What happened
Shares of FedEx (FDX 0.11%) traded down more than 5% on Friday after the shipping giant suspended guidance and said it was tapping its available credit line. The COVID-19 coronavirus pandemic is raising volumes in some businesses while shrinking volumes in others, but the net result is likely to be lower profitability in the quarters ahead.
So what
In a regulatory filing on Friday, FedEx said global business-to-business demand has been negatively affected by the pandemic, while lower-margin U.S. ground demand has increased as consumers are relying more on e-commerce. That, along with the internal changes FedEx is making in light of the outbreak, is going to impact profitability.
Image source: FedEx.
"We are flexing our network and making adjustments as needed to align with volumes and operating conditions," the company said in the filing.
We are taking additional measures and incurring additional expense to protect the health and safety of our employees, contractors, and the public and are working with customers to accommodate special requests around modified store hours, closings, and delivery alternatives to comply with applicable government restrictions and safety guidance.
FedEx said it intends to draw down $1.5 billion from an existing credit facility to reinforce its balance sheet. The company said it expects to stay in compliance with debt covenants for now; however, "if we secure additional financing or experience a deterioration in results of operations that would cause us not to be in compliance with the covenant, we would have to seek to amend this covenant."
The company is also taking other actions to reduce costs, including cutting CEO Fred Smith's salary by 91% through Sept. 30.
Now what
FedEx has ample resources to get by even if the economy does fall into a recession, but the company's results will be affected at least through the first half of 2020 -- and likely for longer. FedEx struggled in 2019 because of trade wars and a slowdown in China, but investors went into 2020 hoping for a rebound.
Given the current macroeconomic conditions and the outlook for the months to come, that rebound is unlikely to materialize any time soon.
