FedEx Is Struggling To Shake Off The Pandemic-Domino Effect

On Tuesday, parcel delivery company FedEx Corporation FDX reported a decline in quarterly profit along with cutting its earnings outlook due to higher costs and labor shortages. Upon the news, its shares declined more than 4% in after-hours trading.

Figures

For the quarter that ended in August, revenue rose 14% to $22 billion which was in line with Refinitiv survey of Wall Street analysts. But net income slid to $1.1 billion, or $4.09 a share, below FactSet expectations of $4.88. During the same quarter last year, it earned $1.25 billion, or $4.72 a share, translating to an 11% drop in profit. Excluding restructuring and integration expenses, per-share earnings become $4.37.

The tight labor market increased spending by $450 million as FedEx needed to pay more over time and raise spending to attract workers while it also needed to spend more on transportation. Salaries and employee benefit expenses alone rose 13%, including 27% in its Ground division. Moreover, shipping demand unexpectedly slowed due to supply-chain disruptions as the current labor environment is driving operational inefficiencies that are dragging down financial results.

Outlook

Tennessee-based delivery giant expects FedEx further downgraded its per-share earnings forecast that it issued in July. Per share earnings before certain accounting adjustments for the fiscal year that started in June are expected to be between $18.25 and $19.50

Failed Attempt To Offset Higher Costs

Like United Parcel Service, Inc UPS, FedEx raised prices and imposed surcharges to offset higher costs associated with the surge in demand as the volume of commercial ground and express packages rose. However, supply chain disruptions slowed domestic parcel demand in the US compared to last year.

On Monday, FedEx announced it will raise its rates 5.9% on average at the beginning of 2022. This is the highest annual increase both FedEx and United Parcel Services Inc. have implemented over the last eight years. But both shipping companies instituted new fees and raised rates on customers as the environment has provided them with increased pricing power.

FedEx's Struggles Aren't Going Away

According to its Chief Operating Officer Raj Subramaniam, the consequences of a constrained labor market continues to weigh heavily on operations and consequently, financial performance. In an effort to catch up, the company is diverting 25% of the volume bound for its troubled Portland hub to other locations, adding trucking routes and hiring assistance from third-party transportation companies. About 600,000 of its packages a day are being rerouted in an attempt to address these network bottlenecks.

The problem is that disruptions are hampering the entire supply chain, from factories starving for parts to congested ports and railroads. Online sales are also taking as consumers shop in-store or pick up their orders themselves.

UPS Is Ahead

On one hand, FedEx picked up some business from UPS as the company was cutting ties with some customers to focus on a more profitable business. On the other, it lost customers such as Clean Eatz Kitchen Inc. due to delays that cost the company thousands of dollars worth of shipments of ready-to-eat frozen meals that ended up spoiled. Recently, the company shifted all its business to UPS, saying that on-time delivery rates are in the high 90s after it made the switch.

Even More Challenges Ahead

FedEx is facing these challenges only weeks before the busiest time of the year for the industry, the Christmas time. Similar to last year, the company aims to hire 90,000 workers to help with the holiday rush. But merchants and retailers are facing another hard year shaped by shipping capacity.

According to ShipMatrix estimates, US shipping demand will be greater than the available capacity by 4.7 million parcels a day, both throughout November and December. Although it is significantly less than last year's 7.3 million shortfalls, millions of packages are still at risk of not being on time for Christmas unless consumers shop early. FedEx is clearly struggling with higher labor costs, as well as the fact that the pandemic-induced e-commerce boom has slowed down.

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