Shares of package delivery giant FedEx (FDX -0.97%) declined nearly 10% for the week as of 2 p.m. EDT Thursday. The move comes after a disappointing set of first-quarter 2022 earnings released on Tuesday.
The reason? FedEx missed analyst and internal company estimates in the quarter due to "constrained labor markets," according to management on the earnings call. In plain English, labor shortages caused higher costs incurred in hiring available workers and delivering packages at the transportation company.
COO Raj Subramaniam discussed the situation at the company's Portland hub, which is running "with approximately 65% of the staffing needed to handle its normal volume." Consequently, 25% of the volume that should run through the hub is being diverted because it "cannot be processed efficiently to meet our service standards."
Management said the impact on quarterly results was a whopping $450 million. Of this figure, $250 million was due to "network inefficiencies" created by labor shortages. These extra costs include using more third-party transportation, asset repositioning costs, and recruiting incentives. The remaining $200 million was for higher wages and "higher rates paid for third-party transportation service."
The key question is whether the labor shortages are due to some temporary issues related to the COVID-19 pandemic, such as safety concerns and the difficulty of obtaining child care if schools and day care centers are closed -- or something more lasting.
If the situation isn't resolved soon, the market will ask questions about FedEx's performance in the upcoming holiday season, when peak delivery days will strain its network.
Frankly, this news is shocking and raises questions over package delivery company margins precisely when FedEx and UPS seemed to demonstrate they could grow margin with e-commerce deliveries. Therefore, cautious investors should monitor events to see whether the labor shortages and disruptions will be lasting or not.