(Updates throughout with quotes from executives and
analysts.)
By Nathalie Tadena
FedEx Corp. (FDX) reported better-than-expected earnings growth
as customers world-wide increasingly used the company's
lower-priced shipping options, a trend executives don't see
changing anytime soon.
The world's largest air-cargo shipper by revenue and its rivals
have been wrestling with a shift by clients toward cheaper and
slower delivery services. FedEx's latest results reflect that
customer emphasis as the company reported double-digit percentage
increases in packages shipped through its lower-priced plans.
FedEx executives said customers choosing cheaper delivery
options may not be a trend but rather a "new normal" because so
many customers have made the shift.
"You can understand why customers are trading down because they
get significantly better price and they give up couple of days,"
Chief Financial Officer Alan Graf said on a conference call with
analysts and media.
In response, FedEx has been altering its pricing plans and
delivery options in order to tap into the trend and grow sales.
"Our pricing, I think, is right. It's just going to take us a
little bit longer than we'd hoped to get this perfectly balanced,"
Mr. Graf said.
Overseas, FedEx saw strong growth in its low-cost International
Economy segment, where revenue rose 9% in the company's first
fiscal quarter and the packages delivered jumped 15%.
"We are embracing International Economy, and we like these
growth rates," Mr. Graf said. "We believe very strongly that we can
make the shift that the customers are making while still growing"
the company's premium businesses.
Contributing to the trade-down trend is the lukewarm economy.
FedEx now sees the U.S. economy growing 1.6% in 2013, which is down
from its estimate of 2% last quarter. The company blamed historical
data revisions for the lower outlook and kept its 2014 forecast for
2.5% growth unchanged. FedEx noted there were signs of improvement
in Europe and China.
Along with its earnings, FedEx reported that it would increase
the shipping rates by an average of 3.9% at its domestic
express-shipping business, its largest segment. The company usually
announces such increases around this time of year, and the
percentage is similar to last year. The change goes into effect
Jan. 6. In July, Fedex's freight business implemented a 4.5%
general rate increase.
The company's express-shipping business is struggling to grow
amid the shift to cheaper options and the sluggish economy. Revenue
at FedEx Express slipped 0.4% to $6.6 billion, with package volume
rising 1% in the U.S. and 4% abroad.
FedEx officials said it continues to cut costs at FedEx Express,
and those moves helped the segment's earnings jump 14%. The company
credited lower pension expenses and an updating of the company's
aircraft fleet, which has helped to reduce maintenance costs.
The company's improved margins, particularly in the Express
segment, indicate the company is "getting their arms around the
customer trade-down phenomena," BB&T analyst Kevin Sterling
said.
Meanwhile, the company's ground-shipping business--considered a
less-expensive option for customers--continued to grow.
Ground revenue jumped 11% to $2.73 billion, helped by continued
growth in home deliveries and commercial business services.
Operating profit rose 5.2%, while average daily volume increased
11% for FedEx Ground and 26% for FedEx SmartPost, which uses the
U.S. Postal Service to deliver the package over the so-called
"final mile."
"We want to put as much money as we possibly can into Ground
because it's going to continue to grow," Mr. Graf said, adding that
it has a high return on invested capital and "we're going to
continue to take market share."
The company said it would announce the 2014 price changes for
FedEx Ground later this year.
Weighing on FedEx's latest results were rising fuel prices.
Company executives didn't provide specific numbers but said it was
unable to pass along the higher fuel prices because the increase
occurred near the end of the quarter before it was able to push the
costs to customers through surcharges.
"It's one of the things that's a big wildcard on a
quarter-to-quarter basis," particularly with jet fuel, said Mr.
Graf, who declined to speculate on the impact in the current
quarter. "Over time, it evens out, but it sure does cause
volatility." The company backed its full-year earnings
guidance.
Last year, FedEx unveiled a multiyear restructuring plan that
includes updating and modernizing its air fleet, as well as
reorganizing its express, ground and freight businesses. However,
the company has cautioned the bulk of benefits from its
restructuring won't come until fiscal 2015.
"It's going to be another quarter or two in a challenging global
environment, and the company's taking the appropriate steps to
right their cost structure, capacity structure and international
routes," Oppenheimer analyst Scott Schneeberger said.
For the quarter ended Aug. 31, the company reported a profit of
$489 million, or $1.53 a share, up from $459 million, or $1.45 a
share, a year earlier. Revenue rose 2.1% to $11.02 billion.
Analysts surveyed by Thomson Reuters had projected a per-share
profit of $1.50 and revenue of $10.97 billion.
FedEx shares jumped 3% in midday trading Wednesday to $114. The
stock is up 24% year to date.
--George Stahl contributed to this article.
Write to Nathalie Tadena at nathalie.tadena@wsj.com
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