By Laura Stevens
FedEx Corp.'s quarterly earnings soared 53% as the growing
payoff from the company's restructuring efforts combined with lower
fuel costs, a successful holiday season and an easier winter
contributed to its bottom line.
Still, the company lowered expectations for its full-year
outlook, adding that both the strong dollar and higher fuel costs
could result in weaker growth for the fourth quarter. The company
narrowed its full-year forecast to between $8.80 and $8.95, from
$8.50 to $9.
While the quarter beat Wall Street's expectations, much of the
increase was due to cost cutting at the company's largest segment,
air express, which brings in more than half of all revenues,
executives said during a conference call with analysts Wednesday.
The company has undertaken a major restructuring of the division,
buying out 3,600 employees and modernizing its air fleet. The
segment also benefited from the plummeting price of oil and a mild
winter. While revenues were flat at $6.7 billion, operating income
more than doubled to $384 million.
FedEx Ground results also benefited in the quarter from both a
strong performance in December over the holiday season, as well as
the new price structure introduced in January to charge customers
by package size instead of weight alone, executives said. While the
company didn't break out the new pricing model's success, revenue
per package increased by 3% due to both the change in pricing and
base rate increases.
The company changed pricing to encourage e-tailers to become
more efficient--instead of just throwing a lightweight item into a
big box as it is pulled for an order.
"What we really sell is cubic space," said Chief Executive Fred
Smith said on the earnings call. Yet, he went on to explain "we
have lots of photographs and stories that we could tell you about
boxes that have a two or three ounce small devices in them that
just have incredibly bad cubed weight ratios."
The change in pricing encouraged many customers to change their
packaging to be more efficient, said Mike Glenn, executive vice
president of market development. While that may not directly result
in added revenue, it saves space in trucks and makes more room for
additional packages.
The segment also benefited from lower fuel costs and better
weather. Total revenues for the division increased by 12% to $3.39
billion, or nearly 30% of FedEx's total revenues, while operating
income increased 14% to $558 million.
While rival United Parcel Service Inc. said in February it would
introduce some type of surcharge to help cover added costs to
handle the flood of packages between Thanksgiving and Christmas
this year, FedEx declined to say whether it will follow. While
executives confirmed that packages came in unevenly--with surges at
the beginning and end of the holiday season--they said any price
changes would be discussed directly with clients.
The strengthening of the dollar against the euro in recent weeks
has started to have an impact on foreign trade, Mr. Glenn added. He
cautioned it is too early to say whether this will translate into a
significant shift in trade patterns or affect FedEx, although the
company said that foreign exchange rates could be a problem for the
fourth quarter. Additionally, it is unclear what effect fuel prices
might have on the company in its fourth quarter.
Total profit for the quarter ended Feb. 28 increased to $580
million, or $2.01 per share, up from $378 million, or $1.23 per
share, the same quarter a year ago. Revenues were up 4% to $11.7
billion.
Analysts polled by Thomson Reuters expected revenue of $11.8
billion and earnings per share of $1.87.
FedEx's freight division, which contributes about 12% of total
revenues, nearly doubled operating income to $68 million, from $35
million a year ago.
While analysts questioned the increasingly aggressive tactics
taken by the U.S. Postal Service to gain market share, FedEx
executive said it isn't a worry, and that the service is suited to
carrying the low-weight, less profitable packages they are
targeting.
Currently, about 85% of shipments by the top three e-commerce
shippers are less than 5 pounds, Mr. Smith said. Most of these are
small, lightweight items in bigger boxes.
Write to Laura Stevens at laura.stevens@wsj.com
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