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Earnings Results: FedEx plans up to $2.7 billion in cost cuts, higher shipping rates as demand weakens

FedEx Corp. on Thursday announced between $2.2 billion and $2.7 billion in cost savings for the fiscal year ahead and said it would raise shipping rates for air and ground services in January, after what it said was a slowdown in volume and “weakening economic conditions.”

Executives, during FedEx’s
FDX,
+0.84%

earnings conference call later in the day, said the higher rates were a response to inflation. The package delivery giant’s CEO, when questioned by analysts, expressed confidence in the executive team currently in place, and said the company was prepared for the peak holiday-period shipping season even as it scales back and hikes prices.

However, he said he hadn’t anticipated the “tremendous inflation of costs” that hit last year. And executives said they expected demand levels seen in late August — when they said spot rates for ocean and air transportation in parts of Asia took a sharp turn south — to continue for the rest of the year.

CEO Raj Subramaniam said the company ran a complex operation, making it difficult to respond to conditions in the air and on the ground more quickly as demand wilted.

“There’s a time lag between the actions we can take on reducing the line-haul network,” he said. “That’s all it is.”

“From a customer perspective, our customers are incredibly sticky,” Brie Carere, FedEx’s chief customer officer, said during the call. “What we experienced, especially in August, both in Asia and here in the United States, is two things: Their demand actually wasn’t there, and our customers missed their own forecasts.”

FedEx’s cost-cutting plans — released sooner than planned earlier Thursday due to what management called a “technical issue” — followed its preannounced quarterly results last week that stunned Wall Street and raised deeper anxieties about the company and the U.S. economy.

The cuts, which added specific figures to cost-reduction plans announced last week, will largely come from FedEx’s big, internationally focused Express business, which offers overnight and expedited air and ground deliveries in the U.S. and abroad.

Management said $1.5 billion to $1.7 billion in savings would be drawn from that unit, as they shrink flight frequencies and park jets. Operating income for the Express business plunged 69% from the year-earlier period, on an 11% drop over that time in global package and freight volumes.

Also read: Why FedEx’s profit warning is such bad news for the U.S. economy

FedEx said $350 million to $500 million in savings would come from its Ground unit, whose trucks haul packages to businesses and residences in the U.S. and Canada. The company said cuts would come from halting some Sunday operations and closing others.

FedEx said another $350 million to $500 million would come from putting off other projects, and closing nearly 140 FedEx Office locations, which handle services like copying and digital printing, and corporate locations.

Executives on Thursday also announced a program to “accelerate progress” to save $4 billion by 2025.

Shares of FedEx dipped 0.5% after-hours on Thursday. Rival UPS
UPS,
-3.43%

crept 0.08% higher.

“First-quarter consolidated operating results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter due to weakening economic conditions,” FedEx said in a statement earlier in the day Thursday. “In addition, results were negatively affected by service challenges at FedEx Express.”

“In response, the company implemented cost actions and continued its focus on yield management and revenue quality to mitigate the effect of volume declines,” the statement said. “However, the impact of cost actions lagged volume declines and operating expenses remained high relative to demand.”

With costs rising, FedEx also said it would raise shipping rates by an average of 6.9% in its Express, Ground and Home Delivery services. Those increases take effect on Jan. 2.

FedEx last week preannounced fiscal first-quarter earnings per share that were well below expectations. The company also withdrew its full-year outlook, forecast weaker trends and announced aggressive cost cuts, hiring halts and closures, sending shares on their biggest weekly drop since 1987. One economist said the dour forecast aligned with his view for a “massive deceleration” in the U.S. economy.

Many of those results were reiterated Thursday. The package-deliverer reported net income of $875 million, or $3.33 per share, compared with $1.1 billion and $4.09 per share in the period a year ago.

Adjusted earnings were $3.44 per share, compared with $4.37 per share in the period a year earlier, and well below FactSet’s estimate for $5.14.

FedEx reported sales of $23.2 billion, compared with $22 billion in the year-ago period. But that also missed expectations for $23.6 billion.

Prior to Thursday’s results, analysts had been wondering how much of FedEx’s difficulties during the quarter were due to internal challenges and weaker demand globally. They’d also been wondering how management’s read on package volumes changed since June, when FedEx said it expected “additional earnings momentum” during its current fiscal year.

Demand for goods, and thus a demand for shipping them, began to fade this year, after more people resumed traveling, dining out, attending concerts and resuming other prepandemic activities. Analysts have also grown concerned about inflation’s impact on demand for package deliveries.

FedEx last week said its Express business took a hit from “macroeconomic weakness in Asia and service challenges in Europe,” leading to a roughly $500 million sales shortfall. Sales in FedEx’s Ground business were also around $300 million below company forecasts.

But others have noted FedEx’s longer-term difficulties in growing profits and margins, and tensions with some contract drivers over pay, as those drivers deal with their own rising costs. Subramaniam, during the call on Thursday, downplayed those tensions, and said the vast majority of the 6,000 contractors in its Ground business had signed onto a peak-season incentive program.

But when asked during the call why some of FedEx’s rivals weren’t calling out similar difficulties surrounding the demand and cost backdrop, Subramaniam said: “I can’t comment on what our competition is seeing or not seeing.”

FedEx stock is down around 40% so far this year. By comparison, the S&P 500 index
SPX,
-0.84%

is down 21% over that time.

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