FedEx rallies after big cost cuts, but one analyst wonders if the easy reductions are in the past

By Claudia Assis and Bill Peters

'Cost cutting will likely remain the main driver in recovering earnings back to pandemic era records, given persistent demand weakness,' analyst says

Shares of FedEx Corp. rallied after hours on Tuesday after the package deliverer said it expected better demand for the fiscal year ahead and said it had placed its freight business under review, as it tries to cut billions in costs and harmonize operations.

Shares jumped 14% after hours.

FedEx (FDX) said it expected low- to mid-single-digit percent revenue growth year on year for its fiscal 2025. Management forecast per-share earnings between $18.25 and $20.25 before adjustments related to pension plans.

That outlook was driven by expectations for an uptick in U.S. shipping volumes and e-commerce demand. Management also said that shipping disruptions from attacks in the Red Sea, and the possibility of tighter available shipping space on planes and boats, could boost the money FedEx makes per package on air shipments out of Asia.

The company over the past two years has dealt with a slowdown in shipping demand and a pullback in global industrial production, after inflation raised concerns about the world's economies. FedEx has pared back flight hours and laid off staff, and is bracing for the loss of a big air-cargo customer, the U.S. Postal Service, in September.

FedEx on Tuesday also said it was assessing the role of its freight business within its broader operations, part of what it called a "the next phase of its long-term stockholder value-creation plans." The company, in its earnings release, said it intends to finish that review by the end of the calendar year.

Chief Executive Raj Subramaniam, asked multiple times about the review process during FedEx's earnings call, declined to elaborate.

FedEx's freight segment handles so-called less-than-truckload freight shipments - generally, smaller shipments from multiple businesses packed into a single trailer. As of last May, that segment ran nearly 30,000 vehicles, with around 43,000 workers and 390 service centers, according to FedEx's most recent annual report. It had $9.6 billion in revenue in FedEx's fiscal 2023, which ended on May 31. During FedEx's fiscal fourth quarter, sales in the segment rose 2%.

For its fiscal fourth quarter overall, FedEx earned $1.47 billion, or $5.94 a share, compared with $1.54 billion, or $6.05 a share, in the year-ago quarter. Adjusted for one-time items, FedEx earned $5.41 a share. Revenue edged higher to $22.1 billion, from $21.9 billion a year ago.

Analysts polled by FactSet expected FedEx to report adjusted earnings of $5.34 a share on sales of $22.04 billion.

Results in FedEx Ground business rose thanks to lower costs as well as growth in ground commercial volume. A decline for FedEx Express - which handles air and ground shipments globally - was due to lower international yields, which were offset in part by cost reductions and higher domestic package yields, the company said.

The quarterly results include a non-cash impairment charge of $157 million, stemming from the decision to retire 22 Boeing jets and seven related engines as FedEx continues to modernize its air fleet, it said.

FedEx also forecast $2.2 billion in permanent cost reductions from its ongoing cost-cutting program, and capital spending of $5.2 billion, with investments giving priority to in-network optimization and efficiency improvement, including fleet and facility modernization and automation, it said.

FedEx has consolidated its Ground and Express units, as well as some other businesses, into a single company. Third Bridge analyst Anthony DeRuijter suggested in emailed commentary on Tuesday that further cost cuts could become more difficult.

"Driving FedEx's margin expansion strategy has been its network consolidation plans, and the plan has thus far yielded significant profitability improvements," he said. "However, our experts are concerned that the easy cost cuts may have already been made at FedEx, which would contradict the company's guidance for materially higher EPS in fiscal 2025."

"The bottom line for FedEx is that the self-help strategy appears to be working and the company has been more strategic with its capital," he added later. "Cost cutting will likely remain the main driver in recovering earnings back to pandemic-era records, given persistent demand weakness."

-Claudia Assis -Bill Peters

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06-25-24 1940ET

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