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Why Did FedEx Cut Its Fiscal 2019 Earnings Outlook?

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Fiscal 2019 EPS outlook

FedEx (FDX) slashed its fiscal 2019 earnings outlook. The ongoing global slowdown sent its third-quarter results below the expectations. During the company’s third-quarter earnings release, FedEx’s executive vice president and CFO, Alan B. Graf, Jr., said, “Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue.”

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FedEx expects the GAAP EPS before the year-end MTM retirement plan accounting adjustments to be $11.95–$13.10—down from the previous forecast of $12.65–$13.40. The non-GAAP EPS is expected to be $15.10–$15.90—compared to the earlier guidance range of $15.50–$16.60. The analysts polled by Thomson Reuters (TRI) forecast an EPS of $15.87 for fiscal 2019.

During the third-quarter earnings conference call, FedEx stated that global delivery and logistics are being hampered by the economic slowdown across the European Union and Asia—particularly China. FedEx revealed that ongoing trade disputes with the US are hurting the Chinese economy.

FedEx revealed that higher expenses related to TNT Express’s integration would weigh on its bottom-line results. FedEx bought the struggling European delivery giant in 2016 for a total consideration of $4.8 billion. FedEx expects to complete the integration by the end of fiscal 2021. Since the company requires consultations with employee representatives across several countries, the integration process is taking more time. FedEx expects the cumulative integration cost to reach $1.5 billion through fiscal 2021.

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FedEx is believed to be a bellwether for the global economy. Therefore, the company’s downbeat EPS outlook and comments about a possible global economic slowdown fueled concerns that the US might also feel the heat. The shares of FedEx’s closest peers (IYT) including UPS (UPS) and XPO Logistics (XPO) fell due to the dismal outlook. UPS and XPO Logistics fell 1.7% and 1%, respectively, during after-hours trading on March 19.

Cost-cutting initiative

To compensate for the slowing revenue growth trend and improve its earnings, FedEx is working to curb its expenses. Under the initiative, FedEx has launched its voluntary buyouts program for US employees, limited hiring, and lowered discretionary spending.

The company’s voluntary buyouts program should be completed during the fourth quarter. The program will lead to a one-time pre-tax expense of $450 million–$575 million. The strategy is projected to bring annualized savings of $225 million–$275 million starting in fiscal 2020.

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