Every quarter we pay particular interest to the results reported by Fedex not only due to its position as the leading company in worldwide logistics but due to its status as a bellwether in global trade. And not surprisingly, following a bevy of reports here and elsewhere confirming the plunge in global trade, Fedex did not disappoint, or rather it did when it reported non-GAAP EPS of $2.42 (which included one extra day att the company's operating segments) missing already reduced consensus expectations of $2.45, but it also cut its full year 2016 EPS guidance from $10.60-$11.10 to $10.40-$10.90 (below the consensus $10.83) proving yet again that hopes for EPS growth are just as misplaced as those for multiple expansion at a time when the Fed is preparing to hike rates and as China unleashes Quantitative Tightening.
Specifically, the company announced that a boost in operating income at FedEx Express "were partially offset by higher incentive compensation accruals, higher self-insurance reserves and operating costs at FedEx Ground, and lower-than-anticipated volume at FedEx Freight. Fuel had a slightly negative net impact to operating income."
At Express, FedEx managed to grow operating income by 45% even as revenues dropped 4% Y/Y to $6.59 billion "as lower fuel surcharges and unfavorable currency exchange rates more than offset improved base rates. U.S. domestic package volume grew by 1%, driven by growth in deferred box and overnight envelope. U.S. domestic revenue per package decreased 3% due to lower fuel surcharges, partially offset by strong base rates."
If Express saw a rebound in profits despite a rise in revenues, the company's Ground segment did the opposite with operating income declining 1% to $537 million "as lower fuel surcharges and unfavorable currency exchange rates more than offset improved base rates. U.S. domestic package volume grew by 1%, driven by growth in deferred box and overnight envelope. U.S. domestic revenue per package decreased 3% due to lower fuel surcharges, partially offset by strong base rates."
But the biggest disappointment was FedEx Freight where revenue was virtually unchanged, yet where operating income tumbled 21% as Less-than-truckload (LTL) average daily shipments declined 1% with the company blaming "weak industry demand". LTL revenue per shipment was down 1% as higher rates from yield initiatives were more than offset by lower fuel surcharges. Operating results declined primarily due to salaries and employee benefits expense outpacing lower-than-anticipated volume.
Perhaps now it is time to trim those record S&P margin forecasts?
So with much of the company's pain due to underprovisioning for fuel surcharges, which was surprising considering the global plunge in gas prices, the company announced that it will "increase shipping rates by an average of 4.9% effective January 4, 2016. FedEx is also increasing surcharges for FedEx Ground shipments that exceed the published maximum weight or dimensional limits, and updating certain fuel surcharge tables at FedEx Express and FedEx Ground effective November 2, 2015."
Finally, it appears not even the company is confident it can execute as the world slows down, and as a resultt it aggressively cut its forecast:
FedEx now projects adjusted earnings for fiscal 2016 to be $10.40 to $10.90 per diluted share before year-end mark-to-market pension accounting adjustments, aided by benefits from the profit improvement program. The outlook assumes moderate economic growth and does not include any operating results or costs related to TNT Express. The capital spending forecast for the fiscal year remains $4.6 billion.
“Our new fiscal 2016 outlook is modestly lower than our initial forecast due primarily to weaker LTL industry demand and higher than expected self-insurance reserves and operating costs at FedEx Ground,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “We still expect strong earnings growth this year, as we remain focused on executing our profit improvement program, leveraging e-commerce growth and enhancing our revenue quality.
Good luck with passing those costs through in a environment of weak demand and the assumption of "moderate economic growth" especially as the Fed begins to hike.