When will FedEx (FDX) stock finally reach its bottom? That’s one of the key questions investors are hoping to get an answer to in the next few weeks. But in the meantime, the market wants some assurances that things are not as bad as the company’s preliminary results suggests.
The global transportation giant will report first quarter fiscal 2023 earnings results after the closing bell Thursday. A stunning earnings warning, however, sank the stock more than 24% intraday Friday, sending Wall Street scrambling for answers. After revealing that FedEx Ground revenue was approximately $300 million below its own forecasts, the company said the results “were adversely impacted by global volume softness that accelerated in the final weeks of the quarter.”
The company also withdrew its full-year guidance for fiscal 2023, but said that it has begun a series of cost-cutting measures to offset weakness in global shipment volumes as the global economy “significantly worsened.” CEO RaSubramaniam said the company is “swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.” Often seen as a gauge of global economic activity, one of the main questions investors will want to know is, has there been any pickup in demand since the quarter ended?
The magnitude of the Q1 miss is noteworthy. The company expects first quarter adjusted EPS to be $3.44, which is more than 30% below the $5.10 analysts expected. Wall Street analysts from KeyBanc, J.P. Morgan, Stifel and Bank of America wasted no time downgrading the stock and slashing earnings projections. On Thursday, FedEx will have to figure out how to regain the market’s confidence, particularly as it relates to profitability improvements among the company’s various business segments.
In the three months that ended August, analysts expect the Memphis, Tenn.-based company to earn $5.14 per share on revenue of $23.58 billion. This compares to the year-ago quarter when earnings came to $4.37 per share on revenue of $21.93 billion. For the full year, earnings are projected to rise 8% year-over-year to $22.29 per share, up from $20.61 a year ago, while full-year revenue of $97.95 billion would rise 4.7% year-over-year.
The projections above were prior to the company’s earnings warning, saying it now expects EPS to be $3.44. That 30% gap with EPS Street expectations is partly due to some of the struggles the company has faced with supply chains, rising cost and labor shortage. As noted, the company blamed macroeconomic weakness in Asia as well as service challenges in Europe which impacted revenue by about $500 million. Likewise, its FedEx Ground segment revenue was adversely impacted by $300 million below its prior forecast.
However, these issues reveal one of the major concerns investors have had which is the company’s lack of pricing power, despite the revenue growth. These headwinds are magnified when they include increased costs related to projects such as network expansion. To offset these headwinds, the company is cutting costs including reductions in flight frequencies, in labor hours, as well as cancelling network capacity expansion.
What’s more, the company is also planning to close about 90 FedEx Office locations, as well as five corporate office facilities. It remains to be seen whether the market responds favorably to these measures. But it’s going to require several quarters of strong operating metrics, particularly the Ground unit, which accounts for 35% of total revenue, to regain investors’ confidence. While the company has outlined aggressive measures to address its challenges, the market will first want to see evidence that these efforts will yield meaningful improvements to the bottom line.
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