FedEx’s Profit Rises 6% in Fiscal 1Q, Aided by Stronger Results at Express

FedEx Corp. said net income for the fiscal first quarter ended Aug. 31 rose 6% to $692 million, or $2.42 per share, helped by stronger results at the Express unit.

Profit at Express — before interest and taxes — rose 45% to $545 million despite a 4% drop in revenue. The performance at the Ground and Freight units lagged the prior-year period.

Total revenue gained 5% to $12.3 billion. In last year’s fiscal first quarter, net income was $653 million, or $2.26.

“Results were below expectations, given weaker-than-expected earnings before interest and taxes in both the Ground and Freight segments, which more than offset better-than-expected earnings before interest and taxes in Express,” a report from Robert W. Baird & Co. analyst Benjamin Hartford said, referring to earnings that trailed the average Wall Street analyst estimate of $2.45 per share.

“FedEx Corp. is performing solidly, given weaker-than-expected economic conditions, especially in manufacturing and global trade,” said Frederick Smith, chairman of the second-ranked company on the Transport Topics Top 100 list of the largest for-hire carriers in the United States and Canada.

The Express unit, which has been advancing a multiyear cost-reduction program with steps such as retiring costly older aircraft, recorded $6.59 billion in revenue. Package volumes rose 1%, but revenue per package declined 7% to $20.05.

“Our profit-improvement program is on track and delivering impressive results,” Smith said.

Dave Bronczek, president of the unit, said Express’ gains resulted from creating a more flexible network that is attuned to fluctuating demand.

At the Ground unit, revenue increased 29% to $3.83 billion, but profit before interest and taxes was 1% lower at $537 million. Ground was hurt by higher incentive compensation, increased self-insurance reserves and higher operating costs, a FedEx statement said.

The revenue increase included $370 million from the acquisition of logistics operator Genco and $240 million from new methods for recording SmartPost revenue. Excluding those factors, Ground revenue improved by $260 million. Ground volume, excluding SmartPost, rose 4%.

Freight profit before interest and taxes fell 21% to $132 million. Revenue dipped less than 1% to $1.6 billion.

LTL shipments and revenue per shipment both fell 1%. Reduced fuel-surcharge collections offset an increase in base rates.

Revenue per 100 pounds of freight for priority LTL freight rose 3% higher at $18.63, but fell 12% for Economy freight to $23.06.

Chief Financial Officer Alan Graf said results at FedEx Freight were affected by heavier freight that moved back to truckload after running earlier as less-than-truckload when trucking capacity was very tight. Another one-time effect, he said, was a drop-off in energy-sector freight.

FedEx also reduced its full-year profit estimate by 20 cents per share to $10.40 to $10.90, blaming economic weakness that hurt Freight and higher Ground costs.

“The takeaway here is that, fundamentally, the story at FedEx remains very much intact, though clouded by a transitory hiccup from self-insurance reserves,” said Art Hatfield, a Raymond James & Associates analyst. He termed the lowered forecast “somewhat of a surprise.”

Smith said the insurance reserve was the key issue in the quarter, saying “all the rest of the stuff is just noise and various issues inside the operating companies.”

He tied the reserve to steady growth at Ground, which required more employees and more miles driven and created more potential loss exposure.

Graf said he didn’t expect further increases in those reserves.

In January, FedEx announced a 4.9% rate increase at all units. In addition, surcharges are being imposed starting Nov. 2 for Ground shipments that are larger than the maximum dimensions set by the company.

The Sept. 16 conference call also included questions about Chinese economic uncertainty and recent court decisions relating to worker classification.

Bronczek said about China that “the impact for us is not very great.”

Executive Vice President Christine Richards expressed confidence that the company would successfully press efforts to protect the contractor model for Ground workers.

She also expected more litigation on the issue, affecting a much broader array of businesses.

Executive Vice President Mike Glenn also said that FedEx is “well-prepared for what we expect to be another record peak holiday season,” including hiring more than 55,000 seasonal workers.