Lousy Quarter May Mean Prolonged FedEx, U.S. Recovery

By Don Miller
Associate Editor
Money Morning

FedEx Corp. (FDX) said yesterday (Thursday) that its quarterly profits dropped by 75% - missing analyst estimates - and announced layoffs among other cost-cutting measures. FedEx, and its archrival, Atlanta-based United Parcel Service Inc (UPS), are considered bellwethers of U.S. economic activity because shipping volumes typically increase during healthy economic conditions and deteriorate in recessions.

As the economy hits its roughest patch since the Great Depression, and the unemployment rate soars to its highest level in 25 years, consumers and corporations have reduced purchases and shipping to friends and business counterparts. 

The second-largest U.S. package-shipping company said sales fell for the first time in at least a decade as U.S. air shipments declined for the 13th consecutive quarter and international air shipments tumbled by 13%.

"FedEx's results are not much of a surprise given the current environment," Dan Ortwerth, a research analyst at Edward Jones told Reuters. "But this is a wake-up call for us that things are not going to get better any time soon."

The nation's second largest shipper said it would respond to the downturn by cutting capacity at its FedEx Express and FedEx Freight units, and reducing personnel and work hours.

Some non-U.S. workers will have their wages cut and an unspecified number of jobs will be cut as the company seeks to slash $1 billion from operating costs by next year. The cuts will result in a $100 million fourth-quarter charge, Memphis, Tenn.-based FedEx said in a statement.

"The downturn in our industry and the severity and expected duration of the recession require that we take additional actions," Chief Executive Officer Fred Smith said in the statement.

The latest cost-saving measures come on the heels of budget cuts implemented in December, when the company suspended matching contributions to its 401(k) retirement plan for a minimum of one year beginning last month.  At the same time, Smith took a 20% pay cut, and announced 5% to 10% cuts for all salaried personnel and froze hiring.

Analysts were surprised by the company's poor results as net income for the third-quarter dropped to 31 cents a share, from $1.26 a year earlier, and revenue fell 14% to $8.1 billion. Estimates from 16 analysts compiled by Bloomberg had predicted earnings of 46 cents per share.

"The fact they missed the estimate that had been already coming down sends a message that maybe we had been living on a bit of false optimism recently," Edward Jones' Ortwerth, told Bloomberg in an interview. "Anybody who thought differently was probably fooling themselves a bit."

The company's prominent stature as an economic "canary in a coalmine," has analysts scratching their heads trying to figure out how FedEx will perform in the future.  The company said it expects earnings of 45 cents to 70 cents a share in the fiscal fourth quarter, below analysts' consensus estimates of 72 cents per share.

"It's a very, very difficult market to forecast right now because of this unprecedented decrease in international business," David Campbell, a Thompson Davis & Co. analyst in Richmond, Virginia, told Bloomberg.

But positive signs for FedEx may be on the horizon as rivals experience their own difficulties, which may result in the company gaining market share.

Deutsche Post AG unit DHL Global Mail shut down its U.S. domestic service and cut 9,500 jobs in January, citing the economic slump and its inability to gain traction in a market dominated by FedEx and UPS.

Ortwerth thinks that may be a good sign for FedEx.

"In a sense these are good times for FedEx," he said. "I'm not worried about them because they work well in downturns."

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