FedEx plans up to $2.7 billion in cost cuts and higher shipping costs if demand slacks

fedex corp announced on Thursday cost savings of $2.2 billion to $2.7 billion for the upcoming fiscal year and said it would increase shipping rates for air and ground services in January after volumes slowed and “economic conditions weakened.” “ be. ”

Executives, during FedEx’s FDX,
On the earnings call later in the day, he said the higher rates were a reaction to inflation. The parcel delivery giant’s CEO expressed confidence in the current leadership team when asked by analysts, saying the company is prepared for the peak shipping season during the holiday season, even as it scales back and hikes prices.

However, he said he did not anticipate the “huge cost inflation” that happened last year. And executives said they expected demand levels seen in late August – when they said spot rates for sea and air transport in parts of Asia were taking a sharp turn south – to hold for the rest of the year.

CEO Raj Subramaniam said the company runs a complex operation that makes it difficult to respond more quickly to air and ground conditions when demand slacks.

“There is a time lag between the actions we can take to reduce the line network,” he said. “That’s all.”

“From a customer perspective, our customers are incredibly sticky,” Brie Carere, FedEx’s chief customer officer, said during the call. “What we’ve seen particularly in August, both in Asia and here in the United States, are two things: Their demand wasn’t actually there, and our customers missed their own forecasts.”

FedEx’s cost-cutting plans, released ahead of schedule earlier Thursday because management called a “technical issue,” followed last week’s pre-announced quarterly results that stunned Wall Street and deepened concerns about the company and the U.S. economy let arise.

The cuts, which added concrete numbers to cost-cutting plans announced last week, will come largely from FedEx’s large, internationally-focused express business, which offers overnight and expedited air and ground deliveries in the US and abroad.

Management said savings of $1.5 billion to $1.7 billion would be drawn from this unit as it would reduce flight frequencies and park jets. Express business operating income fell 69% compared to the same period last year after global package and freight volumes fell 11% during the period.

also read: Why FedEx’s profit warning is such bad news for the US economy

FedEx said savings of $350 million to $500 million would come from its ground unit, whose trucks transport packages to businesses and homes in the United States and Canada. The company said cuts would be made by suspending some Sunday operations and closing others.

FedEx said another $350 million to $500 million would come from postponing other projects and closing nearly 140 FedEx office locations that handle services like copying and digital printing, as well as corporate locations.

Executives also announced Thursday a program to “accelerate progress” to save $4 billion by 2025.

FedEx shares fell 0.5% after the close on Thursday. competing UPS UPS,
rose 0.08%.

“First-quarter consolidated operating results were impacted by global volume weakness, which accelerated in the final weeks of the quarter on weaker economic conditions,” FedEx said in a statement earlier Thursday. “Additionally, the results were negatively impacted by service issues at FedEx Express.”

“In response, the company has implemented cost measures and continued to focus on yield management and yield quality to mitigate the impact of volume declines,” the statement said. “However, the impact of cost measures has lagged behind volume declines and operating costs have remained high relative to demand.”

Amid rising costs, FedEx also said it would increase shipping costs for its express, ground, and home delivery services by an average of 6.9%. These increases go into effect on January 2nd.

FedEx announced last week in advance that earnings per share for the fiscal first quarter came in well below expectations. The company also withdrew its full-year outlook, forecasting weaker trends and announcing aggressive cost cuts, hiring freezes and closures, sending shares on their biggest weekly decline since 1987. One economist said the bleak forecast reflects his view of a “massive slowdown.” in the US economy.

Many of those findings were repeated Thursday. The package delivery company reported net income of $875 million, or $3.33 per share, compared to $1.1 billion and $4.09 per share in the year-ago period.

Adjusted earnings were $3.44 per share, compared to $4.37 per share in the prior-year period, well below FactSet’s estimate of $5.14.

FedEx reported revenue of $23.2 billion compared to $22 billion in the same period last year. But that also missed expectations for $23.6 billion.

Ahead of Thursday’s results, analysts were wondering to what extent FedEx’s difficulties in the quarter were due to internal challenges and weaker global demand. They’ve also wondered how management’s view on package volume has changed since June, when FedEx said it expects “additional earnings momentum” in the current fiscal year.

Demand for goods, and therefore demand to ship them, began to wane this year as more people resumed travel, eating out, attending concerts and other pre-pandemic activities. Analysts are also concerned about the impact of inflation on parcel delivery demand.

FedEx announced last week that its express business was hit by “macroeconomic weakness in Asia and service issues in Europe,” resulting in a roughly $500 million drop in revenue. Revenue from FedEx’s ground business was also about $300 million below company forecasts.

But others have noticed FedEx longer-term difficulties in increasing profits and margins, and tensions with some contract drivers over pay as those drivers cope with their own rising costs. Subramaniam downplayed those tensions during Thursday’s call, saying the vast majority of the 6,000 contractors at its flooring business have signed up for a peak-season incentive program.

But when asked during the call why some of FedEx’s competitors didn’t raise similar difficulties in terms of demand and cost backgrounds, Subramaniam said, “I can’t comment on what our competition sees or doesn’t see.”

FedEx stock is down about 40% so far this year. In comparison, the S&P 500 Index SPX,
has fallen by 21% in that time. FedEx plans up to $2.7 billion in cost cuts and higher shipping costs if demand slacks

Brian Lowry

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