FedEx Corporation (FDX) has announced its first-quarter results, revealing a significant drop in profits amidst a major transformation led by CEO Raj Subramaniam. The parcel giant attributed the decline to weak demand for its high-margin, expedited delivery services. This downturn, which has also impacted its rival, United Parcel Service (UPS), resulted in a 11% drop in FedEx’s share price during late trading.
The decline in profits stems from a shift in consumer behavior, with customers increasingly opting for cheaper, slower delivery options. FedEx’s first-quarter results were particularly impacted by a reduction in demand for priority services and a surge in demand for deferred services. This trend is also affecting UPS, though the company has attributed its squeezed profits to an influx of volume from China-linked e-commerce players like Temu and Shein. In contrast, FedEx has focused more on the decline in priority shipments between businesses.
Despite a stagnant revenue of $21.6 billion, FedEx’s adjusted profit fell to $3.60 per share, a decrease from $4.55 per share earned during the same period last year. This decline was attributed to the inability of cost cuts to offset the weak demand for high-profit priority services, compounded by one fewer operating day during the quarter.
FedEx has also lowered its revenue growth forecast for the fiscal year, projecting low-single-digit percentages instead of the previously anticipated low-to-mid-digit increase. This adjustment reflects a challenging macroeconomic environment and competitive pricing. The company has also narrowed down its adjusted earnings per share range from $20 to $22 to $20 and $21 per share.
Adding to the company’s challenges, FedEx is winding down its contract work for its biggest client, the United States Postal Service (USPS). This contract, which will end on September 29th, will be taken over by UPS and will result in a $500 million reduction in FedEx’s current fiscal year revenue. The USPS air contract, which generated $1.75 billion in revenue for FedEx during the last fiscal year, was previously considered unprofitable.
Despite the current challenges, FedEx remains optimistic about its long-term restructuring plans. The company is aiming to slash billions of dollars in overhead costs and improve operational efficiencies by merging its separate Ground and Express delivery divisions. Wall Street Journal has also reported that transportation experts expect FedEx to consider spinning off its Freight unit. CEO Subramaniam reaffirmed the company’s commitment to its “DRIVE” strategy, which aims to achieve $2.2 billion in permanent cost reduction. J.P. Morgan analyst Brian P. Ossenbeck has expressed optimism that things should improve if DRIVE-driven savings accelerate throughout the rest of the year and pricing power increases during the peak season.
