FedEx cost cuts stanch losses, analysts see need for more

3:32 pm Wednesday, December 21st, 2022

LOS ANGELES (Reuters) – FedEx’s plan to slash almost $4 billion in expenses has begun sheltering profits, but analysts say the uncertain economy points to the need for more surgical cuts at the global delivery firm.

“The company has stemmed the bleeding,” Stifel analyst Bruce Chan wrote after FedEx reported a smaller-than-expected drop in earnings by parking planes, closing offices, stopping rural Sunday delivery and furloughing workers in its freight division.

“There is still a lot of work ahead,” said Chan, who added that cutting too deeply could put future growth at risk.

Shares in FedEx rose 4.7% to $172 at midday Wednesday, a level far below their 52-week high of $266.79.

The stock has been under pressure since September, when the Memphis, Tennessee-based company pulled its forecasts – sparking the largest one-day price drop in its history.

The company slashed costs and “outran deteriorating market conditions” in the fiscal second-quarter that ended Nov. 30, Morgan Stanley analyst Ravi Shanker wrote in client note.

But significant obstacles remain – particularly as e-commerce demand reverts to pre-pandemic norms, global recession threatens and customers chafe over the company’s biggest-ever rate hike next year, analysts said.

The e-commerce reset alone is a large challenge for the company that delivers for major retailers like discounter Walmart and pet supply seller Chewy, analysts said.

And, those are just the external risks, they said.

FedEx has been underperforming its unionized rival United Parcel Service, which is squeezing greater profit from its leaner, more streamlined operating structure. FedEx has outlined plans to integrate its disparate businesses, revive its long-troubled Europe operations and appease activist investor D.E. Shaw.

On Tuesday, FedEx issued a new 2023 profit forecast, signaling that it may be “finding the floor,” Susquehanna analyst Bascome Majors said.

“Now, it’s all about execution,” Evercore ISI analyst Jonathan Chappell said.

(Reporting by Lisa Baertlein in Los Angeles; Editing by Cynthia Osterman)