By Laura Stevens
FedEx Corp. said it is boosting its capital spending by 7% to
$4.6 billion, with the entire increase going toward its ground
segment as it tries to keep up with the boom in online
shopping.
The higher level of investment came as FedEx reported weaker
than expected quarterly earnings and full-year guidance Wednesday,
disappointing investors and sending stocks lower.
FedEx, founded as an air express company, is relatively new to
ground delivery compared with century-old rival United Parcel
Service Inc. FedEx only added its home delivery service in 2000 and
has been rapidly expanding its ground network to accommodate the
big increase in e-commerce packages.
Spending on the delivery giant's ground network expansion is
expected to peak this year at $1.6 billion and fall about 30% in
subsequent years, executives told analysts during a call Wednesday.
Most of FedEx's ground hubs are high tech, automatically sorting
packages and sending them to the correct truck for loading.
"Those investments are going to give us returns right away,"
said CFO Alan Graf.
Revenue in the ground segment jumped 19% to $3.57 billion, as
average daily volume increased 5%.
The delivery company is also looking to take back some business
from the U.S. Postal Service. FedEx currently uses the agency to
deliver packages for its no-frills SmartPost offering, which is
used extensively by e-commerce shippers. For that service, FedEx
sorts the packages according to ZIP code, then delivers them to
local post offices so that letter carriers can bring them to the
door.
In a major reorganization, FedEx is integrating its separate
SmartPost subsidiary into its ground network. By doing so, the
company will be able to have its own drivers deliver packages when
they're already headed to a home -- something that will save them
the average of about $1.70 the USPS charges for the service.
The move follows rival United Parcel Service Inc., which has
already been using technology to reroute its similar SurePost
package offering away from the USPS when it makes financial
sense.
Integrating SmartPost should reduce operating expenses
"significantly," said Henry Maier, Chief Executive of FedEx Ground.
"We've discovered over the last couple of years that when we can
maximize the use of facilities...not only do we drive costs out of
the equation, but we improve the service."
FedEx executives added that the company looks on track to
complete its $4.8 billion acquisition of Dutch parcel firm TNT
Express NV, and that it doesn't expect to face competition issues
from European regulators. In 2013, European regulators blocked a
similar acquisition attempt by UPS of TNT.
For the fourth quarter ended May 31, FedEx posted a loss of $895
million, or $3.16 a share, compared with a profit of $780 million,
or $2.62 a share, in the year-earlier period. The quarter was
dragged down by special charges, including a $2.2 billion pretax
charge in the quarter as it changes its pension accounting
method.
The company said it expected earnings for the quarter ending
Aug. 31 to come in lower than current analyst consensus due to
higher annual incentive compensation. Its full year adjusted
earnings guidance of $10.60 to $11.10 per share take that into
account.
Shares were down more than 3% in morning trading at $176.39.
FedEx added it raised the mandatory retirement age for its board
to 75 from 72, effective immediately. FedEx's Chief Executive and
founder, Fred Smith, turns 71 in August. James Barksdale, another
board member, turned 72 this year.
"This change is consistent with the market trend of increasing
the mandatory retirement age for board members," said David P.
Steiner, the company's lead independent director.
Write to Laura Stevens at laura.stevens@wsj.com
Chelsey Dulaney contributed to this article
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