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In a challenging economy, FedEx isn’t doing enough, and that’s what worries Wall Street.
In the last quarter, it processed fewer packages due to “weak economic conditions,” and operating income at FedEx Express fell 69%, according to the latest FedEx earnings report released Thursday.
Expenses at the ground carrier have skyrocketed, and the company now plans to raise its rates by about 7% on average.
The news comes on the heels of a surprising warning last week that the company is facing difficulties. After the announcement, FedEx’s stock price fell more than 20%, and some of its competitors, including UPS and XPO Logistics, also lost ground.
CEO Raj Subramaniam told CNBC’s Jim Kramer last week that the global economy – “macro-climate” – was to blame for the company’s shocking downturn. Kramer asked the CEO if he expected the world to plunge into recession.
Subramaniam replied, “I think so.”
On Thursday, FedEx outlined important steps to get back on the right track.
The company will take some of its planes out of service and reduce deliveries on Sunday. On top of that, it plans to close nearly 100 retail locations and, like many businesses right now, plans to press a hiring halt until economic uncertainty around the world subsides.
Beyond express deliveries: FedEx is seen by the world as an economic leader
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What worries investors is that FedEx is seen as a leader.
“We are a reflection of everyone’s actions,” Subramaniam said.
In that warning last week, which came in the form of a business update, FedEx withdrew its earnings forecast. It is unable to anticipate the money that will come to it because it is in a “continuous volatile operating environment”.
FedEx also says it faces “service challenges” in Europe, where a recession appears likely, and “macroeconomic weakness” in Asia, which is also still reeling from strict COVID lockdowns.
J. Bruce Chan, who covers Stifel’s transportation and logistics companies, said that due to its size and the fact that its business handles moving goods, FedEx “can tell us very clearly what’s going on with inventory movements and general business activity.”
While it provides a good read on two key parts of the economy, it also serves as a reliable indicator of what might happen down the road. FedEx’s earnings have shrunk in a similar way during the last three recessions — in 2020, 2009 and 2001, according to analysts at Barclays.
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Today, FedEx has a giant global footprint. Operating in more than 200 countries, the half-million employees of the Memphis-based company handle more than 15 million shipments daily.
During the pandemic, when home shoppers ordered books, electronics, and furniture, shipment volumes soared, and so did FedEx’s stock price.
But with the United States and many other countries relaxing their COVID protocols, people have moved to spend more on services, not goods. The result: FedEx and its competitors are handling fewer shipments.
“They are not collapsing, but they are regressing,” said Amit Mehrotra, an analyst at Deutsche Bank, adding that it needs to weather the current slowdown with “very, very good cost management.”
“This is where we think FedEx has failed massively,” Mehrotra said.
Like other Wall Street analysts who track the company, Mehrotra says FedEx performance can tell us a lot about the state of the global economy, but the company can’t pin all of its problems on this alone.
“This was a company story … more than anything that can be explained by the slowdown in the overall economy,” he said.
Deciding whether the culprit is the economy, the company, or both
FedEx is in a critical transition. Subramaniam became CEO about four months ago, succeeding Fred Smith, who founded the company in 1971.
After analyst Ken Hoxter, who covers FedEx for Bank of America, reviewed the business update last week, he questioned how much of the company’s predicament is attributable to current executives setting unrealistic goals.
“I think what you had here was a setup that wasn’t achievable from the start,” he said.
Things may have gotten worse economically, he added, “but the FedEx-specific problems crept in.”
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So, were the sell-offs justified?
According to Stifel’s Chan, there is a lot to worry about for investors and everyone else.
“Right now, there is a lot of debate about the direction of the global economy,” he said.
By omitting the earnings sign so poorly and offering such an uncertain view of the future, “FedEx has given people who may have been riding the fence what they need in terms of moving toward caution,” Chan said.
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