unreasonably high market expectations that were closer to 10 percent.”
The company’s cost challenge parallels similar pressure at Unit
ed Parcel Service, which sparked a brief rout in its own shares when it warned of higher expenses after reporting results in October. While Wall Street turned bullish on the couriers this year as the pandemic compelled consumers to shop more online, investors have been sensitive to any
sign that soaring e-commerce deliveries will weaken profitability.
FedEx said margins at its Ground business will improve after the company gets through the extra costs of the peak holiday delivery season.
The unit’s chief, Henry Maier, said on a conference call with analysts that he was “highly confident of double-digit margins” in the next two quarters.
The Memphis, Tenn.-based courier also will get a boost from a rebound in commercial business when the pandemic abates, as the U.S. economy recovers and more people return to offices. But the growth in e-commerce shipments is here to stay, the company said, with those parcels expected to triple from their 2019 level to 111 million a day in 2026.
“Unquestionably, the sustainability and acceleration of the ecommerce business that we have seen and that everybody has highlighted is here to stay,” Chief Financial Officer Mike Lenz said on the call. “That volume is going to keep coming.”
Besides becoming more efficient, FedEx plans to raise prices further, especially for e-commerce, marketing chief Brie Carere said.
The courier has increased prices with surcharges as the pandemic swelled residential demand. FedEx signaled the increases will continue with an announcement last week that surcharges on certain packages will remain indefinitely after the peak season.
“We’re going to continue to execute on our revenue quality strategy. We think there have been some fundamental shifts in the market,” Carere said.