FedEx today announced a 6% drop in Q3 net profits and warned profits for the current quarter andnew fiscal year could be hit by the weakening US economy and high oil costs.
For the quarter ended February 29, the US express giant reported revenue up 10% to $9.44billion, stagnant operating income of $641 million and a drop in operating margin to 6.8%, downfrom 7.5% the previous year. Net income declined 6% to $393 million.
Third quarter operating margins declined, as higher fuel prices and a weak U.S. economylimited demand for U.S. domestic express, less-than-truckload (LTL) and copy and print services.The costs of retail service enhancement initiatives, increased marketing and technology expensesand higher expenses at FedEx Ground more than offset the benefits from lower variable compensationand favourable exchange rates.
“FedEx faces a challenging economic environment that includes persistently high oil prices,sluggish U.S. growth and continued concerns in the credit markets,” said chairman and CEO FredSmith. “We are managing our costs while positioning our portfolio of global transportationsolutions to increase our profitability and returns once conditions improve.”
For the March-May fourth quarter, FedEx expects earnings to be $1.60 to $1.80 per dilutedshare compared to $1.96 a year ago. The outlook assumes no additional increases to current fuelprices and no further weakening in the economy, the company said. The capital spending forecast forthe year has been reduced to approximately $3 billion, it added.
“Our fourth quarter earnings outlook has been impacted by higher than anticipated fuel pricesand a weak U.S. economy,” said CFO Alan B. Graf, Jr. “Looking ahead to our fiscal 2009, we areexpecting a continuation of fourth quarter trends, which would result in limited earnings growthnext year. We are scrutinizing all expenses and investments to realign them with the currentenvironment.”
The main business, FedEx Express, increased Q3 revenues by 11% to $6.13 billion, improved itsoperating income by 8% to $425 million, but its operating margin dropped back to 6.9% from 7.2% theprevious year.
IP package revenue grew 18% for the quarter, as IP revenue per package grew 10%, primarilydue to higher fuel surcharges and favourable exchange rates, FedEx said. IP average daily packagevolume grew 6%, led by increases in volume originating in Latin America, the United States andAsia. U.S. domestic revenue per package increased 6% due to increased fuel surcharges and higherrate per pound, while package volume declined by 2%.
FedEx Express’ operating income and margin were negatively impacted by continued softness inthe U.S. economy, increased intercompany charges from the FedEx Services segment and the ongoingcost of investments in the company’s China domestic express service, more than offsetting thebenefits from the timing lag of the fuel surcharge, one additional operating day and exchangerates.
US domestic parcels business FedEx Ground segment reported revenue up 13% to $1.72 billionbut its operating income dropped 13% to $170 million and the operating margin declined to 9.9%,down from 12.9% the previous year. Average daily package volume grew 7% and yield improved 3%primarily due to fuel surcharges, extra service revenues and the impact of general rate increases.But the operating income and margin were lower due to increased intercompany charges from the FedExServices segment and costs to enhance and defend the independent contractor model, partially offsetby the benefit from one additional operating day.
FedEx Freight saw Q3 operating profits drop 8% on revenue up 5% mostly due to high fuelcosts. FedEx Kinko’s, which has opened 252 centers so far this fiscal year as part of its plan for300 new centers, will cut back expansion in fiscal 2009 to about 70 new locations only.
