Three weeks ago we warned that with banks such as Morgan Stanley and BofA warning that margin contraction is about to hit US companies, we were going to see a bevy of earnings warnings.
If MS and BofA are right on slumping consumer demand and margin contraction we should start seeing Q3 earnings warnings in the next 2 weeks.— zerohedge (@zerohedge) August 30, 2021
Moments ago we got a vivid example of this, when Fedex tumbled after hours after it reported that not only did it miss Q1 earnings - just hours after announcing it was raising prices at the fastest pace in decades - but also slashed guidance, warning about sharply higher labor costs and operating expenses.
For its just completed fiscal first quarter, the company reported:
- Adjusted EPS $4.37 vs. $4.87 y/y, missing consensus estimates $4.92 and also missing the lowest forecast of the range from $4.60 to $5.90
- Adjusted operating margin - just as we said - of only 6.8%, down sharply from 8.50% a year ago, and missing the estimate of 8.52%
- Revenue of $22.0 billion, up +14% y/y, beating the estimate of $21.88 billion but clearly not enough to offset the margin compression.
The 2022 full-year forecast was more troubling, with the company now expecting adjusted EPS of only $19.75 to $21.00, below the consensus estimate of $21.03 .
Commenting on its disappointing results, Fedex said that first quarter operating results were negatively affected by an estimated $450 million year over year increase in costs due to a constrained labor market which impacted labor availability, resulting in network inefficiencies, higher wage rates, and increased purchased transportation expenses. And while commercial ground and U.S. domestic express package volume increased year over year, the company warned that continued supply chain disruptions have slowed U.S. domestic parcel demand compared to the company’s earlier forecast.
The story was the same for both Express, Ground and Freight segments:
- FedEx Express operating results declined due to higher operating expenses, largely driven by staffing challenges and COVID-19-related air network impacts. Results were also negatively impacted by a decline in U.S. average daily freight pounds due to a surge in charter flights a year ago. These factors were partially offset by higher revenue per package and growth in FedEx International Priority and U.S. domestic express packages.
- FedEx Ground first quarter operating results declined primarily due to higher labor costs and network inefficiencies due to inadequate staffing, which negatively affected year-over-year results by an estimated $320 million. Operating results were also negatively impacted by higher expansion-related costs. These costs were partially offset by higher revenue per package and growth in commercial packages.
- FedEx Freight first quarter operating results improved primarily due to the continued focus on revenue quality and cost management. FedEx Freight reported a record operating margin of 17.3% for the quarter, with average daily shipments growing 12% and revenue per shipment increasing 11%.
The company also reiterated that it was jamming through massive prices increases, and that effective January 3, 2022, FedEx Express, FedEx Ground and FedEx Home Delivery shipping rates will increase by an average of 5.9%, while FedEx Freight rates will increase by an average of 5.9% to 7.9%. Additionally, effective November 1, 2021, a fuel surcharge increase will be applied to FedEx Express (U.S. domestic package and freight services), FedEx Ground and FedEx Freight shipments.
In retrospect, and in light of the big profit and margin miss, FDX should have passed its price increase far sooner.
Looking ahead, and even when factoring in the new price increases, FedEx said it was reducing its earnings outlook to reflect first quarter results, which were lower than the company’s June forecast. "As conditions during the first quarter were more challenging than anticipated and are now expected to extend longer, the revised FedEx outlook also reflects management’s updated expectations for the remainder of the fiscal year:"
- Earnings per diluted share of $18.25 to $19.50 before the MTM retirement plan accounting adjustments, compared to the prior forecast of $18.90 to $19.90 per diluted share;
- Earnings per diluted share of $19.75 to $21.00 before the MTM retirement plan accounting adjustments and excluding estimated TNT Express integration expenses and costs associated with business realignment activities, compared to the prior forecast of $20.50 to $21.50 per diluted share;
- ETR of approximately 24% prior to the MTM retirement plan accounting adjustments; and Capital spending of $7.2 billion.
These forecasts assume continued growth in U.S. industrial production and global trade, a gradual improvement in labor availability beginning in the second half of fiscal 2022, no additional COVID-19-related business restrictions, and current fuel price expectations. FedEx’s ETR and earnings per share forecasts are based on current law and related regulations and guidance.
CFO Michael C. Lenz said that “our results for the first quarter reflect higher operating costs we are incurring during this uncertain and challenging operating environment." Like central bankers, Lenz is hopeful that the distortions created in the labor market by the BIden admin will be transitory: "While we expect these conditions to continue near-term, we expect a gradual improvement in labor availability combined with our proactive revenue management actions to mitigate the ongoing impact of these headwinds on our results and position us for earnings growth in fiscal 2022.”
Alas, the market does not seem to agree, and FDX stock was sharply lower after hours reflecting what is now a far more challenging environment where fading stimmies have given way to soaring input prices, labor costs and wholesale margin compression.