FedEx Issues Earnings Warning on Worsening Economic Outlook

FedEx (FDX) announced that overall package volume weakness accelerated more than it expected in the final weeks of its fiscal first quarter (ended August), while we suspect cost inflation and lost leverage pressured its overall margin performance. Total revenue of $23.2 billion came in only modestly below FactSet consensus, but adjusted EPS of $3.44 was well below consensus near $5.14. Relative to our own expectations, it appears the biggest shortfall occurred at Express as revenue growth (1%) and adjusted EBIT margin (1.7%) came in solidly short of our expected run-rates for the year. We note that management withdrew fiscal 2023 guidance.

The firm called out “worsening” macroeconomic conditions internationally and in the U.S. (including weakness in Asia), but also noted service challenges in Europe, the specifics of which aren’t quite clear to us. We’ve been expecting revenue growth to ease this fiscal year on the back of normalization of business-to-consumer volumes, retailer restocking, and air freight market activity, but Express’ performance deteriorated faster than we expected. Ground’s 8.5% EBIT margin also came in shy of our expectations, especially after heading back into double digits last quarter, though the shortfall was less severe.

Given margin weakness in particular, we expect to materially temper our fiscal 2023 and 2024 Express and Ground model assumptions. We anticipate more color when FedEx fully reports results on Sept. 22, but at first glance we estimate that our forecast adjustments could reduce our $258 fair value estimate by 8%-12%. We also suspect the shares will encounter selling pressure at the market’s opening on Sept. 16. Execution risk is elevated, but we still see upside potential to the shares in the longer term, as new management shifts from a growth to an efficiency posture, Express adjusts to normalizing demand, and Ground drives down costs to serve on the B2C business.