Management delivered first-quarter earnings right in line with what investors were expecting. Profits landed at $1.23 per share while revenue rose 8%, missing $10 billion by a nose. Management also reiterated full-year guidance of roughly $5 per share, but it added that this year's second quarter will probably fall short of last year's. When will these year-over-year declines end?
Hard to say. CEO Fred Smith tells us that FedEx will take steps to "enhance the customer experience, gain market share, reduce expenses, [and] improve profits." Let's address these plans in some detail:
Improve profits: FedEx told us that average daily package volume in the FedEx Express and FedEx Ground segments grew 1% year over year. Yet companies that ship their goods to consumers using FedEx, such as Blue Nile
(NASDAQ:NILE)and J.Crew (NYSE:JCG), expect soft consumer-spending trends to linger. Will volume growth, which ultimately leads to profit growth, really be able to pick up?
Reduce expenses: Cutting costs while holding revenue constant implies that profit margins must rise. To get moving on that front, FedEx is cutting its capital-expenditures budget yet again. The company promises to spend no more than $2.6 billion on capital improvements this year. But yes, Boeing
(NYSE:BA), FedEx still wants to buy some gas-sipping 757s and 777s, if you could see your way clear to build 'em.
Enhance the customer experience while gaining market share: This is the tricky part. FedEx said it will increase shipping rates by an average of 6.9% for U.S. domestic and U.S. export services, to juice the growth rate. So how do you make customers happy with that kind of rate increase and persuade them to switch away from DHL and UPS
(NYSE:UPS)? FedEx's answer is the ol' "give with one hand and take away with the other" gambit. While raising base rates, FedEx will give back 2% of its fuel surcharges. For FedEx, that works out to about a 4.9% revenue boost, if shipping volume holds firm.
Once upon a time, legendary businessman Warren Buffett told his corporate lieutenants at Berkshire Hathaway
Now, Fred, is that really any way to delight your customers?
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