FDX FedEx Corp

By Laura Stevens 

FedEx Corp. on Wednesday cut its earnings outlook for the year, blaming weaker demand for its freight services, higher costs in its Ground division and higher insurance costs.

The move came as the delivery giant missed Wall Street expectations for the quarter despite a 6% increase in profit as restructuring of its Express division pays off and the company experiences a surge in e-commerce growth.

FedEx said it expects adjusted earnings of $10.40 to $10.90 for the year ending May, down from its previous guidance of $10.60 to $11.10 a share.

FedEx's stock price has dropped from a high of about $185 in June to $147.68 in recent trading. Shares have declined since the company missed earnings expectations in June owing to litigation costs and a $2.2 billion pretax charge as it changed its pension-accounting method. Also weighing on the stock, FedEx is more exposed to Asia than some of its rivals, a concern because of the weakening global economic environment.

On an earnings call with analysts, executives said that they are confident that the company has the right amount of capacity in its Asia-Pacific network. In addition, most of its business exposure in China is serving multinational companies. And while costs were up in its freight and ground segments for the quarter, executives said that those were one-time items, and that those businesses are still well positioned for longer-term growth.

Chief Executive Fred Smith said that without increasing its self-insurance reserves, the company would have beat Wall Street expectations for the quarter and kept its full-year guidance.

"All the rest of the stuff is just noise and various issues inside the operating company, so it's important that you focus on that one issue," Mr. Smith said.

The increased self-insurance reserve, which accrues in part as the company puts more trucks on the road and drives more miles, lowered the Ground business's first-quarter operating margin by 1.7 percentage points. That helped reduce Ground's operating margin to 14%, from 18.4% a year ago.

FedEx's Ground business, which contributed about a third of total revenue, was hurt by other one-time items. It spent more money as it integrates GENCO, a company that specializes in product returns, which FedEx acquired for $1.4 billion this year. In addition, FedEx is taking its Smartpost business, which uses the U.S. Postal Service to deliver packages the so-called "last mile," and incorporating it into Ground.

Average daily volume for Ground's package business grew 4% in the quarter, which was about in line with the company's expectations. But a higher percentage than expected--about half of both Ground and Express deliveries in the U.S. now--is residential traffic owing primarily to the increase in e-commerce, executives said.

An analyst questioned whether the change in the business mix lowered Ground margins. Small, slow e-commerce parcels are typically less profitable than business-to-business shipments, where a delivery driver is usually dropping off several heavier, more urgent and expensive packages at one location.

"E-commerce is clearly changing the dynamics of the industry, and it's driving incredible growth," said Henry Maier, head of FedEx Ground. "I think we're best positioned to benefit from the e-commerce economy."

Ground's operating income slipped 1% to $537 million, while revenue shot up 29% to $3.83 billion in part from the addition of GENCO.

The company also provided guidance on what it expects to be another record holiday season, saying it plans to hire more than 55,000 employees, up from 50,000 last year. FedEx is working closely with retailers to forecast package shipments, but warned it plans to turn away packages it doesn't have room for, something it did in past years.

The company also outlined its plans to charge more for oversize packages. The Wall Street Journal reported in July that rival United Parcel Service Inc. was removing discounts on oversize packages as e-tailers increasingly ship large packages that clog up operations.

"More and more e-commerce companies are electing to ship those packages through networks like ours rather than handle them in the store, [and] we've seen an increase," said Mike Glenn, executive vice president of market development, on the call.

Overall, for the first quarter ended Aug. 31, FedEx posted a profit of $692 million, or $2.42 a share, up from $653 million, or $2.26 a share, a year earlier. Profit in the prior-year period included a benefit from its recent pension accounting change. Revenue rose to 5% to $12.3 billion.

A bright spot for the company was continued improving margins at Express, which contributes more than half of total revenue. The company's restructuring of the division, which included buyouts and modernization of its airfleet, helped boost the segment's operating income by 45% to $545 million.

FedEx said costs went up at its Freight division, as volumes fell unexpectedly and too many employees were left idle. Revenue was flat at $1.6 billion, and operating income fell 21% to $132 million.

Chelsey Dulaney contributed to this article

Write to Laura Stevens at laura.stevens@wsj.com

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(END) Dow Jones Newswires

September 16, 2015 14:57 ET (18:57 GMT)

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