Company Reports

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest US less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the US ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx announced that after a period of "extensive discussions," it will not renew its contract with the United States Postal Service, or USPS, which will expire on Sept. 29. Recall that for roughly the past 20 years, FedEx express has provided airlift transportation for several USPS products within the US, including first class mail and priority mail express. Overall, this does not come as a surprise given management's commentary in recent quarters, which (as we heard it) seemed to hint that material service and pricing changes were necessary in order for a deal to be mutually beneficial and work effectively.

FedEx's fiscal third-quarter (ended February) top line fell 2% year over year, driven by lingering US package (and airfreight) volume declines at express, the sluggish underlying demand backdrop for freight's less-than-truckload operations, and lower fuel surcharges. Express' volume declines stem from muted retailer restocking, soft industrial end markets globally, and lost business from the United States Postal Service, which has tweaked its delivery strategy (using less of FedEx's air capacity). Ground revenue was roughly flat as volumes and yields were flat. On the positive side, core pricing appears to be holding up across the board and total revenue was mostly in line with our expectations.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx's fiscal second-quarter (ended November) top line fell 3% year over year, driven by ongoing package volume and yield declines at express, as well as the soft underlying demand backdrop for freight's less-than-truckload, or LTL, operations. Express' sluggish volume showing stems from muted retailer restocking, soft industrial end markets globally, and lost business from the United States Postal Service, which recently tweaked its delivery strategy. Also, express yields saw pressure from normalizing demand surcharges and mix. Overall, revenue came in slightly shy of our expectations.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx's fiscal first-quarter (ended August) revenue fell 7% year over year on persistent volume declines and falling yields at express, along with normalizing less-than-truckload, or LTL, tonnage at freight. Express' softer package activity stems in part from muted retail sector restocking and lost business from the United States Postal Service, which recently tweaked its delivery strategy. Revenue came in slightly shy of our expectations due mostly to yield pressure at express—including the steep correction in demand-driven surcharges. That said, express' volume declines are easing, core pricing at ground still looks healthy, and ground volume trends flipped positive (up 0.6%) on easier comps and as customers diverted shipments away from UPS due to the Teamsters strike threat.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx's fiscal fourth-quarter (ended May) revenue fell 10% year over year as volumes continued to decline across all segments, while express yields flipped negative on tough comparisons, as well as excess airfreight-industry capacity and unfavorable mix for international export business. Revenue came in shy of our expectations because of worse-than-expected yield declines at express and a sizable drop in freight (LTL segment) volumes.

During its investor event, FedEx provided incremental color surrounding its ongoing Drive and eventual Network 2.0 programs, which target significant structural cost savings. To bolster its Drive efforts, the firm announced it will consolidate Express and Ground—which are currently run separately—into a fully integrated air/ground network by June 2024. The less-than-truckload segment (Freight) will remain independent. This was new information for us (and probably for investors), but as we understand it, management was already anticipating the move as part of its network transformation.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx's fiscal third-quarter (ended February) revenue fell 6% year over year on continued volume declines across all segments. Yields were still up meaningfully at ground and freight, and up slightly at express, with help from sticky demand-related surcharges, but gains diminished on tough comparisons. Express yield growth slowed the most due to softening priority shipments and lower peak surcharges across Europe and Asia.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx's fiscal second-quarter (ended November) consolidated revenue flipped negative year over year (down 2.8%) on accelerating volume declines across all segments, but especially at express, which once again fell short of our forecasts. Yields remained positive across the board though, as we expected, gains are rapidly dissipating at express on tough comparisons (including for fuel surcharges) and softer underlying demand, particularly in Asia.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

As disclosed last week in its preliminary earnings announcement, FedEx's fiscal first-quarter (ended August) consolidated revenue grew about 5.5% year over year, as solid yield gains more than offset greater-than-expected package volume declines. Consolidated adjusted EBIT margin fell 160 basis points to a disappointing 5.2%, due in large part to lost leverage from lower volume (especially at express), cost inflation, and a lag in responding to accelerating demand deterioration in August.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

FedEx 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.

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.