(FROM THE WALL STREET JOURNAL 3/17/16)
By Laura Stevens
FedEx Corp. executives said retailers should be paying more for
shipments to help offset the cost of expanding its network to meet
the growing demands of e-commerce.
'There's an enormous interest in people having things delivered
to themselves. It does not change, one iota, the input costs of the
delivery," Chief Executive Fred Smith said in an interview.
FedEx this year increased its capital spending to $4.8 billion,
with the largest increase in its ground division which handles most
of its e-commerce business, and intends to continue the increases
in the next two years.
FedEx Chief Financial Officer Alan Graf said that it is
important for the price of shipping an e-commerce package to
reflect the effort it takes to deliver it. "We can't build these
networks and spend this kind of capital and not get a return on
it," Mr. Graf said in an interview.
The executives' remarks came as the Memphis, Tenn.-based
delivery giant reported third-quarter net income fell 19% to $507
million for the period ended Feb. 29, due largely to settling 19
lawsuits regarding its former independent-contractor driver model
at its ground segment for $204 million.
Shares of FedEx rose 5.1% to $151.69 in after-hours trading as
the company's results topped expectations and it provided an upbeat
outlook.
Before the latest results, the stock had fallen 19% over the
past year, hurt by unexpected legal costs, higher spending for
expansion, a rough holiday season and worries about Amazon.com Inc.
becoming a competitor to the delivery giant.
Mr. Smith said he thought it was unbelievable that some have
suggested that Amazon would be able to build out a network to
compete with FedEx and rival United Parcel Service Inc.
Just because Amazon has created a network of warehouses to
support its retail operations, doesn't mean that could translate to
something akin to FedEx's massive network for deliveries, Mr. Smith
said. "The key driver of any delivery system is route density and
revenue per delivery stop," he said.
Mr. Smith said Amazon is an important customer and that they
expect to continue to do business with them for a long time. Last
week Amazon said it agreed to lease as many as 20 planes from an
air-cargo company for transporting merchandise around the U.S.,
something FedEx said it expected.
Amazon declined to comment.
E-commerce's impact was reflected in FedEx's quarterly results.
Revenue in FedEx's ground segment jumped 30% to $4.41 billion, but
higher costs -- driven in part by network expansion and peak
holiday season demand -- caused the segment's operating income to
slip to $557 million from $559 million.
Last year, FedEx launched a nearly $5 billion bid to acquire TNT
Express NV in part to help it build its e-commerce capabilities in
Europe, and bought U.S.-based Genco which specializes in
online-shopping returns.
Much of the expansion so far has been funded with debt. Moody's
Investors Service on Tuesday downgraded FedEx's long-term debt
ratings, saying in a report that FedEx's reliance on debt to fund
share repurchases had been "well in excess of free cash flow since
2013" and it had increased its debt. Moody's also said it believes
there is "significant execution risk" in acquiring TNT and noted
that FedEx "has yet to quantify the synergies it expects to
realize" or the costs.
Mr. Graf said the downgrade had been expected. He said the
company is getting ready to refinance and pay off debt.
"We're a company with a strong cash flow," Mr. Graf said in the
interview. He said the company won't do anything to push their
ratings lower. "We built a very strong balance sheet so we could
leverage it at a time like this," he added.
One way that FedEx intends to boost its e-commerce returns is by
increasing fees attached to the growing number of large shipments
such as kayaks and other items that don't fit into its ground
network.
Mr. Smith blamed some of the trend in low-cost e-commerce
expectations on the U.S. Postal Service, which it and other
delivery companies, including UPS and Amazon, use to deliver
packages the most expensive leg of the trip -- to resident's
doors.
"The postal service's rates, which are the primary driver of
e-commerce. . .they're going to have to go up as mail service goes
down," Mr. Smith said.
The U.S. Postal Service didn't immediately have comment.
FedEx's quarterly results surpassed Wall Street expectations.
The company reported earnings, on an adjusted basis, of $2.51 a
share and revenue of $12.7 billion.
In comparison, analysts surveyed by Thomson Reuters expected
profits of $2.35 a share and revenue of $12.4 billion.
FedEx also lifted the low-end of its earnings forecast for the
current business year and said it expects momentum to carry beyond
that.
For the year ending in May, the company said it now expects to
earn between $10.70 and $10.90 a share on an adjusted basis, up
from its earlier guidance of $10.40 to $10.90.
(END) Dow Jones Newswires
March 17, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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