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What FedEx Just Said About Europe and China

Summary:
“Asia volume weakness, which we experienced during peak season, deepened post Chinese New Year.” When FedEx, a corporate barometer for the global goods-based economy, reported earnings this evening, it missed lowered earnings and revenue expectations, and it cut its guidance for the rest of the year, below already lowered expectations, and its shares tanked 5.7% in afterhours trading. The US holiday-shipping season had been fairly decent for FedEx, largely due to the continued shift of retail sales from brick-and-mortar to booming e-commerce. Quarterly revenues in the FedEx Express segment in the US rose 4.0% year-over-year to .19 billion, and shipping volume rose 6%. The stunner was in its international business. In the FedEx Express segment – “macroeconomic environment lately

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“Asia volume weakness, which we experienced during peak season, deepened post Chinese New Year.”

When FedEx, a corporate barometer for the global goods-based economy, reported earnings this evening, it missed lowered earnings and revenue expectations, and it cut its guidance for the rest of the year, below already lowered expectations, and its shares tanked 5.7% in afterhours trading. The US holiday-shipping season had been fairly decent for FedEx, largely due to the continued shift of retail sales from brick-and-mortar to booming e-commerce. Quarterly revenues in the FedEx Express segment in the US rose 4.0% year-over-year to $4.19 billion, and shipping volume rose 6%. The stunner was in its international business.

In the FedEx Express segment – “macroeconomic environment lately has presented challenges relative to our prior expectations, particularly at FedEx Express,” is how CEO Fred Smith put it during the earnings call – quarterly revenues for all international sub-segments combined fell 4.5% year-over-year, to $4.67 billion. This includes:

  • International export, package: -3.4% ($2.54 billion)
  • International domestic (intra-country) package: -5.4% ($1.08 billion)
  • International priority freight: -10.3% ($477 million)
  • International economy freight: +0.6% (495 million)
  • International airfreight: -18.3% ($76 million)

This 4.5% decline in its international revenues overpowered the 4% growth in US revenues, and so overall FedEx Express revenues fell by 1.0% to $9.0 billion.

“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,” it said in the earnings release.

And cost cutting has started by trimming the workforce via a “voluntary employee buyout program,” constraining hiring, and tamping down on “discretionary spending,” the statement said. And it’s “reviewing additional actions to mitigate the lower-than-expected revenue trends.”

During the earnings call with analysts (transcript via Seeking Alpha), CFO Alan Graf put a little more flesh on the statement : “Next month, we will know which US employees will be leaving the Company via the voluntary buyout program. They will begin exiting starting at the end of May.”

These “business realignment activities,” he said in perfect corporate-speak, will cost $450 million to $575 million. And they’re expected “to drive savings of $225 million to $275 million in fiscal year 2020.”

But that’s just the workforce reduction in the US: “Similar programs are likely for employees in international regions,” he said.

The lowered guidance for earnings and revenues for its fourth quarter (current quarter) was in part based, as the statement said, on “slowing global economic conditions, particularly in Asia and Europe.”

And this disappointing guidance is “dependent on key external factors, including fuel prices, moderate U.S. domestic economic growth, and no further weakening in international economic conditions from our current forecast.”

In other words, if things weaken further globally, results could be even more disappointing down the road.

During the earnings call, a few more nuggets about the slowdown in Asia and Europe came to light:

Chief Marketing Officer Brie Carere: “Since our last earnings call, we have seen the overall China economy slow down further, and this has impacted other Asian economies. Given the size of China, no markets will be able to absorb more than a fraction of what China produces, but customers continue to look to diversify from China.”

CFO Alan Graf: “Asia volume weakness, which we experienced during peak season, deepened post Chinese New Year.”

And CEO Fred Smith offered an explanation for the boom in shipping last year and the slowdown since then:

“Prior to January 1st, there was a significant amount of traffic that was put on the water beginning in late summer and in the fall, based on the deadline of January 1st for the imposition of new tariffs. Now, the President decided to delay those, but there was a lot of inventory that was moved into the US.”

In other words, these efforts to front-run the tariffs were then met by delays of those tariffs, and now everyone in the US is sitting on a historic inventory pileup. Once those inventories are whittled back down, and once the trade disputes are resolved — “hopefully” — “maybe we’ll go back into a more normal cycle,” Smith said.

And in the US, the services sector better hang in there. Read…  US Freight Volume Drops

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What FedEx Just Said About Europe and China

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Wolf Richter
Founder, Wolf Street Corp. In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

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