FedEx Pulls a Fast One

If FedEx (NYSE: FDX  ) left any surprises on shareholders' doorsteps with its latest quarterly report, the packages weren't necessarily welcome. By my count, this was the company's fifth consecutive quarter of falling year-over-year earnings. Even worse, customers will get stuck with a 5% price increase for no additional service.

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 (NYSE: BRK.B  ) , "Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs." As one-half of a globetrotting duopoly, FedEx has the moat and the advantage down pat. Head honcho Smith seems committed to fighting costs as well. But FedEx's customers are bound to figure out that in the middle of an economic slowdown, and with oil prices falling, FedEx is sticking them with a 5% price increase while they get nothing new in return.

Now, Fred, is that really any way to delight your customers?

Find further FedEx Foolishness in:

Fool contributor Rich Smith owns shares of Boeing. Berkshire Hathaway B shares are a recommendation in Stock Advisor and Inside Value, and the Fool owns shares. UPS is an Income Investor pick, and FedEx is a Stock Advisor selection. Blue Nile is a Rule Breakers pick. The Motley Fool has a disclosure policy.


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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.

  • Report this Comment On September 22, 2008, at 12:20 PM, Bizgeek3 wrote:

    Mr. Smith,

    Your ignorance of business & commerce truly astounds me. Package volume gains in a declining market are indications of market share gain - a bigger slice of the pie for when economic growth rebounds. Reducing variability in fuel surcharges enables customers - Blue Nile and J Crew - to more accurately predict and recoup their costs associated with shipping. The FedEx announcement is well ahead of the holiday shipping season, so all their customers can make adjustments.

    With Jet Fuel prices up over 50% YOY, what did you expect the company to do - cut rates? And by your logic, since my gas prices are up over 50%, Should I be expecting my gas station to be pumping my gas, washing my car and shining my shoes when I stop in?

    This company is actively managing its business, and has a history of coming out of an economic slump full-throttle.

    Your article is foolish indeed.

  • Report this Comment On September 22, 2008, at 3:52 PM, mikeque wrote:

    Many see Fedex as a barometer of the overall economy. Could this 5% increase be a sign of rising inflation rates?

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