FedEx profit declines to USD 420 million as demand drops

FedEx Corp. said quarterly profit fell for the first time in three years and cut its earnings forecast for this quarter because of a slowing U.S. economy.

Net income for the fiscal third quarter dropped to USD420 million, or USD1.35 a share, from USD428 million, or USD1.38, a year earlier as winter storms damped shipping demand, FedEx said today in a statement. Revenue rose 7 percent to USD8.59 billion.

FedEx pared its outlook for the quarter ending May 31 by 5 cents a share and said it may miss its annual earnings growth target of 10 percent to 15 percent. The U.S. economy grew at a 2.2 percent annual rate in 2006's final quarter, less than half the pace at the start of the year.

“FedEx operates a high fixed-cost business, so when there is a slowdown on the revenue line, the incremental hit on earnings can be disproportionate,'' said James Gallop, who manages USD265 million including FedEx shares at Scotsman Capital Management in New York.

Per-share earnings will be USD1.93 to USD2.08 in the May quarter, down from a previous range of USD1.98 to USD2.13, FedEx said. The fiscal fourth quarter is typically strongest for the Memphis, Tennessee-based company, Chief Financial Officer Alan Graf said on a conference call.

Slower economic growth is particularly hurting results at FedEx's Express parcel delivery and Freight trucking units, the company said. FedEx said earnings growth this year may fall short of the company's 10 percent to 15 percent target unless the U.S. economy accelerates.

Shares Drop

Shares of FedEx declined USD1.30, or 1.1 percent, to USD110.99 at 4:02 p.m. in New York Stock Exchange composite trading. They have gained 2.3 percent this year.

Analysts expected FedEx to earn USD1.33 a share, the average of 14 estimates compiled by Bloomberg.

Winter storms reduced earnings by 6 cents a share in the three months ended Feb. 28, FedEx said, while a lower tax rate boosted earnings by 8 cents a share. Gallop said FedEx's profit matched estimates, excluding the storm and tax adjustments.

FedEx hadn't reported a lower year-over-year quarterly profit since November 2003. The company projected on Dec. 20 it would earn USD1.20 to USD1.35 a share last quarter.

Operating profit fell 12 percent at FedEx Express, which makes up almost two-thirds of the company's sales, as economic weakness and bad weather curbed demand for shipping, the company said. Earnings were also pared when FedEx reduced the fuel surcharge it levies to offset higher fuel expense.

Smith's View

“The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets,'' Chief Executive Officer Fred Smith said. FedEx economists expect U.S. companies to start rebuilding inventories late in the year, propelling earnings back to more typical growth rates, he said.

Smith is expanding FedEx's trucking, international and retail businesses to give shippers more options than at rival United Parcel Service Inc. and smaller trucking firms.

Revenue at FedEx Ground, the company's parcel delivery business and second-largest unit, grew 12 percent to USD1.5 billion. Operating profit rose 5 percent to USD196 million.

Freight, Kinko's

FedEx Freight, the third-largest unit by revenue, had a 32 percent decline in operating profit on slowing demand and costs of integrating last year's acquisition of Watkins Motor Lines.

Revenue increased 30 percent as the company picked up market share, FedEx Freight President Doug Duncan said during the conference call.

At FedEx Kinko's, the chain of printing and copying stores that is the company's smallest division, profit margin fell for an eighth straight quarter, to 0.8 percent. FedEx Kinko's accounts for about 6 percent of FedEx revenue.

FedEx plans to continue expanding the unit, “so I think it's going to be a few years before you'll see us being able to harvest from that investment,'' Ken May, president of FedEx Kinko's, said during the conference call.

“They are continuing to make wise long-term investments in freight and Kinko's despite what must be strong temptations to adjust those levels to prop up near-term results,'' said Dan Ortwerth, an analyst in St. Louis for Edward Jones & Co.

Smith said FedEx is poised for growth particularly in Asia, which he called the “manufacturing base'' for the U.S. On March 19, FedEx said it would start overnight delivery in May between 19 cities on China's east coast, then offer day-specific delivery between 200 cities in China in June.

The expansion will cause a “drag'' on earnings over the next 18 months, Graf said today, declining to be more specific.