FedEx will reveal its fourth-quarter results on Tuesday, wrapping up a bumpy financial year further complicated by the COVID-19 pandemic.
The Memphis logistics giant was already mired in an earnings slump fueled by a global economic slowdown and heavy investments in its delivery network. Then COVID-19 shut down business activity worldwide, hurting demand for commercial shipping services.
All the while, FedEx employees have been on the frontlines keeping its delivery network humming. Five workers at FedEx Express’ Newark, New Jersey, hub have died of COVID-19, and FedEx has also confirmed cases at its World Hub in Memphis. The company says it’s doing everything possible to protect its workers.
Investors will be eyeing FedEx’s earnings, often considered an economic bellwether, for insight into how long the disease could keep the world’s businesses down. Chairman and CEO Fred Smith said in May that FedEx saw its “lowest point” in mid-April before industrial shipping began to rebound.
Still, some analysts are doubtful FedEx’s results for the quarter, which ended in May, will impress. Company executives already framed fiscal year 2020 as a transition year well before COVID-19’s spread, and FedEx said in its most recent earnings report that it expects “weak global economic conditions will be exacerbated” in the fourth quarter.
Investment research firm Zacks forecasted Tuesday that FedEx will report $16.3 billion in revenue for the quarter, which would be down from $17.8 billion the year-before quarter.
How long will FedEx's struggles persist?
Financial services firm UBS anticipates “a very weak” earnings report from FedEx, analyst Thomas Wadewitz said in a note. UBS is also predicting FedEx will enact “significant cost reduction measures” to improve its profit margins.
FedEx announced it would reduce flight hours pre-pandemic, but Wadewitz said the company will likely come up with additional measures “to support Express performance beyond simply network air capacity.”
Business-to-business volume, FedEx Express’ key segment, has declined during the pandemic as companies have closed their doors and reworked their operations. Meanwhile, FedEx Ground contractors are scrambling to fulfill an unprecedented flood of online orders spurred by more people staying at home.
Wadewitz sees these issues persisting “for several more quarters." UBS is expecting a 15% revenue decline at FedEx Express, FedEx's largest company, for the quarter and for FedEx Ground’s profit margin to reach a low point of 5.8% in fiscal 2021.
However, Credit Suisse analysts said in a note that 2020 “will finally mark a bottom” for FedEx. They pointed to FedEx’s costly integration of TNT Express nearing completion, as well as the company getting 7-day delivery and its SmartPost volume shift under its feet — two factors that should drive down home delivery costs.
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FedEx is handling fewer commercial deliveries and significantly more home deliveries, which are less profitable.
“While the acceleration in (business-to-consumer volume) will undoubtedly pose a headwind to profitability, we see a number of reasons to believe that Express, Ground and corporate margins will inflect in FY21,” Credit Suisse analysts wrote.
Cargo crunch squeezes air industry
Although the economy has slowed, FedEx Chief Marketing Officer Brie Carere said in March that the company expects demand for its Express shipping services to remain elevated due to a lack of air cargo capacity elsewhere.
Global air cargo demand fell by 15.2% in March and air cargo capacity dropped by 22.7%, according to the International Air Transport Association. The grounding of many passenger planes, which carry cargo in their belly holds, means less space for packages needing air transport.
"At present, we don’t have enough capacity to meet the remaining demand for air cargo,” said Alexandre de Juniac, IATA director general and CEO, in a statement. “…The capacity crunch will, unfortunately, be a temporary problem. The recession will likely hit air cargo at least as severely as it does the rest of the economy.”
Medical shipments have been a priority during the pandemic. FedEx Express' cargo planes have been filled with personal protective equipment and COVID-19 testing kits in recent months, as the company leverages its vast logistics network to deliver needed supplies.
“There’s going to be demand,” CFO Alan Graf said in March. “People are going to be needing medical supplies. People are going to be needing to eat. People that run businesses are going to run businesses and they’re going to be relying on us to help them with their supply chains. I’m confident in that.”
FedEx stock was trading at $130.13 per share Friday afternoon, up from $124.81 one month earlier. Over the same period, the S&P 500 Index rose from $2,991.77 to $3,023.15.
FedEx will announce its fourth-quarter earnings for the 2020 fiscal year at 3:15 p.m. CT Tuesday, and its earnings call will follow at 4 p.m. CT.
Max Garland covers FedEx, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-529-2651 and on Twitter @MaxGarlandTypes.
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