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Business

What FedEx’s steep sales tell us about where the economy is headed: NPR




What FedEx’s steep sales tell us about where the economy is headed: NPR

FedEx shares fell after it warned investors that its results suffered last quarter.

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FedEx shares fell after it warned investors that its results suffered last quarter.

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In a challenging economy, FedEx is not delivering, and that has Wall Street worried.

Last quarter, it processed fewer packages due to “weakening economic conditions,” and operating income at FedEx Express fell 69%, according to FedEx’s latest earnings report, released Thursday.

Expenses at the ground carrier increased, and now the company plans to increase prices by about 7% on average.

The news comes after a surprise announcement last week that the company has been struggling. After that announcement, FedEx’s stock price dropped more than 20%, and some of its competitors, including UPS and XPO Logistics, also lost ground.

The global economy — the “macro climate” — is to blame for the company’s shocking decline, CEO Raj Subramaniam told CNBC’s Jim Cramer last week. Cramer asked the leader if he expects the world to sink into an economic recession.

“I think so,” Subramaniam replied.

On Thursday, FedEx outlined key steps to get back on track.

The company will take some of its planes out of service and scale back Sunday deliveries. On top of that, it intends to close nearly 100 outlets and, like many companies right now, plans to pause hiring until the economic uncertainty around the world clears.

Beyond fast deliveries: the world sees FedEx as an economic watch

Because Wall Street watches FedEx like a clock, an unexpected update on the company’s results rattled investors. The share price fell by more than 20 percent.

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Because Wall Street watches FedEx like a clock, an unexpected update on the company’s results rattled investors. The share price fell by more than 20 percent.

Spencer Platt/Getty Images

What worried investors is that FedEx is seen as a clock.

“We are a reflection of everyone’s business,” Subramaniam said.

In that warning last week, which came in the form of a business update, FedEx withdrew its earnings forecast. It is unable to estimate what money will come in because it is in “a still volatile operating environment.”

FedEx also says it faces “service challenges” in Europe, where a recession looks likely, and “macroeconomic weakness” in Asia, which also continues to struggle from strict COVID shutdowns.

Because of its size and the fact that the business is about moving goods, FedEx “can tell us very clearly what’s going on with warehouse movement and general business activity,” said J. Bruce Chan, who covers transportation and logistics companies for Stifel.

While it provides a good reading for two important parts of the economy, it also serves as a reliable indicator of what may be coming. FedEx’s earnings fell similarly 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.

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FedEx, which operates in more than 200 countries, says it has had trouble navigating economic challenges in Europe and Asia recently.

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Today, FedEx has a gigantic global footprint. Operating in more than 200 countries, the Memphis-based company’s half a million employees process more than 15 million shipments every day.

During the pandemic, as stay-at-home customers ordered books, electronics and furniture, the volume of shipments increased, and so did FedEx’s stock price.

But as the US and many other countries eased their COVID protocols, people shifted to spending more on services, not goods. The result: FedEx and its competitors handle fewer shipments.

“They’re not collapsing, but they’re declining,” said Amit Mehrotra, an analyst at Deutsche Bank, adding that it needs to navigate the current downturn with “very, very good cost management.”

“That’s where we think FedEx failed quite dramatically,” Mehrotra said.

Like other Wall Street analysts who track the company, Mehrotra says that FedEx’s performance can tell us a lot about the state of the global economy, but that the company can’t pin all of its problems on it alone.

“This was much more of a company-specific story … than something that can be explained by a macroeconomic downturn,” he said.

Deciding if the culprit really is the economy, the company, or both

FedEx is in the midst of a critical transition. Subramaniam became CEO about four months ago, succeeding Fred Smith, who founded the company in 1971.

After reviewing last week’s business update, analyst Ken Hoexter, who covers FedEx for Bank of America, wondered how much of the company’s difficulties can be attributed 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 financially, “but FedEx-specific issues crept up on them,” he added.

FedEx shares fell more than 20% last week, sparking a broader sell-off on Wall Street.

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FedEx shares fell more than 20% last week, sparking a broader sell-off on Wall Street.

Spencer Platt/Getty Images

So, was the sale justified?

According to Stifel’s Chan, there are many things that scare investors, and everyone else.

“Right now there is a lot of debate about the direction of the global economy,” he said.

By missing earnings so badly and giving such an uncertain outlook for the future, “FedEx gave people who might be on the fence what they needed to move toward caution,” Chan said.



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