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FedEx misses 2Q earnings expectations and lowers guidance

Emily McCormick

FedEx (FDX) delivered fiscal second-quarter results that missed consensus expectations and lowered its profit outlook again amid escalating competition from e-commerce giant Amazon (AMZN).

Here were the results from the report, compared to consensus expectations compiled by Bloomberg:

  • Revenue: $17.3 billion vs. $17.66 billion expected

  • Adjusted earnings per share: $2.51 vs. $2.78 expected

  • Adjusted operating margin: 3.9% vs. 5.35% expected

“Fiscal 2020 is a year of continued significant challenges and changes for FedEx, particularly in the quarter just ended due to the compressed shipping season,” FedEx CEO Fred Smith said in a statement.

“We have significantly enhanced our e-commerce capabilities with strategic initiatives including year-round seven-day FedEx Ground delivery, enhanced large package capabilities and the insourcing of FedEx SmartPost packages,” he added. “These changes have been well-received by the marketplace as reflected in our record volumes this peak season. While we have experienced some higher-than-expected expenses this quarter, we forecast FedEx Ground operating margins to rebound to the teens in our fiscal fourth quarter as the bow wave of costs for these changes is absorbed.”

FedEx said it expects to see full-year adjusted earnings of between $10.25 and $11.50 per share, excluding some acquisition integration expenses and before an accounting adjustment for its mark-to-market retirement plan. This was a reduction from its previous guidance for between $11.00 to $13.00 a share by this measure previously.

Shares of FedEx extended steep losses Wednesday morning, sliding 9% to $148.54 each as of 9:36 a.m. ET.

A Federal Express truck is shown in Los Angeles, California, U.S., October 16, 2019.  REUTERS/Mike Blake
A Federal Express truck is shown in Los Angeles, California, U.S., October 16, 2019. REUTERS/Mike Blake

With its business model of shipping goods for corporate and retail customers all over the world, FedEx has become a closely watched bellwether for global economic growth.

To this end, signals from FedEx have been flashing red. The company had also lowered its full-year guidance in September, warning at the time that trade tensions and a weakening global macroeconomic backdrop would weigh on profitability. FedEx shares fell about 7% from its last earnings report in September and were little changed for the year to date through Tuesday’s close, underperforming against the S&P 500’s 27% gain.

Over the past couple months, economic data has rebounded and the U.S. and China have announced a phase one trade agreement. But FedEx on Tuesday still called out “weak global economic conditions” as cause for its estimates-missing results, along with “increased FedEx Ground costs from expanded service offerings, the loss of business from a large customer, a continuing mix shift to lower-yielding services and a more competitive pricing environment.”

During a call with investors Tuesday, FedEx executives pointed to an expected improvement in results following the second-quarter disappointment.

“We are at the bottom,” FedEX Ground President Henry Maier said during a call with analysts Tuesday. “Our adjusted operating profit declined year-over-year is horrific, and it's going to improve. It's going to improve in Q3, and it's going to improve substantially in Q4 versus the prior year's adjusted operating income.”

Some analysts, for their part, agreed with the assessment.

“At this risk of sounding like a broken record calling a bottom for FDX earnings, at this point it is truly a challenge for us to think that things get materially worse from here,” Credit Suisse analyst Allison Landry wrote in a note Wednesday. “With many of the major problematic cost headwinds being largely absorbed in FY20, there is reasonable line of sight toward margin improvement and a reacceleration in earnings growth in FY21.”

“At the same time, favorable outcomes for Brexit and the China trade deal are catalysts for upside,” Landry added. She maintained her Outperform recommendation on shares of FedEX.

FedEx’s second-quarter earnings report also comes amid an escalating with Amazon for shipping industry dominance. The e-commerce giant decided to stop its third-party sellers from using FedEx’s ground delivery network for Prime shipments starting this week, the Wall Street Journal first reported Monday.

FedEx Ground, the company’s North American small-package ground delivery system, accounted for about 59% of the company’s overall operating income in fiscal 2019. However, FedEx said Amazon’s decision will impact just a small number of shippers, but “limits the option for those small businesses on some of the highest shipping days in history” heading into the holiday season, a spokesperson said in an email to Yahoo Finance.

The two companies initially severed ties this summer after ending contracts for FedEx to deliver Amazon’s packages via its ground and air-shipping networks. Amazon, for its part, has been building out its own delivery infrastructure to rival FedEx.

Meanwhile, the company has struggled with a protracted plan to integrate Dutch courier company TNT Express, which FedEx acquired in 2016 for more than $4 billion. FedEx said in September that its outlook for 2020 adjusted for TNT Express integration expenses of $71 million, or 21 cents a diluted share.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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