FedEx’s Fiscal Q3 Volumes Continue to Fall, but Cost Rationalization Is Reviving Ground Margins

FedEx’s FDX 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.

Average daily package volume plummeted 10% at express and 11% at ground, driven by normalizing e-commerce activity, slowing airlift demand, the pullback in retail-sector restocking, and softer macroeconomic conditions across Europe. Volumes for all segments fell short of our expected run rates, though declines should moderate in the quarters ahead on easing comps.

The key takeaway in the quarter was that management’s aggressive cost and efficiency efforts showed solid incremental progress, at least at ground. Ground margins jumped 240 basis points year over year, to 9.7%, nicely above our 8.9% forecast, and despite the challenging volume backdrop. Express margins came in shy of our expectations as network adjustments are still lagging package-volume declines, but management raised fiscal 2023 guidance, calling for adjusted EPS of $14.60 to $15.20 (previously $13.00 to $14.00). The raise suggests management has confidence in additional ground improvement and sequential margin progress at express in the quarters ahead. We expect the market price to react favorably to these factors, though we still see significant uncertainty surrounding express’ potential margin levels in the year ahead.

We expect to boost our fiscal 2023 and 2024 ground profitability forecasts, but that impact will be partly offset by tempering express margins. Overall, we will likely raise our $217 fair value estimate only slightly, by less than 3%. In recent quarters, the shares have risen on optimism over FedEx’s turnaround efforts, and now trade in fairly valued territory.