A voluntary retirement and severance program for its Express division employees ate into FedEx's
The retirement and severance program's been more popular than the Memphis-based company expected, with workers jumping at the chance to leave. On the flipside, increased use of the program now will result in greater cost savings down the road.
The goal is to get FedEx Express, the company's largest and slowest-growing segment, into leaner shape. A heavy and largely fixed capital structure, along with higher fuel and employee costs, drove FedEx Express's operating income down 3% in fiscal 2003, following a decline of 4% in 2002. Revenues, package volume, and package yields were up for 2003. The division's ballooning costs have been the biggest concern.
For the quarter, revenues at the Express unit increased 4% to $4.28 billion. Excluding the costs of the severance program, operating income improved by 13%, and operating margins expanded from 5.6% to 6.1%. That indicates that the company's cost control efforts are working.
Through the first two quarters of this year, FedEx has booked $415 million in costs associated with the retirement program. It expects cost savings for the rest of the current fiscal year to run $135 million-$145 million, above the company's earlier predicted levels. For fiscal 2005 and beyond, FedEx expects annual cost savings of $235 million-$240 million, better than the $200 million-$230 million projected in October.
While everything looks hunky dory for FedEx Express, shareholders should keep an eye on FedEx Ground, which competes head-on with UPS
In the second quarter, though, FedEx Ground's operating income was flat vs. last year, and operating margins dropped to 13.8% from 14.8%. FedEx's capital expenditures are largely dedicated to expanding the Ground unit, so one hopes that these are just growing pains as it rolls out the business more aggressively.
FedEx expects that the rest of its fiscal year will be strong. It raised estimates for the year to $3.30-$3.40 a share from its earlier guidance of $3-$3.15, after including expected cost savings. After a so-so quarter, a solid finish would be good news for shareholders.