FedEx Plunges After Cutting Outlook on Trade War, Weaker Economy

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(Sept 18): FedEx Corp. tumbled after slashing its profit outlook and warning that the global economy is slowing down because of worsening trade tensions.

The courier’s best-case scenario for adjusted earnings in the fiscal year ending in May was only $13 a share -- a dollar short of the lowest of 25 analyst estimates compiled by Bloomberg. The company will deepen its cost-cutting drive to contend with the diminished expectations, according to a statement Tuesday.

“Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty,” Chief Executive Officer Fred Smith said in the statement.

President Donald Trump’s trade maneuvers are tormenting Smith, a free-trade advocate and longtime Republican donor who has predicted quarter after quarter that tariffs would hurt economic growth. Commercial tensions are complicating FedEx’s already costly and slow integration of a European acquisition and putting the company under the microscope of the Chinese government.

The shares tumbled 9.2% in late trading to $157.40, wiping out this year’s gain. FedEx was already trailing the shareholder returns of rival United Parcel Service Inc. and a Standard & Poor index of U.S. industrial companies.

FedEx’s forecast for adjusted earnings of $11 to $13 a share in fiscal 2020 implied at least a 16% drop from the previous year’s level. FedEx had predicted in June a decline of a “mid-single-digit percentage point.”

In the fiscal first quarter, adjusted earnings dropped to $3.05 a share, trailing the $3.15 average of analyst estimates complied by Bloomberg. Sales were little changed at $17 billion. Operating income fell 8.8% to $977 million in the quarter. Operating margins narrowed to 5.7% from 6.3%.
Amazon Pressure

The earnings pressure underscored the hurdles for FedEx as it introduces costly changes to its ground network to handle surging e-commerce deliveries and contend with rising competition from Inc. FedEx is walking away from doing business with Amazon as the e-commerce retailer builds out its own delivery network.

The move will dent FedEx’s sales since Amazon had accounted for about 1.3% of annual revenue at the Memphis, Tennessee-based courier. But FedEx is betting that the decision not to renew contracts with the e-commerce giant for U.S. ground and air shipments will boost profit margins because the business fetched below-average prices.

FedEx vowed to continue investing in improved service even as the profit outlook weakens. The company is moving to year-round, seven-days-a-week service in January, investing to handle oversize items and taking on last-mile delivery of more lower-cost packages that used to be carried by the U.S. Postal Service.
Cost Cuts

“FedEx is implementing additional cost-reduction initiatives to mitigate the effects of macroeconomic uncertainty, including post-peak reductions to the global FedEx Express air network to better match capacity with demand,” Chief Financial Officer Alan Graf said in the statement. “We are continuing to make strategic investments to improve our capabilities and efficiency.”

An economic slowdown in Europe is hampering FedEx’s effort to turn around operations at TNT Express, a Dutch company acquired in 2016 for $4.8 billion. Integration spending will be about $350 million over the 12-months ending in May 2020, FedEx said in June, pushing the expected total to about $1.7 billion by May 2021.

In China, FedEx has been under scrutiny in recent months after Huawei Technologies Co. said documents that it asked to be shipped from Japan to China were instead diverted to the U.S. without authorization. In another incident, FedEx said it mistakenly rejected a package containing a Huawei phone being sent to the U.S. from the U.K., a claim China rebuffed.

Earlier this month, China said it was investigating FedEx on suspicion of illegally handling a package to Hong Kong containing knives that are controlled by law, according to a report by state-run Xinhua News Agency. - Bloomberg