Earnings Preview: FedEx likely had a mixed start to fiscal 2024

After ending fiscal 2023 on a positive note, FedEx Corporation (NYSE: FDX) is preparing to publish results for the first quarter. As demand conditions continue to improve post-COVID, the cargo giant is currently busy transforming the business with focus on becoming a more efficient and data-driven company.  

Since rebounding from a two-year low about twelve months ago, the Memphis-based company’s stock made steady gains and is currently trading well above its long-term average. As recovery picks up momentum, the value could move higher and go beyond the 2021 peak. Currently, FDX looks like a promising investment option investors wouldn’t want to miss.

Resilience

It needs to be noted that the company has managed to perform well in the competitive environment. Volumes have improved for the Ground and Express businesses, but yields remain under pressure from unfavorable demand-supply balance. Recently, the management revealed plans to raise shipping rates and customs clearance fees in an effort to boost profitability. At the same time, cost pressures would likely persist in the near term, dragging down margins to some extent.

While the balance sheet is reasonably healthy, FedEx’s high debt is a concern. The management has embarked on a cost-reduction drive to protect profitability, in response to inflation pressure and elevated operating costs. In the most recent quarter, there was a 9% year-over-year drop in expenses. As part of its cost-cutting program, the company is gearing up for a fresh round of workforce reduction after laying off many senior executives and closing offices.

New Structure

The restructuring includes consolidation of the three main business segments – Express, Ground, and Freight – into one single unit by June 2024. Also, all FedEx ground operations and personnel in Canada are being transitioned into FedEx Express.

CEO Raj Subramaniam said in a recent statement, “Consolidation will create significant efficiencies throughout the business from first to last mile and across our support teams. We expect this change in Canada to generate an annualized benefit of over $100 million upon completion in FY ’25. We announced transitions in 20 markets, and Canada marks the first large-scale implementation of Network 2.0, which builds on the learnings from our completed transitions in other geographies. To be clear, we’re not taking a one-size-fits-all approach to our Network.”

Q1 Report Due

FedEx’s first-quarter report is expected to come on September 20, as soon as the market closes. Experts are looking for a mixed outcome – lower revenues and a year-over-year increase in profit. As per the most recent estimate, they are looking for adjusted earnings of $3.71 per share and revenues of $21.79 billion, which is down 7.5%.

Last year, FedEx delivered mixed results, with earnings beating estimates in all four quarters and revenues missing every time. In the final three months of 2023, revenues declined 10% from last year to around $22 billion, hurt by weakness in the main operating segments. That translated into a double-digit fall in adjusted profit to $4.94 per share. Meanwhile, reported net income more than doubled to $1.54 billion or $6.05 per share, aided by one-time gains.

FedEx’s shares have lost about 5% since mid-August and the downtrend continued in the last session. The stock traded slightly above $250 on Wednesday morning.