FedEx’s 1Q Earnings Gain 24%; Profit Margins Rise at All Units

This story appears in the Sept. 22 print edition of Transport Topics.

FedEx Corp. last week reported that fiscal first-quarter net income rose 24% to $606 million, or $2.10 per share, driven by stronger growth at the Freight, Ground and Express units.

Revenue rose 6% to $11.7 billion at the Memphis, Tennessee-based package company for the period ended Aug. 31, as a result of the margin growth companywide, FedEx reported Sept. 17.

For the same year-ago period, earnings were $489 million, or $1.53, on revenue of $11 billion.

Profit before interest and taxes rose 70% to $168 million at the Freight unit — well outpacing the 13% higher income on that basis of $545 million at Ground — and 35% better results at Express, the largest unit by revenue that saw profitability increase to $369 million.

“The improving U.S. economy appears to be driving the strong results through increased volumes and package yields in the Ground and Freight segments,” said a report from Nate Brochmann, an analyst at William Blair.

FedEx CEO Frederick Smith said the quarter was “an outstanding start,” citing factors such as “very strong performance at FedEx Ground, solid volume and revenue increases at FedEx Freight.”

The Freight unit, the largest LTL carrier, also raised revenue the most. The increase of 13% to $1.61 billion primarily was the result of the 11% growth in freight shipments, the report showed.

LTL shipments grew faster in the Priority group, which also showed a 13% increase in demand. Economy shipments increased more than 5%.

LTL revenue per 100 pounds of freight was 1% higher at $20.18 and average shipment weight increased nearly 2%. The result was a 3.4 percentage point improvement in the operating ratio.

The first-quarter’s 89.6 was the first time that number was below 90 since the fourth quarter of 2007.

“Freight leveraged a solid LTL operating environment,” a report from Deutsche Bank analyst Robert Salmon said. “The company benefited from solid shipment growth … aided by both base rate increases and adjustments to its fuel surcharge mechanism.”

FedEx Freight’s performance followed announcements earlier this month by other LTL carriers that their third-quarter earnings would be stronger than previously expected. Last week, second-largest LTL carrier YRC Freight signaled that profits would top forecasts.

At FedEx’s Ground unit, the operating ratio improved to 81.6 from 82.3, the first year-over-year improvement since the first quarter of 2013. Ground revenue was 8% higher at $2.96 billion, reflecting a 6% rise in volume as a result of more shipments ordered online.

Like the LTL unit, changes in fuel surcharge calculations also helped Ground, along with increased residential delivery fees.

The SmartPost business, which provides deliveries in conjunction with the U.S. Postal Service, had a 10% drop in volume because an unidentified customer stopped using the service, the report said. On the positive side, SmartPost boosted revenue per package by 10%, but that was diluted by higher rates at the Postal Service.

At FedEx Express, revenue was $6.86 billion, up 4%. Profit margins at Express improved to 5.4% from 4.1% due to ongoing cost reductions and better markets for domestic and international packages.

Express improved margins on domestic shipments by 1%, partly due to fuel surcharge adjustments.

Stimulated by the stronger environment, FedEx also outlined pricing plans for next year that included a 4.9% increase at every unit.

The LTL unit’s increase comes just nine months after the last increase of 3.9% in March that kicked off a cycle of higher prices at competing carriers. The increases take effect  Jan. 5.

Express rates are rising on Express shipments inside and outside the United States. The Ground increase is in addition to the previously reported shift to pricing all shipments based on their dimensions rather than weight.

Express and Ground rates have been in place since January.

Results at FedEx were also helped by lower tax and interest costs, Salmon’s report said.

CFO Alan Graf said in the statement that “our profit improvement programs are progressing as planned, and we continue to expect strong earnings growth this year.”

The company said it acquired 5.3 million shares of its common stock in the quarter, contributing 15 cents a share to the period.

The per-share earnings forecast for the No. 2-ranked company on the Transport Topics Top 100 For-Hire Carriers in the United States and Canada remains at between $8.50 and $9 a share for the fiscal year ending May 31. The higher number is 33% above fiscal year 2014 results of $6.75. 

The capital spending forecast for fiscal 2015 remains $4.2 billion.