For its fiscal third quarter, FedEx reported a decline in revenue and earnings as the shipping company struggles with a slowdown in its business. Global softness in package volume weighed on sales during the period. Nevertheless, the stock soared on Friday even as the overall market pulled back, evidenced by the S&P 500's 1.1% decline. Shares of FedEx (FDX 0.11%) rose about 8% as investors digested the company's earnings report.
What gives? The Street's optimism for FedEx stock in the face of slowing sales comes down to the company's cost-cutting efforts. Despite a challenging environment, FedEx management was optimistic about its long-term prospects thanks to some of its focused efforts to address challenges and improve profitability.
How FedEx is coping with lower sales
FedEx's fiscal Q3 revenue was $22.2 billion, down from $23.6 billion in the year-ago quarter. Earnings per share (EPS) declined from $4.59 to $4.20 over the same period.
Capturing how FedEx is handling demand weakness better than expected, the company's adjusted EPS of $3.41 for the quarter was far in excess of analysts' average estimate for adjusted EPS of $2.73. This occurred despite revenue for the period coming in about a half-billion dollars below analysts' forecast.
"We've continued to move with urgency to improve efficiency, and our cost actions are taking hold, driving an improved outlook for the current fiscal year," said FedEx CEO Raj Subramaniam in the company's fiscal Q3 earnings release.
But investors should note that even though non-GAAP EPS for the quarter was better than expected, it was still down substantially from adjusted EPS of $4.59 in the year-ago period. So it's going to require more than one quarter of cost-cutting to make a big difference in the investment thesis for investors in the stock. This is why the bulk of the excitement on The Street regarding FedEx's fiscal Q3 results was likely related to management's better-than-expected guidance.
A robust outlook
With its cost-cutting efforts taking hold, management was able to offer an improved full-year outlook for investors. Management said it now expects adjusted EPS (before mark-to-market retirement plan accounting adjustments) for the full fiscal year to be between $14.60 and $16.20, up from a previous forecast for adjusted EPS between $13.00 and $14.00.
FedEx Chief Financial Officer Michael Lenz explained in the company's fiscal Q3 earnings release that this view reflects how FedEx is "building momentum through our cost and efficiency initiatives to improve profitability."
Importantly, FedEx said it will be able to continue with its cost-cutting while maintaining its plan to spend $5.9 billion on capital expenditures. This is important because capital expenditures represent investments the company makes for long-term growth initiatives, though management noted in its earnings call that even its capital expenditures are trending lower as a percentage of revenue. "We are in an era of lower capital intensity at FedEx," said Lenz during the company's earnings call. Subramaniam said he believes this efficiency is, in part, due to the company's ability to "operate more collaboratively," increasing return on invested capital across its business.
In short, cost-cutting efforts today could help FedEx come out of this period of global softness with a leaner and far more profitable business. Based on the stock's big move on Friday, Wall Street seems on board with this view.
