FedEx Confidently Delivered An Earnings Growth Surprise Owed To Structural Cost Cuts
On Thursday, FedEx Corporation (NYSE: FDX) surprised Wall Street withby surpasing earnings estimates for its fiscal 2024 third quarter, while revenue came short of estimates. Amid a backdrop shaped by macroeconomic uncertainty, FedEx also narrowed its full fiscal year earnings outlook but the midpoint stayed the same as cost cuts are expected to offset a decline from lowered demand of its largest customer, the, U.S. Postal Service, who shifted away from high-margin air services in favor of lower-cost alternatives.
FY2024 third quarter highlights
For the quarter that ended on February 29th, $21.7 billion, FedEx reported that revenue amounted to $21.7 billion, which is lower compared to fiscal 2023’s comparable quarter when revenue amounted to $22.8 billion.
However, operating income improved from fiscal 2023 third quarter’s $1.04 billion to $1.24 billion. As a result, net income grew from $771 million to $879 million.
Despite declining revenue, operating and net income improved due to the successful execution of the company’s DRIVE strategy, along with its continued focus on revenue quality. Through the DRIVE initiative, FedEx aims to lower permanent costs by $4 billion by fiscal 2025 and by the looks of it, these structural changes are already showing a real positive impact on the bottom line.
Moreover, FedEx’s largest and most struggling unit, Express overnight delivery, also delivered good news. Its operating margin expanded from last year’s comparable quarter, more precisely, from 1.2% to 2.5%. The unit has been struggling with declining volumes due to the U.S. Postal Service opting to use more economical carrier alternatives on the ground.
On Monday, the Wall Street Journal even reported that FedEx entered talks with Amazon.com Inc (NASDAQ: AMZN) last year, to discuss teaming up on returns. FedEx and Amazon had a working relationship that ended in 2019 that included a deal to make U.S. ground deliveries, as Amazon not only ships billions of packages on an annual basis, but also receives millions of returns. Amazon uses United Parcel Service Inc (NYSE: UPS) and other carriers to deal with returns, as well as letting customers take their returns to third party locations, such as those of Kohl’s Corporation (NYSE: KSS).
After posting better-than-expected earnings, FedEx executives are confident that the carrier company is on the right path to improving profitability. After all, their self-confidence to be able to align its network with the evolving demand environment while unlocking profit opportunities has been justified by delivering improved profitability amid a challenging environment. FedEx also mentioned it is in talks with USPS regarding a new multi-year contract agreement, as the existing one is due to expire in September.
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