FedEx Q3 results exceed expectations
FedEx has announced a third quarter (Q3) fiscal 2016 revenue of $12.7bn, up $1bn from last year. Reported net income was down 19% at $507m, but this was mainly down to legal costs at FedEx Ground and spending for acquisitions. Adjusted net income rose by about the same margin from $586m to $692m. The results exceeded expectations, leading to a 6% jump in the share price in after-hours trading yesterday.
In a statement issued yesterday (16 March), Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, commented: “We now expect our fiscal 2016 adjusted earnings to be up 20% to 22% over last year, as we continue to benefit from our execution of the profit improvement program.
“Our positive financial momentum should continue into our upcoming fiscal 2017, where we expect solid growth in earnings and cash flow.”
The FedEx Express segment reported a Q3 revenue of $6.56bn, down 1% on last year, but operating income was up 51% to $595m and the operating margin improved from 5.9% to 9.1%. US domestic volume growth helped to drive the improved results.
Revenue at FedEx Ground was up 30% at $4.41bn, but operating income fell by $2m to $557m, while the operating margin declined from 16.5 to 12.6%.
FedEx said that the Ground segment had been hit by higher costs, which were “driven significantly by network expansion and by peak season demand that exceeded both volume and package size expectations”.
“Increased self-insurance expense and higher purchased transportation rates also negatively impacted the quarter,” added FedEx. “The change in FedEx SmartPost revenue reporting and the inclusion of GENCO results collectively reduced the operating margin year-over-year by 1.9 percentage points.”
The company statement added that FedEx Ground has reached agreements in principle to settle all of the 19 cases regarding its former independent-contractor driver model – and it has had to factor in the expected costs. “In the third quarter, we recognized a liability at Corporate for the net expected loss of $204 million for these settlements and other contractor-related proceedings,” said FedEx. “The settlements will require court approval.”
Revenue at FedEx Freight was up 1% at $1.45bn, but operating income fell 16% to $56m and the operating margin was down from 4.7% to 3.9%. FedEx attributed the decline to “salaries and employee benefits expense outpacing volume growth”.
Overall, the results were seen as positive and company beat analysts’ expectations in terms of both revenue and net income (when the legal and acquisition costs were removed from the equation).
Despite this, much of the media coverage has focused on the perceived threat that Amazon is building up its own delivery network in order to reduce its reliance on – and perhaps also compete with – FedEx, fellow express giant UPS and the US Postal Service (USPS).
In a conference call with analysts, investors and media yesterday, FedEx CEO Fred Smith dismissed the speculation: “Concerns about industry disruption continue to be fueled by fantastical — and I chose this word carefully — articles and reports.
“In all likelihood, the primary deliverers of e-commerce shipments for the foreseeable future will be UPS, the U.S. Postal Service and FedEx.”
