FedEx fiscal second quarter revenue is down annually

Fiscal second quarter earnings for Memphis-based global freight transportation and logistics services provider FedEx saw some gains, driven by pricing and service initiatives, amid ongoing mixed economic conditions.

Quarterly revenue—at $22.2 billion—was down 2.6% annually, and operating income—at $1.42 billion—increased 9%. Net income, at $1.01 billion, topped the $820 million recorded for the same quarter a year ago. Adjusted earnings per share came in at $3.99, up 20% annually while falling short of Wall Street expectations, at $4.19.

FedEx explained that quarterly income and margin saw improvements, while revenue was lower. And it added that the operating income game was mainly attributed to its DRIVE program—a program focused on improving the company's long-term profitability, which includes a business optimization plan to increase efficiency while decreasing costs and utilizing automation to transform back-office operations and modernize infrastructure—and also a continued focus on service and revenue quality.

“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,” said Raj Subramaniam, FedEx Corp. president and chief executive officer, in a statement. “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.”

Individual segments

FedEx Express revenue, at $10.2 billion, was down 5.6% annually, and operating income was off 2.8%, to $137 billion. The company said that the operating income decline was due to lower revenue, which was partially offset by reduced operating expenses. And it noted that the revenue decrease was due to volume declines, lower fuel surcharges, reduced demand surcharges, and a mix toward lower-yielding services.

FedEx Ground revenue, at $8.63 billion, increased 3% annually, and operating income, at $900 million, rose 51%. These gains were paced by yield improvement, cost reductions, and higher volumes, according to FedEx. Cost per package was off 2%, due to lower line-haul expense and improved first- and last-mile productivity. Revenue per package rose 1%, to $11.69, and total average daily package volume was up 1%, to 9.559 million.

FedEx Freight revenue, at $2.36 billion, fell 4% annually, with operating income up 11%, to $487 million, and average daily shipments down 5%. FedEx said that the revenue decline was due to lower shipments, fuel surcharges, and weight per shipment, which was partially offset by base yield improvement. Average daily shipments, it said, were impacted by reduced demand for services related to macroeconomic conditions. Revenue per shipment, at $381.05, was up 1%, due to base yield improvement and a continued focus on revenue quality and was partially offset by lower fuel surcharges.

Total quarterly package revenue, at $8.4 billion, decreased 2% annually, and total U.S. package revenue, at $3.81 billion, was off 4%. Total international export package revenue, at $3.5 billion, saw a 2% annual decline.

On the company’s earnings call late yesterday, Subramaniam said the company’s second quarter performance reflects clear signs of progress in its transformation in what remains a difficult demand environment.

“We are moving with speed and agility to deliver on DRIVE, which is supporting improved profitability and enabling us to maintain our earnings outlook for the year, even as our revenue expectations have moderated further,” he said. He also observed that the company’s focused execution enabled it to retain a majority of the high-quality volume it won over the summer from UPS and as a result of the Yellow shutdown.

The top FedEx executive added that the company reduced costs by approximately $200 million in its Surface Network, which includes its U.S. Express operations, and was driven by shifting to a single daily courier dispatch, applying dock productivity initiatives, consolidating underutilized sorts, and maximizing the use of rail.

“Across our Air Network and International operations, our DRIVE initiatives are helping offset pressures with about $115 million in total cost reductions in Q2, primarily driven by structural flight takedowns,” he said.

Brie Carere, FedEx Executive Vice President, Chief Customer Officer, said on the call that revenue quality and industry-leading service remained top priorities for FedEx in the quarter.

“Our ability to retain the majority of the business we won from both UPS and Yellow is a testament to the team's hard work and our value proposition, which is the best service offering in the industry,” she said. “And as a result, we are gaining parcel share here in the United States and around the world. Looking at the US, market conditions remained soft, with Q2 demand lower than we anticipated. The industry has now experienced 10 consecutive quarters of decline in U.S. domestic average daily volume. Additionally, International market pressure continued. Despite this pressure, our Europe and EMEA teams did a great job of growing parcel volume.”

Addressing the 2023 Peak Season, Carere explained that with less than one week to Christmas, FedEx’s focus remains on delivering outstanding service.

“Our networks are running extremely well and we are receiving very positive customer feedback this peak,” she said. “We are delivering this excellent service while creating new value for customers and driving customer acquisition. Overall, this year's Peak Season has been relatively similar to last year and it's in line with our expectations. But looking ahead, we're ready to support our customers for post-holiday returns. Our robust returns portfolio is well-positioned to handle the returns that inevitably follow peak.”

Jerry Hempstead, president of Orlando-based Hempstead Consulting, said that FedEx benefitted this quarter from the lack of bad weather compared to past years, noting that weather “ruins the numbers and makes it hard to recover…and not a big issue this year like a blizzard in the Midwest or Northeast.”

And while volumes were largely down, the company continued to tout its focus on pricing, or revenue and yield management efforts. Hempstead said that both FedEx and UPS “continue to race to see who can take rates up the fastest and how.”