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In a tough economy, FedEx isn’t delivering, and that worries Wall Street.
Last quarter it handled fewer packages due to “weakening economic conditions” and FedEx Express’ operating profit fell 69%, according to FedEx’s latest earnings report, released Thursday.
Spending on its ground carrier has increased, and the company now plans to raise fares by about 7% on average.
The news follows a surprise warning last week that the company was struggling. After that announcement, FedEx stock price fell more than 20% and some of its competitors, including UPS and XPO Logistics, also lost ground.
The global economy – the “macro-climate” – is to blame for the company’s shocking downturn, CEO Raj Subramaniam told CNBC’s Jim Cramer last week. Cramer asked the executive if he expected the world to slide into an economic recession.
“I think so,” replied Subramaniam.
On Thursday, FedEx outlined important steps to get back on track.
The company will take some of its planes out of service and reduce Sunday deliveries. On top of that, he intends to close nearly 100 outlets and, like many businesses right now, he plans to pause hiring until economic uncertainty around the world dissipates.
Beyond Fast Delivery: The World Looks to FedEx as an Economic Indicator
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What worries investors is that FedEx is seen as an indicator.
“We are a reflection of everyone’s business,” Subramaniam said.
In that warning last week, which took the form of a trade update, FedEx withdrew its earnings forecast. He is unable to predict the cash flow because he is in “a still unstable operating environment”.
FedEx also says it faces “service challenges” in Europe, where a recession looks likely, and “macroeconomic weakness” in Asia, which also continues to struggle with strict COVID lockdowns.
Because of its size and the fact that its business is in the transportation of goods, FedEx “can tell us very clearly what’s going on with inventory movements and general business activity,” said J. Bruce Chan, who covers transport and logistics companies for Stifel.
While it provides a good reading of two key elements of the economy, it also serves as a reliable indicator of what could be coming. FedEx profits have contracted similarly in the past three recessions – in 2020, 2009 and 2001, according to Barclays analysts.
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Today, FedEx has a giant global footprint. It operates in more than 200 countries, and the Memphis-based company’s half-million employees process more than 15 million shipments every day.
During the pandemic, when home shoppers ordered books, electronics and furniture, the volume of shipments surged, as did FedEx’s stock price.
But as the United States and many other countries relaxed their COVID protocols, people started spending more on services, not goods. Result: FedEx and its competitors process fewer shipments.
“They’re not collapsing, but they’re declining,” said Deutsche Bank analyst Amit Mehrotra, adding that he needed to weather the current downturn with “very, very good cost management.”
“This is where we think FedEx failed quite dramatically,” Mehrotra said.
Like other Wall Street analysts who follow the company, Mehrotra says FedEx’s performance can tell us a lot about the state of the global economy, but the company can’t blame all of its problems on that alone. .
“This was much more of a company-specific story … than anything that can be explained by a macroeconomic downturn,” he said.
Decide if the culprit is really the economy, the company or both
FedEx is in the midst of a critical transition. Subramaniam became CEO about four months ago, succeeding Fred Smith, who founded the company in 1971.
After analyst Ken Hoexter, who covers FedEx for Bank of America, reviewed last week’s trade update, he wondered how much of the company’s predicament was attributable to the fact that its current leaders are setting unrealistic goals.
“I think what you had here was an unreachable setup from the start,” he said.
Things may have gotten worse economically, “but FedEx-specific issues crept in,” he added.
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So, was the sale justified?
According to Chan of Stifel, this is cause for alarm for investors, and everyone else.
“Right now there’s a lot of debate about the direction of the global economy,” he said.
By missing the earnings target so badly and offering such an uncertain outlook on the future, FedEx “gave people who might be overcoming the close what they needed in terms of caution,” Chan said.