Labor Costs Impacted FedEx’s Q1 2019 Earnings, Stock Fell 2.8%



FedEx’s Q1 2019 earnings

FedEx (FDX) announced its first-quarter earnings after the market closed on September 17. According to a survey by Thomas Reuters, the logistics giant missed analysts’ adjusted EPS estimate by 9%. While analysts expected FedEx to report an adjusted EPS of $3.80, the company’s EPS was $3.46. The adjusted EPS was 39% YoY (year-over-year) in the first quarter.

On September 17, FedEx stock opened at $257.28—up 0.8% from the previous session’s close of $255.44. The company’s shares increased to $259.25. However, the shares declined to $253.67 before closing at $255.73—up marginally from the previous session’s close. The stock declined ~2.8% to $248.70 later on September 17 due to concerns regarding FedEx’s higher labor costs.

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Revenues and operating margin

FedEx reported revenues of $17.0 billion in the first quarter, which beat analysts’ estimate of $16.8 billion. Compared to the company’s revenues of $15.3 billion in the first quarter of 2018, FedEx witnessed 11.4% YoY growth in the first quarter. The better-than-expected revenue growth was a result of higher volumes, lower taxes, and better yields.

FedEx’s first-quarter adjusted operating income was $1.19 billion—up 9.2% from $1.09 billion in the same quarter of fiscal 2018. The company’s operating margin contracted by ten basis points to 7% from 7.1% in the first quarter of 2018.

Substantially higher variable compensation accruals and an accelerated wage increase for certain hourly employees due to the passage of Tax Cuts and Jobs Act increased FedEx’s YoY labor-related expenses by $170.0 million during the quarter. Last week, FedEx announced the expansion of its US ground operations to six days a week. The expansion was in response to a record volume increase due to growing e-commerce demand.

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Outlook for fiscal 2019

Fredrick Smith, FedEx’s chairman, and CEO said, “We are very optimistic about our prospects for profitable growth and remain confident we will reach our goal to improve FedEx Express operating income by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017.” The company increased its EPS outlook for 2019 to $17.20–$17.80 from the previous forecast of $17.0–$17.60. The following are the company’s projections for fiscal 2019.

  • FedEx expects revenue growth of ~9% and an operating margin of ~7.9%.
  • The company expects an operating margin of ~8.5% excluding TNT Express integration expenses.
  • FedEx expects an EPS of $15.85–$16.45 by the end of the year before mark-to-market retirement plan accounting adjustments—up from the earlier prediction of $15.65–$16.25.
  • FedEx expects capital expenditure of $5.6 billion—marginally lower than fiscal 2018.

The tax deduction of capital expenditure is a significant tailwind for transportation (XTN) stocks. However, the current US-China trade tussle remains a major hurdle for stocks’ upward journey. The online shopping boom is spurring road transportation companies’ growth. Growing e-commerce sales are expected to boost the top-line growth of less-than-truckload companies like FedEx, United Parcel Service (UPS), Old Dominion Freight Line (ODFL), and SAIA (SAIA) in the coming quarters.


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