FedEx Q2 revenue down 3%, outlook muted

NYSE-listed FedEx reported a three percent decline in adjusted revenue at $22.2 billion for the second quarter ended November 30, 2023, driven by volume declines at Express and Freight.

Operating income, however, increased 17 percent to $1.42 billion and adjusted diluted earnings per share increased to $3.99 from $3.18 in the second quarter of fiscal 2023, says an official release.

"Ground and Freight delivered improved operational performance translating to strong operating income growth. Adjusted consolidated margin growth reflects DRIVE initiatives taking hold and improved operational execution," FedEx said in a presentation after announcing the results.

“FedEx has delivered an unprecedented two consecutive quarters of operating income growth and margin expansion even with lower revenue, clear evidence of the progress we are making on our transformation as we navigate an uncertain demand environment,” says Raj Subramaniam, President and Chief Executive Officer, FedEx. “We are moving with speed to make our network more efficient while delivering outstanding service to our customers through the peak season with the fastest Ground network in the industry. I am confident in our strategy as we make our global network more flexible, efficient, and intelligent.”

FedEx Express revenue declined five percent to $10.3 billion and operating income was down 60 percent to $137 million. "The revenue decrease was driven by volume declines, lower fuel surcharges, reduced demand surcharges, and a mix shift toward lower-yielding services."

That was partly due to falling volume from the U.S. Postal Service, which has been shifting more packages from higher-margin air services to more economical ground services, Reuters reported.

FedEx Ground operating income increased 50 percent to $900 million, primarily due to yield improvement, cost reductions, and higher volumes. "Cost per package declined two percent, driven by lower line-haul expense and improved first- and last-mile productivity."

FedEx Freight operating income increased (up 10 percent to $487 million) "despite a decline in revenue. The profit increase was driven by higher yield and increased efficiency, partially offset by lower shipments."

FedEx completed a $500 million share repurchase programme during the second quarter, and approximately two million shares were delivered under the agreement. "The year-to-date decrease in outstanding shares benefited second quarter results by $0.05 per diluted share. FedEx expects to repurchase an additional $1 billion of common stock during fiscal 2024. Cash on-hand as of November 30, 2023 was $6.7 billion."

John Dietrich, Executive Vice President and Chief Financial Officer, FedEx says: “With demand continuing to pressure the top-line, we are pleased with our ability to deliver stronger operating leverage and improved profitability, enabling us to maintain our fiscal year adjusted earnings outlook. These results are a testament to DRIVE initiatives taking hold, where we are focused on improving margins and driving long-term returns for our stockholders.”

2024 outlook
FedEx expects a low-single-digit percentage decline in revenue year over year compared to the prior forecast of approximately flat revenue growth, the release added.

Other highlights:

*Earnings per diluted share of $17.00 to $18.50 before the MTM retirement plans accounting adjustments after also excluding costs related to business optimisation initiatives;

*Permanent cost reductions from the DRIVE transformation program of $1.8 billion; and

*Capital spending of $5.7 billion with a priority on investments to improve efficiency including fleet and facility modernisation, network optimisation and automation.

Markets respond negatively to outlook
"We expect revenue will continue to be pressured by volatile macroeconomic conditions negatively affecting customer demand for our services across our transportation companies for the remainder of the fiscal year that ends May 31," FedEx said in a regulatory filing, Reuters reported.

FedEx shares dropped 10 percent to 252.58 in after markets trading, and also dragged down the shares of United Parcel Service (UPS).