Categories Analysis, Industrials

Cost reduction has become a priority for FedEx (FDX) after a challenging quarter

The company expects revenue of $23.5-24 billion in Q2

Shares of FedEx Corporation (NYSE: FDX) were up 1% on Tuesday. The stock has dropped 44% year-to-date and 34% over the past 12 months. The company delivered mixed results for its first quarter of 2023 as tough economic conditions took a toll on volumes. As it deals with a challenging operating environment, FedEx is taking steps to reduce costs across its business in order to improve its performance and profitability.

Economic conditions

On its quarterly conference call, FedEx mentioned that manufacturing and global trade had slowed down more than it had expected during the first quarter. There has also been a slowdown in consumer spending in the US due to inflation. These factors led to a decline in the company’s volumes during the quarter, which in turn weighed on its profitability.  

In Q1, FedEx Express’ results in Asia and Europe were affected by macroeconomic weakness and service challenges. For FedEx Ground, despite lower volumes, the company managed to hold market share in the US. FedEx has announced a general rate increase of 6.9% across its business, which will be effective from January, to deal with inflationary pressures on its costs.

FedEx Q1 2023 earnings infographic

Cost savings

In the current challenging business environment, cost reduction has become a priority for FedEx. It is taking several steps to reduce its costs in order to align them with demand. Within FedEx Express, the company expects to drive $1.5-1.7 billion in savings, mainly through changes to its express air network.

This includes lowering its trans-Pacific daily frequencies by 11%, transatlantic daily frequencies by 9% and daily frequencies on the lane between Asia and Europe by 17%. In Europe, to improve productivity, FedEx is reducing its ground network routes by 11% in the UK and 12% in Germany.  

Within FedEx Ground, the company expects to drive savings of $350-500 million through the closure of select sort operations as well as the suspension of certain Sunday operations in over 170 stations. The rest of the savings will be from reducing overhead expenses. This will include the closure of around 140 FedEx office locations and at least five corporate office facilities. In addition, FedEx Services has stopped all non-critical projects. These actions are expected to contribute savings of $350-500 million.

In total, FedEx expects to generate cost savings of $2.2-2.7 billion in fiscal year 2023. During the first quarter, the company realized around $300 million of these savings and it expects to realize around $700 million in savings in the second quarter.

Mixed results

In Q1, FedEx’s total revenue increased 5% year-over-year to $23.2 billion but fell short of expectations. Adjusted EPS dropped 21% to $3.44 but surpassed projections. Operating income fell 15% to $1.19 billion while operating margin decreased to 5.1% from 6.4% last year.

Outlook

FedEx expects business conditions to remain challenging in the second quarter of 2023. The company expects revenue of $23.5-24 billion in Q2. GAAP EPS is expected to be $2.65 or greater while adjusted EPS is expected to be $2.75 or greater for the period.

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