FedEx Delivers a Downbeat Economic Outlook, Cuts Its Earnings Forecast
Sep 18th 2012 11:20AM
Updated Sep 18th 2012 11:23AM
By SAMANTHA BOMKAMP
NEW YORK (AP) - FedEx (FDX) says the global economy is stalling, and it's going to get worse next year.
The world's second largest package delivery company cut its forecast for the fiscal year ending in May, citing slow trade and high fuel prices that are hurting the economy.
A steep decline in Asian exports due to weakness in Europe is causing most of the pain. But consumers and businesses are also choosing to move goods more slowly to save money, which is hurting FedEx's core Express unit.
FedEx said its net income for the current quarter ending in November should fall well below last year's quarter.
The Memphis, Tenn. company also cut its forecast for the full to year to between $6.20 and $6.60 per share, from $6.90 to $7.40 previously. Shares of the company fell nearly 2 percent in early trading.
As the economy slows, FedEx is seeing a drop in demand for more expensive priority services. FedEx customers are chosing to move goods by ship or truck instead of by plane. FedEx hasn't been able to cut costs fast enough to match the decline in express demand.
Fear of a further economic slowdown is driving some of that behavior, but FedEx says steadily increasing fuel prices are also playing a big role.
"The world economy has absorbed an incredible increase in the price of fuel," CEO Fred Smith said on a conference call. "And that has had very big implications on the way people think about supply chains on their decisions to move by ocean or whether they move things by air."
This trend is having the most impact in the Express unit, where FedEx has already made cuts but plans to make more. It's reducing flights, taking planes out of service, and last month it offered buyouts to employees. Operating income in that unit, which is about double the size of any other, fell 28 percent in the first quarter. Revenue rose 1 percent as higher rates countered lower volume.
FedEx plans to announce a broad cost cutting plan for that unit next month, although it said that won't include layoffs.
For the current quarter, FedEx forecasts earnings of $1.30 to $1.45 per share, compared with $1.57 per share last year. That's well under analysts' forecasts. FedEx doesn't expect major technology product launches, like the recently announced iPhone 5, to be enough to make up for the slowdown elsewhere.
FedEx's forecasts are closely watched for signals of future economic health. Its results provide insight into the global economy because of the number of products it ships and the number of countries in which it does business.
In the three months that ended in August, FedEx Corp. earned $459 million, or $1.45 per share. That hit the top end of its recently lowered estimate. Revenue rose 3 percent to $10.79 billion. It earned $464 million, or $1.46 per share, on revenue of $10.52 billion in the same quarter a year ago.
The company's ground unit performed better in the first quarter as it benefited from those customers trading down. Operating income in the company's ground segment rose 9 percent on an 8 percent increase in revenue.