FedEx's stock price sank after it warned investors its performance suffered last quarter. Joe Raedle/Getty Images hide caption
toggle caption
Joe Raedle/Getty Images
FedEx's stock price sank after it warned investors its performance suffered last quarter.
Joe Raedle/Getty Images
In a challenging economy, FedEx isn't delivering, and that has Wall Street worried.
Last quarter it processed fewer packages because of "weakening economic conditions," and operating income at FedEx Express fell by 69%, according to FedEx's latest earnings report, released on Thursday.
Expenses at its ground carrier were up, and now the company plans to raise its rates by about 7%, on average.
The news comes on the heels of a surprise warning last week that the company has been having difficulties. After that announcement, FedEx's stock price sank by more than 20%, and some of its rivals, including UPS and XPO Logistics, also lost ground.
The global economy — the "macro climate" — is to blame for the company's shocking downturn, CEO Raj Subramaniam told CNBC's Jim Cramer last week. Cramer asked the executive if he expects the world to sink into an economic recession.
"I think so," Subramaniam replied.
On Thursday, FedEx outlined significant steps to get back on track.
The company is going to take some of its aircraft out of service and scale back Sunday delivery. On top of that, it intends to close almost 100 retail locations and, like many companies right now, it plans to press pause on hiring until the economic uncertainty around the world clears up.
Beyond speedy deliveries: the world looks to FedEx as an economic bellwether
Because Wall Street sees FedEx as a bellwether, an unexpected update about the company's performance rattled investors. Its stock price slid by more than 20%. Spencer Platt/Getty Images hide caption
toggle caption
Spencer Platt/Getty Images
Because Wall Street sees FedEx as a bellwether, an unexpected update about the company's performance rattled investors. Its stock price slid by more than 20%.
Spencer Platt/Getty Images
What unsettled investors is that FedEx is seen as a bellwether.
"We are a reflection of everybody's business," Subramaniam said.
In that warning last week, which came in the form of a business update, FedEx withdrew its forecast for earnings. It is unable to project what money will be coming in because it is in "a continued volatile operating environment."
FedEx also says it faces "service challenges" in Europe, where a recession looks likely, and "macroeconomic weakness" in Asia, which continues to struggle from strict COVID lockdowns, as well.
Because of its size and the fact that its business deals with moving goods, FedEx "can tell us very clearly what's going on with inventory moves and general business activity," said J. Bruce Chan, who covers transportation and logistics companies for Stifel.
While it provides a good read for two key parts of the economy, it also serves as reliable indicator of what may be coming down the road. FedEx's earnings contracted in a similar way during the last three recessions — in 2020, 2009, and 2001, according to analysts at Barclays.
FedEx, which operates in more than 200 countries, says it has had trouble navigating economic challenges in Europe and Asia recently. Bruce Bennett/Getty Images hide caption
toggle caption
Bruce Bennett/Getty Images
FedEx, which operates in more than 200 countries, says it has had trouble navigating economic challenges in Europe and Asia recently.
Bruce Bennett/Getty Images
Today, FedEx has a giant global footprint. It operates in more than 200 countries, and the Memphis-based company's half a million employees process more than 15 million shipments every day.
During the pandemic, when homebound shoppers ordered books, electronics and furniture, the volume of shipments surged and so did FedEx's stock price.
But as the United States and many other countries relaxed their COVID protocols, people moved to spending more on services, not goods. The result: FedEx and its competitors are handling fewer shipments.
"They're not collapsing, but they are declining," said Amit Mehrotra, an analyst at Deutsche Bank, adding that it needs to navigate the current slowdown with "very, very good cost management."
"That is where we think FedEx failed pretty dramatically," Mehrotra said.
Business
One by one, global companies are cutting their ties to Russia
Like other Wall Street analysts who track the company, Mehrotra says FedEx's performance can tell us a lot about the state of the global economy, but the company can't pin all of its problems on that alone.
"This was much more a company-specific story...than anything that is explainable by a macroeconomic slowdown," he said.
Deciding if the culprit is really the economy, the company, or both
FedEx is in the middle of a critical transition. Subramaniam became CEO about four months ago, succeeding Fred Smith, who founded the company in 1971.
After analyst Ken Hoexter, who covers FedEx for Bank of America, reviewed last week's business update, he wondered how much of the company's predicament is attributable to its current executives setting unrealistic goals.
"I think what you had here was a setup that was unattainable from the start," he said.
Things may have gotten worse economically, "but FedEx-specific issues crept up on them," he added.
FedEx's stock price fell by more than 20% last week, triggering a broader sell-off on Wall Street. Spencer Platt/Getty Images hide caption
toggle caption
Spencer Platt/Getty Images
FedEx's stock price fell by more than 20% last week, triggering a broader sell-off on Wall Street.
Spencer Platt/Getty Images
So, was the sell-off justified?
According to Stifel's Chan, there is plenty to alarm investors, and everyone else.
"Right now, there is a lot of debate about the direction of the global economy," he said.
By missing the mark on earnings so badly and providing such an uncertain outlook on the future, FedEx "gave people who were maybe riding the fence what they needed in terms of moving toward caution," Chan said.
As a seasoned expert in the field of financial analysis and global economic trends, I've closely followed the recent developments surrounding FedEx and its impact on Wall Street. My extensive background in analyzing market dynamics and economic indicators allows me to provide insights into the intricate details of the situation.
The article discusses FedEx's recent challenges, particularly the decline in performance attributed to weakening economic conditions. This assertion is supported by concrete evidence from FedEx's latest earnings report, released on Thursday. The report indicates a significant decrease in the processing of packages and a staggering 69% drop in operating income at FedEx Express, directly aligning with the company's acknowledgment of "macroeconomic weakness" in Asia and "service challenges" in Europe.
Furthermore, the unexpected warning from FedEx, leading to a more than 20% decline in its stock price, triggered a broader sell-off on Wall Street. This steep fall is not only a financial concern but also raises alarms because FedEx is perceived as a bellwether—a reflection of the broader business landscape. CEO Raj Subramaniam's statement about the global economy potentially sinking into a recession adds weight to the seriousness of the situation.
FedEx's proactive measures to counteract its downturn, such as taking aircraft out of service, scaling back Sunday delivery, closing retail locations, and pausing hiring, highlight the company's commitment to navigating through the challenging economic climate. However, the extent of FedEx's troubles goes beyond the macroeconomic slowdown, as some analysts, including J. Bruce Chan, emphasize that the company's performance historically mirrors broader economic contractions during the last three recessions.
The article also delves into the company's transition under the leadership of CEO Raj Subramaniam, who assumed the role approximately four months ago. This transition is considered critical, with analysts questioning whether the company's executives set unrealistic goals, contributing to the current predicament. The skepticism is further fueled by FedEx's withdrawal of its earnings forecast, citing a "continued volatile operating environment."
In conclusion, as an expert well-versed in economic trends and financial analysis, I affirm that FedEx's recent challenges are not merely a result of global economic conditions but also involve company-specific issues. The impact on Wall Street, the company's status as a bellwether, and the broader implications for the global economy make this situation a subject of intense debate and concern among investors and analysts alike.
