FedEx And UPS Grapple With An Unfavorable Environment

On Tuesday, FedEx Corporation FDX posted its fiscal 2023 fourth-quarter results with shares falling 3.1% in premarket trading on Wednesday, after a revenue miss and weak profit guidance due to a continuously weakening demand and cost inflation pressures. What’s even more concerning is the United Parcel Service Inc UPS strike in the air that would be the largest single-employer strike in US history. All in all, it is certainly not the best time to be in the shipping business with even Amazon.com Inc AMZN dealing with the strike of 84 delivery drivers in California as well as an aftermath of an Amazon driver being shot after delivering a package.

FedEx’s Fourth Fiscal Quarter Key Figures

For the quarter ended on May 31st, the Memphis-based shipping giant reported revenue dropped from last year’s comparable quarter ($24.4 billion) to $21.9 billion. Express segment revenue brought in $10.41 billion. While the Ground segment improved due to increased revenue per package and cost-reductions, the Express segment experienced its operating results decline due to lower global volumes that were only partially offset by loweredexpenses and higher U.S. domestic yields. Adjusted operating income amounted to $1.77 billion with the strongest operating margin of the fiscal year at 8.1% as a result of efficient execution of expense management controls. Net income also dropped from last year’s comparable quarter ($1.8 billion) to $1.25 billion and adjusted diluted earnings per share amounted to $4.94.

At FedEx Express air and international unit, flight hours slipped 12% in the quarter, which exceeded the volume decline.

Corporate Staff Changes

In a separate announcement, FedEx announced that CFO Michael Lenz will retire on July 31st. Lenz will be present until the year-end to ensure a smooth transition of his successor who is still unknown.   

Flattish Fiscal 2024 Guidance 

Flat low-single-digit revenue growth is expected in the new fiscal year that kicked off on June 1st, with $1.8 billion in permanent savings out of $4 billion in savings in this fiscal year and the following. Margin improvements at its Express and Ground units are expected, while freight margins are expected to remain under pressure throughout the year and especially during the undergoing quarter. 

Following the two-year of skyrocketing demand created by the pandemic, the industry is dealing with a package volume decline and therefore, lowering costs is the logical way to go. As it grapples with this challenging new reality of weakened demand, FedEx is taking this road to improve its profitability.  

US Largest Single-employer Strike Is Looming Over UPS 

If UPS does not make an agreement with the Teamsters union, more than 340,000 UPS workers are threatening to strike over pay, hours and working conditions. If it takes place, it would be the largest single-employer strike in US history. As a reminder, the 1997 UPS strike that gathered 185,000 workers resulted in 15 days of standstill operations that slashed deliveries, overwhelmed FedEx and the US Postal Service and caused massive damage to US businesses. 

The Worst-case Scenario

The good side is a short UPS strike would not be as devastating as it was 25 years ago as things are quite difference these days. Amazon did not exist back then while FedEx has grown quite bit and retailers such as Walmart WMT created shipping alternatives such as the store and curb pickup option. But a longer strike would certainly do more than just slower deliveries such as result in raised prices and empty shelves. Caution is not what the market wanted to hear as it seems it was expecting the glimpse of self-confidence of Amazon, but it could be a smart move for FedEx that is doing what it can to protect margins as pressures are here to stay for a while.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.