FedEx Corporation Delivers on All Fronts

FEDEX CORPORATION IS TRYING TO INFLUENCE CUSTOMERS TO PACKAGE MORE EFFICIENTLY WITH ITS PRICING INITIATIVES. IMAGE SOURCE: FEDEX CORPORATION.

FedEx Corporation (FDX -0.77%) kicked off its fiscal year 2017 with a bumper set of first-quarter earnings. All three of its ongoing segments (express, ground, and freight) reported revenue and operating-income increases. Looking ahead, management outlined expectations for the integration of TNT Express, and announced pricing increases and a change to the company's fuel surcharge pricing. Let's take a look at the earnings report and what it all means.

FedEx Corporation's first-quarter earnings

In step with rival United Parcel Service, Inc. (UPS -0.35%), the package delivery giant is managing to generate earnings growth despite a deterioration in growth expectations. For example, FedEx's economic outlook now calls for U.S. GDP growth of just 1.6% in 2016, with industrial production expected to decline by 0.7% in the same period.

However, a look at FedEx's earnings figures by segment shows good growth across the board, and there are positives to be drawn from each segment.

DATA SOURCE: FEDEX CORPORATION PRESENTATIONS.

Express segment

The express segment's reported growth of 1% may not seem much, but recall that FedEx and UPS have both seen revenue growth held back by lower fuel surcharges (caused by lower oil prices) and unfavorable currency movements (the stronger U.S. dollar reduces foreign-currency earnings). In fact, FedEx Services' CEO, Michael Glenn, claimed that, excluding the impact of fuel, U.S. domestic express revenue actually grew 3.8% and international express revenue grew 1%.

Essentially, FedEx was able to increase revenue thanks to a 1% increase in overall average daily package volume and an improvement in base yields. For example, U.S. domestic yield grew 1% on a reported basis, but increased 2.5% excluding fuel.

Similarly, underlying the express segment's U.S. domestic-package yield may be a fascinating dynamic -- also evident in UPS' recent results -- whereby customers are warming to using faster, more expensive delivery options again. For example, FedEx's U.S. overnight-box daily package volume (average revenue per package is $21.11) grew 4% in the quarter compared to a 5% decline in the U.S. deferred daily package volume ($15.12) -- something to look out for in upcoming quarters.

However, the key story with the express segment is the ongoing margin improvement. Reported operating margin increased to 9.4% from 8.3% in the same period last year, aided by the base yield improvements (discussed above) and "ongoing cost efficiencies" as part of the company's profit-improvement plan.

Ground and freight

While the economy hasn't been as strong as expected, e-commerce (particularly consumer and residential deliveries) remains in a robust growth mode. As a result, FedEx's ground revenue increased 12%, driven by a 10% increase in average daily volume and a 2% increase in package yield (3% if you exclude the impact of the lower fuel surcharge).

However, just as with express, the key story with ground revolves around margin. Operating margin increased to 14.2% from 14% in the same period last year. It's a good result considering management had previously flagged the negative impacts of higher operating costs (including purchased transportation) and network expansion costs on margin. 

In freight, the revenue and profit increase is impressive given the circumstances of weakening economic growth. Essentially, FedEx managed to offset a 4% decline in revenue per less-than-truckload (LTL) shipment by increasing average daily LTL shipments by 8%. Glenn claimed it was down to the company's "outstanding sales efforts with small and medium customers and reflects the speed, reliability and choice of priority and economy service for our LTL customers." He added that the company "also saw increased demand from larger customers during the quarter."

Pricing changes

FedEx followed UPS in announcing rate increases for 2017, with ground, home delivery, and freight shipping rates set to increase by 4.9% on Jan. 2. UPS has announced its ground, air, and international package rates will increase by 4.9% before the end of 2016. Incidentally, UPS followed FedEx in implementing an additional handling charge for packages exceeding 48 inches, a lower limit than the previous allowance of 60 inches.

Moreover, fuel surcharges will be adjusted on a weekly basis rather the current monthly adjustment, therefore reducing the time lag between oil-price movements and fuel surcharges.

TNT Express integration

Finally, CFO Alan Graf affirmed management's confidence in the "initial views of the value of this acquisition" and talked of an "aggregate integration program expense over the four years to be in the range of $700 million to $800 million," with the integration expected to produce annual synergies of $750 million by the exit of the fourth year.

Looking ahead

All told, the market was pleased with the earnings and outlook for the company. Indeed, FedEx and UPS continue to demonstrate they can overcome a sluggish economy by benefiting from strong e-commerce growth. As FedEx starts to integrate TNT Express in fiscal 2017, much will depend on the successful execution of this process.