FedEx Reports Net Income, Revenue Increase for Q3
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FedEx Corp. continued efforts to improve profitability during its fiscal third quarter despite navigating an especially challenging operating environment, the company reported March 20.
The Memphis, Tenn.-based transportation services company posted net income of $909 million, or $3.76 a diluted share, for the three months ending Dec. 31. That compared with $879 million, $3.51, during the same time the previous year. Total revenue increased by 2.3% to $22.2 billion from $21.7 billion.
Results were mixed regarding expectations from Wall Street. Per Zacks Consensus Estimate, analysts were expecting EPS of $4.65 per share and quarterly revenue of $21.89 billion.
“Weakness in the industrial economy continued to pressure our higher-margin [business-to-business] volumes,” FedEx CEO Raj Subramaniam said during a call with investors. “Similar to last quarter, this dynamic was most pronounced in freight, where fewer shipments and lower weights continue to negatively affect our results, albeit to a lesser extent than last quarter. Considering our B2B mix, we are well-positioned to capture strong incremental flow-through when the industrial economy recovers.”
Helping to advance that goal is FedEx Drive, a multiyear initiative aimed at improving long-term profitability through efficiency gains and structural cost reductions. Much of the effort is aimed at improving efficiency in transporting and delivering packages in North America. Subramaniam credits the program for helping to improve year-over-year results but warned that plenty of uncertainty remains in the current environment. Network 2.0 is an additional initiative that aims to consolidate and streamline operations.
“We remain focused on what we can control,” Subramaniam said. “Q3 Drive savings continue to ramp, and we’re in line with our expectations. We expect to achieve our incremental target of $2.2 billion for FY25 and our total of $4 billion for our FY23 baseline.”
He added, “We continue to work closely with our customers to help them adapt to this evolving market. Our flexible and unmatched global network, digital tools and data ecosystem enable us to quickly support our customers’ needs.” He said that includes streamlined clearance processes to help customers comply with regulatory requirements as well as automated processes that help the company clear packages more quickly, better address improperly filed paperwork and reduce manual work.
In the company’s FedEx Express segment, Q3 revenue increased 3% to $19.2 billion from $18.7 billion last year. Operating income rose 10% to $1.29 billion from $1.17 billion. Segment results were given a boost through cost-reduction efforts, higher base yield and increased export volume both domestically and internationally. These factors were partially offset by higher wages, purchased transportation rates and the expiration of a contract with the U.S. Postal Service.
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FedEx Freight Q3 segment revenue decreased 5% to $2.09 billion from $2.21 billion, while operating income fell 23% to $261 million from $341 million. Results were affected by lower fuel surcharges, reduced weight per shipment and fewer shipments. This was partially offset by a higher base yield. The segment’s Q3 results include a net tax benefit of $46 million derived primarily from corporate entity structure changes and revisions of prior-year estimates for actual tax return results.
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TD Cowen noted in a report that near-term catalysts for volume and rate growth appear unlikely. The financial firm also pointed out that there were no indications given for an impending economic decline. Drive and Network 2.0 also were highlighted as being on track. It noted 12% of average daily package volume now runs through an integrated network.
“Despite elevated [near-term] uncertainty and headwinds, FDX remains focused on the controllable,” Cowen analyst Jason Seidl wrote in the report. “FDX had paused integration during peak and has now resumed the initiative. FDX sees this [average daily package volume] in the integrated network reaching 40% by the end of F26, and [management] has not seen volume disruption or implementation costs through the rollout.”
Edward Jones sees long-term growth opportunities from investments in efficiency, e-commerce and improving TNT Express operations. The financial services firm believes that FedEx has opportunities to improve profitability despite it struggling to do so in recent years. But the most recent quarterly results disappointed the firm in the meantime.
“We believe FedEx had a disappointing quarter with weaker-than-expected operating profit margins in both its Express and Freight segments,” Edward Jones Analyst Faisal Hersi wrote in a report. “We expect some pressure on the share price due to the weaker results and, more importantly, the lowered guidance.”
Hersi added that the implied outlook for the fourth quarter is significantly lower than his expectations as a result of ongoing challenges in the global industrial economy, inflationary pressure and uncertainty surrounding global trade policies. He highlighted the freight segment as being much softer than expected and how that could complicate plans to spin off that business.
“Overall, we continue to think FedEx has a significant opportunity to improve profitability,” Hersi also noted. “However, there are execution risks, and it remains to be seen how much of the projected savings will translate to earnings growth.”
FedEx ranks No. 2 on the Transport Topics Top 100 list of the largest for-hire carriers in North America and No. 2 on the TT Top 50 list of the largest global freight carriers. FedEx Logistics ranks No. 34 on the TT Top 100 logistics companies list.
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