United States | FedEx sends worrying signal for the economy

FedEx warned that its business would slow in the coming year and reported a lower-than-expected quarterly profit, a worrying sign about the direction of the U.S. economy.

The parcel shipping giant was hurt by a decline in priority services as customers opted for cheaper shipping options in what CEO Raj Subramaniam called a “challenging quarter.” “A broad cost-cutting effort helped gain momentum but only partially mitigated these headwinds,” the Memphis-based company said late Thursday.

FedEx shares fell 15.23% in New York trading on Friday, while rival United Parcel Service shares fell 2.67%.

The results spooked investors looking for signals about the direction of the economy after the Federal Reserve this week cut its benchmark interest rate for the first time since 2020. The policy shift reflects growing concerns about the health of the labor market as job creation has slowed and inflation has eased.

A number of analysts have downgraded their targets for FedEx following the results, including JPMorgan, Susquehanna and Stifel. Morgan Stanley’s Ravi Shanker, who cut both his price target and his recommendation, said in a note that the courier’s risks may be structural rather than cyclical, suggesting they “won’t go away anytime soon.”

“Tighter” customers

FedEx saw customers — increasingly price-sensitive — shift to slower, cheaper shipping options in its most recent quarter, a trend that also hit UPS earlier this year. U.S. domestic shipping volumes fell 3% in FedEx’s express segment due to weaker demand from businesses, Brie Carere, vice president of customer service, said on the company’s earnings call.

Expectations for increased revenue and profits from premium services in the U.S. also fell short, Chief Financial Officer John Dietrich said on the conference call.

“The sense of urgency isn’t there” to pay extra for superfast shipping, said Lee Klaskow, an analyst at Bloomberg Intelligence. “That usually happens when things are tough, when people are trying to save money.”

Downward outlook

FedEx now expects adjusted annual profit of $20 to $21 per share for the current fiscal year, below its previous forecast of up to $22 per share.

The midpoint of the new range is roughly in line with the $20.53 average of analyst estimates compiled by Bloomberg.

FedEx is considered an economic bellwether because of its broad exposure to sectors spanning the global economy, from retail to manufacturing.

The company is integrating its Ground and Express delivery networks as part of a broad cost-cutting drive. Mr. Subramaniam said the company remains on track to achieve savings of $2.2 billion this fiscal year.

For the quarter ended Aug. 31, FedEx reported adjusted earnings per share of $360, well below analysts’ expectations of $477 after the $437 it reported a year ago. Revenue was $21.6 billion, slightly below the $21.9 billion analysts had estimated.

FedEx’s results “came in well short of our estimates and consensus expectations as lower trade and weak demand continue to weigh on the parcel market,” TD Cowen analyst Jason Seidl said in a note.