FedEx's Shaky Ground

A voluntary retirement and severance program for its Express division employees ate into FedEx's (NYSE: FDX  ) quarterly results again. Including realignment costs, FedEx earned $91 million in its second quarter, down 63% from last year's $245 million. Shares are off today about 4% thanks to the company's estimate miss of two cents and concerns over FedEx Ground.

The retirement and severance program's been more popular than the Memphis-based company expected, with workers jumping at the chance to leave. On the flipside, increased use of the program now will result in greater cost savings down the road.

The goal is to get FedEx Express, the company's largest and slowest-growing segment, into leaner shape. A heavy and largely fixed capital structure, along with higher fuel and employee costs, drove FedEx Express's operating income down 3% in fiscal 2003, following a decline of 4% in 2002. Revenues, package volume, and package yields were up for 2003. The division's ballooning costs have been the biggest concern.

For the quarter, revenues at the Express unit increased 4% to $4.28 billion. Excluding the costs of the severance program, operating income improved by 13%, and operating margins expanded from 5.6% to 6.1%. That indicates that the company's cost control efforts are working.

Through the first two quarters of this year, FedEx has booked $415 million in costs associated with the retirement program. It expects cost savings for the rest of the current fiscal year to run $135 million-$145 million, above the company's earlier predicted levels. For fiscal 2005 and beyond, FedEx expects annual cost savings of $235 million-$240 million, better than the $200 million-$230 million projected in October.

While everything looks hunky dory for FedEx Express, shareholders should keep an eye on FedEx Ground, which competes head-on with UPS (NYSE: UPS  ) . The unit has been the company's fastest-growing segment, with revenues and operating income growing 26% and 47%, respectively, in fiscal 2003.

In the second quarter, though, FedEx Ground's operating income was flat vs. last year, and operating margins dropped to 13.8% from 14.8%. FedEx's capital expenditures are largely dedicated to expanding the Ground unit, so one hopes that these are just growing pains as it rolls out the business more aggressively.

FedEx expects that the rest of its fiscal year will be strong. It raised estimates for the year to $3.30-$3.40 a share from its earlier guidance of $3-$3.15, after including expected cost savings. After a so-so quarter, a solid finish would be good news for shareholders.

Talk it over on the FedEx discussion boards. FedEx is one of David Gardner's Motley Fool Stock Advisor recommendations.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 500602, ~/Articles/ArticleHandler.aspx, 10/21/2016 6:03:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:02 PM
FDX $170.20 Up +0.50 +0.29%
FedEx CAPS Rating: ****
UPS $107.16 Down -0.24 -0.22%
United Parcel Serv… CAPS Rating: ****