The Dark Side of FedEx: Why the Company’s recent warning should make us all worry

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FedEx’s recent warning that it may not be able to afford all of its pension obligations should be taken very seriously. The company is one of the largest parcel delivery businesses in the world and has significant leverage over retailers that depend on it to transport goods from distribution centers to stores and homes across the country and around the world. If FedEx says something is amiss, people ought to listen.

Image Source- Fedex

In a preliminary earnings report released last week, FedEx warned of declining worldwide transportation demand, leaving the market struggling to discern whether the issues are due to internal business issues or a more generalised economic diagnosis.

After the shipping behemoth failed Wall Street revenue and profit forecasts, CEO Raj Subramaniam blamed external causes, telling CNBC’s Jim Cramer on “Mad Money” that the company is a “mirror of everyone else’s business” and that he anticipates a “global recession.” However, other observers point to the relative stability of UPS and DHL, rivals, and claim that FedEx’s own inability to adapt also had a role in its success.

According to Moody’s analyst Jonathan Kanarek, “FedEx has missed its own expectations for its fiscal first quarter for the second year in a row, and I think it does generate a bit of dissatisfaction among investors.”

Kanarek was one of the analysts who pointed out the combination of internal and external variables that probably contributed to FedEx’s underwhelming performance.

Recognising reality
According to some observers, FedEx’s performance represents a long overdue acknowledgment by the corporation of market realities resulting from the Covid epidemic.

FedEx presented an optimistic 2025 estimate at its investor day in June, based on annual revenue growth of between 4% and 6% and profits per share growth of between 14% and 19%.

Raj debuted a major show in June, their first analyst day in two years, and had a generally positive environment. But now it’s been three months,” Ken Hoexter, a Bank of America analyst.

The economic collapse wasn’t anticipated or planned for, according to Hoexter.

Subramaniam said last week that FedEx had experienced weekly drops in shipment volumes since around the time of its investor day. To save expenses, the firm stated it will remove offices and park planes in addition to withdrawing its 2023 prediction. The day after the announcement, its stock price dropped by more than 21%, erasing roughly $11 billion from its market value.

The Gordon Haskett Research Advisors described FedEx’s decision to stick with their 2025 projections as “borderline ridiculous.” They assert that FedEx’s rivals are approaching the end of the pandemic-era rise in demand with greater realism.

While FedEx last week listed a softening in European demand as one of its problems, UPS increased its market share there. UPS recently announced its greatest quarterly consolidated operating margin in over 15 years, emphasising its ability to adapt in the face of challenging macroeconomic conditions.

In terms of how they are considering post-Covid margins, UPS is two to three years ahead of FedEx, according to Kevin Simpson of Capital Wealth on “Closing Bell: Overtime.” It almost seems as though FedEx didn’t believe the atmosphere would ever return to normal.

FedEx announced it will delay recruiting and scale back some ground operations as part of its cost-cutting measures. For the holiday season, UPS will hire more than 100,000 seasonal workers.

A bellwether?
Analysts point out that FedEx’s ground and express service are still susceptible to changes in the world economy and that the subpar performance of the categories may be indicative of a downturn in the economy.

“We haven’t actually noticed any signs of a general downturn. However, FedEx is a bellwether, so we shouldn’t discount what they have to say, according to Moody’s Kanarek.

The express category’s performance, which was $500 million below FedEx’s own estimates, is seen by Bank of America’s Hoexter as the first sign of a larger slump. Because maintaining air transport is so expensive, he said that even slight volume losses have a big impact on profitability.

The second sector to see a slowdown is ground service, which fell $300 million shy of the company’s estimates. According to Hoexter, “when the customer stops buying, the retailers start seeing shelves filled, you stop restocking those stockpiles.”

According to a Bank of America Global Research study, Hoexter’s monthly truck shipper survey has recorded 11 consecutive weeks in the “recession range.” As occurs at the same time that FedEx announces lower-than-expected revenue with major clients Target and Walmart, both of whom have recently struggled with excess inventory.

Hoexter pointed out that although FedEx recorded healthy freight margins, the category is “more manufacturing-weighted, which hasn’t suffered as great a burden.” Hoexter said FedEx might start to experience a softening in freight volumes if demand continues to decrease and manufacturers require less manufacturing.

Holiday fizzle
Whatever the causes of FedEx’s problems, it seems unlikely that they will be resolved before the coming holiday season. The cost-cutting measures FedEx outlined last week, according to a statement, are not anticipated to have an impact on service. The business declared, “We are confident in our capacity to deliver this holiday season.

Retailers, though, anticipate weak Christmas sales. And many had products delivered early out of concern about the delays from the previous year. By the end of August, according to the Port of Los Angeles, 70% of holiday merchandise had already arrived on US soil.

The current inventory shortages that have afflicted merchants may continue, resulting in lower shipment volumes and further hurting FedEx’s profitability. According to a KPMG poll, 56% of retail executives anticipate having extra inventory after the holidays.

According to S&P’s Geoff Wilson, FedEx does have some padding if problems continue. As of May 31, the business had approximately $7 billion in cash on hand, compared to the $3 to $4 billion it had been holding before the outbreak. He said that the business reiterated its $1.5 billion share repurchase programme.

The best indication management can provide of FedEx’s long-term strength is this, according to Wilson.

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