Special Delivery! FedEx Drives Up, Drops Off Box Of God-Awful Numbers. Drives Off.

The last time we checked in on FedEx, the shares were getting bludgeoned in after hours trading after a grievous guide down.

That was on September 17.

Fast forward three months and the shares are – wait for it – getting bludgeoned in after hours trading on a grievous guide down. Specifically the stock is off some 6% after the company missed everything in what looks, at first blush anyway, like a rough FY second quarter report.

Q2 revenue was $17.3 billion, somewhere near the middle of the range, but below consensus, which was looking for $17.66 billion. Operating margins were 3.9%, some 140bps (!) shy of what the street was looking for, and barely half of the 7.5% the company reported a year ago.

Adjusted EPS wasn’t even close. At $2.51, the company didn’t manage to meet the most pessimistic estimate ($2.57) let alone consensus $2.78.

This comes with the usual caveat about why it is we’re bothering to cover this. Generally speaking, there needs to be a discernible connection to the macro narrative for individual earnings results to feature in these pages. FedEx fits that description.

The courier has, at various intervals going back to last year, found itself beset by concerns tied to the trade war. Those concerns haven’t been limited to generic global growth jitters. Over the summer, the company stumbled into Beijing’s crosshairs thanks to an at times farcical dispute over rerouted Huawei shipments and, at one point, illegal knives.

As you can see from the bottom pane in the visual above, FedEx has woefully underperformed UPS over the course of the trade war.

Things got materially worse for the courier this week when Amazon slammed the door shut on third-party merchants’ use of FedEx’s ground delivery network for holiday shipments, citing (hilariously) a lack of speed. Sellers can, however, still use FedEx’s express service for Prime packages, or, if they prefer, UPS. Amazon was already in the process of cutting ties with FedEx. After all, Bezos has his own delivery network now.

If the quarter was bad, the guidance was worse. Adjusted earnings for fiscal 2020 will be between $10.25 and $11.50 a share (before the year-end MTM retirement plan accounting adjustment and excluding TNT Express integration expenses and aircraft impairment charges). The previous outlook called for adjusted earnings of between $11.00 and $13.00. When we say “previous” we mean what the company said just three months ago, and those numbers were themselves a disappointment.

“Our revised guidance reflects lower-than-expected revenue at each of our transportation segments and higher-than-expected expenses driven by continued mix shift to residential delivery services”, CFO Alan Graf said. “In response, we are implementing reductions to the global FedEx Express air network to better match capacity with demand”, he went on to say, adding that the company is also “further restricting hiring and pursuing opportunities to optimize our networks, including investments in technology aimed at improving our productivity and lowering our costs”.

And here’s the thing: Even this new guidance is contingent upon a relatively rosy economic outlook, both at home and abroad.

“These forecasts assume moderate US economic growth, the company’s current fuel price expectations, no further weakening in international economic conditions from the company’s current forecast and no additional adverse developments in international trade policies and relations”, the press release reads.

We could go on (and on, and on). But why would we bother when the simplest of simple charts tells you everything you need to know?…


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