Today's Fun Fact
For advertising, FedEx has marketed itself in many famous movies like Castaway. In the movie, the actor Tom Hanks has been seen using a FedEx package to contain all the items that he needs to survive on an island.
Here's what you need to know before the US markets open.
Market Snapshot 📈
What to expect in today's market 🕒
Aurora Cannabis Inc. Earnings (ACB)
Stitch Fix Inc. Earnings (SFIX)
Neogen Corporation Earnings (NEOG)
12:30 PM GMT: Building Permits
FedEx: Failed Delivery?
Courier delivery service FedEx (FDX) overestimated holiday season demand last year. This time, it underestimated the demand slowdown. Wrong forecasts, tussles with activist investors & contractors, and deteriorating sentiment have ensured a rough start to new CEO Raj Subramaniam’s tenure. Can it ever catch a break?
Multiple Flip-Flops!
In June this year, FedEx’s incoming CEO Raj Subramaniam laid out elaborate growth targets for the courier company within the next three years. Today, its annual guidance stands withdrawn.
Multiple fundamental problems plague FedEx. Activist investor D.E. Shaw demanded more changes to make the company more efficient. Instead of announcing more structural reforms, FedEx boosted dividend payout, added board members picked by the activist investor, and reduced capex. The street cheered the move but did anything change on the ground? Sadly, no.
Within three months of painting a rosy outlook for the company, FedEx now warns of the global economy plunging into a worldwide recession. Subramaniam attributes this to deteriorating macroeconomic trends, particularly in Europe & Asia, that crippled shipments.
The company will shutter 90 office locations and five corporate facilities as part of its cost-cutting effort. It will also freeze hiring, park some cargo aircraft, and cancel projects. In another unusual move, FedEx announced Q1 FY23 results a week before schedule. If FedEx meant to soothe investors' nerves through this move, it only rubbed more salt on their wounds.
Key Highlights From Q1 FY23:
Revenue: $23.2B Vs $23.59B expected
Earnings Per Share: $3.44 Vs $5.14 expected
So dismal were the results that an analyst even called it the worst earnings report in over two decades! True to script, FedEx withdrew its full-year forecast due to a volatile environment. It also cut capex guidance by $500M to $6.3B.
Revenue for FedEx’s largest unit, Express, fell $500M short of internal forecasts, while that of Ground, which primarily handles e-commerce deliveries, fell short by $300M.
FedEx’s current-quarter guidance:
Revenue: $23.5B - $24B Vs $24.86B expected
Earnings Per Share: $2.75 Vs $5.48 expected
Some companies underpromise and overdeliver, some are the opposite, and then there’s FedEx. In 2019, it set guidance, raised it in the subsequent quarter, and then cut it twice! In fact, in nine out of the last 10 years that the company has set an annual EPS goal, it has cut that target at least once.
Recession Or Internal Problems?
FedEx’s ground unit barely manages to get its feet off the ground. It does not directly deliver parcels to homes and businesses but hires 6K independent contractors to take them from sorting facilities to the final destination. The result has been declining profit margins since 2012, inefficient deliveries, and increasing turnover of contractors’ drivers.
The conditions have deteriorated to a point where thousands of contractors have written to FedEx to give them better working terms. However, how the company will resolve this dispute ahead of a make-or-break holiday season remains unclear.
FedEx’s Express unit, which introduced the concept of overnight deliveries, has had operating margins below 7% for the last five years. A capital-intensive business, it depends on the growth of global trade, which according to analysts, has peaked and could be on the way down.
In contrast to UPS, which has a unified network, FedEx continues to run and defend two separate networks, despite investors demanding that it combine them. A unified network is coming to aid UPS as its margins rise while that of its closest rival fall.
The company’s tussle with its contractors took an ugly turn last month when it sued one of its largest delivery contractors in the US and canceled his routes. FedEx alleged that the contractor, named Spencer Patton, hosted a conference where he called contractors to join his trade association and asked them to stop delivering packages on Black Friday if FedEx did not renegotiate the terms of the agreement.
FedEx has sought a permanent injunction and unspecified monetary damages, alleging that Patton is encouraging contractors to boost his consulting firm and seeking to disrupt operations on Black Friday. Patton calls this a move to silence anyone with a voice and that this sudden decision forced him to fire 225 of his employees. FedEx even claims Patton renewed some of his contracts in May and June this year, adding that the average annual revenue of a contractor has more than doubled over the last four years to $2.3M.
Analysts say FedEx should've sensed the slowdown much earlier when Amazon said it had overbuilt warehouses. They also blamed company-specific problems and missteps over the last few years for the mess it finds itself in, adding that earnings misses like these make the investor skepticism increasingly warranted.
FedEx has taken more U-turns in recent times than its delivery vehicles. It has failed to find a middle ground between overestimating and underestimating. If there is somebody under severe pressure, it is Raj Subramaniam. But where does he begin? An accurate prediction for once would do for starters!
Market Reaction
FDX ended at $162..90, down 1.17%.
Newsworthy 📰
Fallout: Ford warns investors of an extra $1B in supply chain costs during the third quarter (F -4.35%) (Premarket)
Relief: Judge rejects antitrust challenge to UnitedHealth's acquisition of Change Healthcare (UNH +0.49%)
Conditions Apply: Intuit CEO says company sees healthy consumer spending, but inflation still needs to get under control (INTU +0.16%)
What Next?
Subscribe to the Trove YouTube Channel
Join the Trove Telegram Community
Rate us on the Playstore or Appstore
Disclaimer: The email content is prepared and provided by Winvesta India Technologies Ltd. for informational and educational purposes only and is not meant to represent trade or investment recommendations. Remember capital is at risk. Terms & Conditions apply.