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What Happened to FedEx’s Operating Margins in Fiscal 2Q18?

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FedEx’s operating margins

In fiscal 2Q18, FedEx (FDX) witnessed a very marginal contraction in its reported operating margin. The company’s total operating margin fell to 7.7%, down 0.1% from 7.8% in fiscal 2Q17 on a reported basis. In the reported quarter, its operating margins were comparable due to the absence of mark-to-market pension accounting adjustments in both years.

A quick look at the fiscal 2Q18 income statement reveals that while revenues rose 9.3%, its operating expenses rose 9.4%. Let’s look at the company’s operating margin contraction in detail.

Major drivers in the rise of FedEx’s operating expense were purchased transportation expenses, fuel expenses, and maintenance and repair expenses. These expenses rose 12%, 24.3%, and 14.9%, respectively, in the second quarter of fiscal 2018.

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Segmental margins

FedEx Express’s adjusted operating margins rose from 8.5% in fiscal 2Q17 to 8.7% in fiscal 2Q18. Adjusted operating income rose to $813 million from $734 million a year ago. The profit rose due to increased revenue, a favorable net impact from fuel, and continued cost efficiencies. However, the rise was partially offset by an estimated $100 million impact from the cyberattack and the timing of aircraft maintenance. TNT Express integration expenses of $96 million were included in FedEx Express’s fiscal 2Q18.

FedEx Ground’s operating margin in fiscal 2Q18 expanded 0.1% to 10.5% from 10.6% in fiscal 2Q17 due to revenue growth. However, it was negatively impacted by increased purchased transportation, network expansion, and staffing costs.

FedEx Freight’s operating margin expanded 1.2% in fiscal 2Q18 to 6.7% from 5.5% a year ago. The division’s operating profit rose to $118 million from $88 million in fiscal 2Q17. Operating performance was stellar mainly due to the leverage from higher LTL (less-than-truckload) revenue per shipment.

Management insights

FDX reiterated its objective of a $1.2 billion–$1.5 billion improvement in the Express division’s operating income by fiscal 2020. The company expects to improve FedEx Ground’s margin through the implementation of certain cost-reduction initiatives in the second half of fiscal 2018. The company anticipates that FedEx Ground’s fiscal 2018 operating income and cash flows should outpace the fiscal 2017 levels.

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Next, we’ll look at FedEx’s capital expenditure and outlook for fiscal 2018.

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