Higher fuel costs, weakness in the U.S. economy and the impact of Hurricane Sandy played a significant role in mixed second-quarter numbers for FedEx Corp. for fiscal year 2012.
Revenue in the second quarter for the company as a whole climbed 6 percent to $9.45 billion compared to $8.93 billion in 2011, while operating income was $783 million, down 7 percent from $839 million a year earlier. In addition, the express carrier reported net income of $479 million, down 6 percent from last year's $511 million.
Due to increased domestic express shipments and growth in the international priority segment, daily package volume at FedEx Express and FedEx Ground grew by 8 percent, year over year. Revenue and operating income were both up for FedEx Express in the second quarter, and FedEx Ground saw a large, 12-percent increase in revenue, though operating income was down by 10 percent.
FedEx Ground experienced a 1-percent uptick in revenue, coupled with a 43-percent decline in operating income. The operating income decline was precipitated by a lack of less-than-truckload shipments. Holiday shipping, however, exceeded predictions. FedEx handled 19.8 million shipments on its busiest day of the holiday season — 800,000 more packages than anticipated.
“We’re very pleased with the operating results from FedEx Ground and FedEx Freight, which continue to show improvement,” FedEx Chairman and Chief Executive Officer Fred Smith said during an earnings conference call. “At FedEx Express, persistent weakness in the global economy and increasing demand for lower-yielding international services limited profits during the quarter.”
Next year, FedEx sees modest growth of 1.9 percent in the U.S GDP and a slightly larger GDP increase of 2.5 percent around the world. This is a rather positive outlook, officials noted during the call, which could change, of course, depending on what happens with the U.S. "Fiscal Cliff" debate and the economic uncertainty in Europe. But they cautioned that the third quarter of the fiscal year has historically been tough.
In the conference call, Smith and other FedEx executives also detailed their plans to improve profitability by $1.7 billion in three years. The previously announced initiative, which has already started being implemented, involves a combination of employee buyouts with an initial cost to the company of $550 million to $650 million. Streamlined processes, the elimination of less-essential work and improvement in information technology will also help reach the cost-savings goal. The impacts will primarily be felt in the Express and Service divisions, said FedEx Chief Financial Officer Alan Graf.
Staff reductions will be seen in three phases, with the first employees leaving the company on May 31. Officials gave no hard numbers on the amount of employees they expect to take the buyout.
“These programs, combined with continued profit improvements in ground and freight, are expected to increase margins, improve cash flows and increase our competitiveness,” Graf said. “We are very confident about reaching the $1.7 billion profit improvement program by fiscal '16. And the deeper we get into this, the more confident we are.”
An analysis by BB&T Capital Markets pointed out that uncertainty in the global and domestic economies could slow demand for freight services. The analysis also noted the possibility of integration risks related to future acquisitions. But these potential red flags, the analysts wrote, could amount to nothing more than a slowing down of growth.
“Given FedEx's scale and network, and even with slow growth,” the BB&T analysts wrote, “we do not see significant downside risk as the company restructures its Express Division.” - Jon Ross