FedEx (FDX) Delivers In-Line With Last Week’s Poor Guidance; Focus Now Is On Cutting Costs

FedEx (FDX) delivered pretty much as expected with its Q1 (Aug) report late yesterday. Last week, FDX preannounced Q1 results that were well below analyst expectations and the final numbers were in-line with that. FDX also reaffirmed the Q2 (Nov) guidance it provided last week, which also was below expectations at the time.

The company saw a saw a decline in volumes in Q1, which accelerated in the final weeks. Softening volumes in Asia and the US were predominantly due to the economy, while the shortfall in Europe was both economic and service-related. As a result, FDX says it had costs in the system for volumes that did not materialize. Furthermore, US consumer spending has slowed due to inflation and consumption is being skewed more toward services and away from goods, which is not great for a delivery company.

The main focus of the call last night was FedEx’s efforts to reduce costs, including a plan to save $2.2-2.7 bln in FY23, of which, about $1 bln will be permanent. The biggest cost actions will be taken at FedEx Express, where it expects to drive $1.5-1.7 bln in savings, mostly from reducing global flight hours. FedEx Ground savings are expected to be $350-500 mln, driven by rationalizing operations and cancelling several planned ground network capacity projects.

Something that jumped out at us on the call was FDX saying it had ample liquidity. Importantly, it remains committed to its plan to repurchase $1.5 bln of stock in FY23. And it sounds like FDX is going to take advantage of the drop in its share price as it plans to step on the gas with $1 bln in buybacks in Q2 alone.

Overall, the results were generally in-line with last week’s guidance, so no big surprises. We were glad to see Q2 guidance getting reaffirmed. The cost reduction plan seems pretty substantial to us and should act as a tailwind, especially in the second half of the fiscal year. The rate increase should also help. More broadly, it does make us nervous about the economy generally and earnings season next month because FDX delivers for all types of businesses. However, we also think some of this weak performance may have been caused by FDX’s own missteps because UPS has been putting up much better numbers.