“Our management team and the board of directors, along with outside advisors, are conducting an assessment of the role of FedEx Freight in our portfolio structure and potential steps to further unlock sustainable shareholder value, said FedEx’s president and CEO Rajesh Subramaniam during an earnings call to investors late Tuesday. “We are committed to completing this review thoroughly and deliberately by the end of the calendar year.”
UBS analyst Thomas Wadewitz said Wednesday in a research note that a “spin out of the LTL business is a potential path” and could unlock meaningful value considering the much higher valuations of other leading non-union LTL firms.
The analyst’s focus on a spinoff of the business suggests that a sale of the operation might not be a feasible option. FedEx Freight is the largest LTL carrier in the U.S. and the transportation services firm’s best-performing business, but its size could perhaps portend some difficulties in finding a buyer for the operation.
Overall, FedEx had a very good fourth quarter, one that indicates its deep cost-cutting plan dubbed DRIVE to save $4 billion by fiscal 2025 was the right path to take.
“We delivered year-over-year operating profit growth and margin expansion in every quarter of FY ’24,” Subramaniam told investors. “We lowered our capital intensity, reaching our FY ’25 target of less than 6.5 percent a year early.”
He said the company delivered full year earnings toward the “higher end of the firm’s original guidance range, up 19 percent year-over-year on an adjusted basis,” adding that FedEx continues to roll out its Network 2.0 platform and is finalizing the transition to One FedEx, which went into effect on June 1. One FedEx is the consolidation of FedEx Express, FedEx Ground and FedEx Services into Federal Express Corp.
While Subramaniam said the company is “firmly on track” to achieve its $4 billion cost savings target, he also said the company expects “another $2 billion to follow from Network 2.0.” And as the company improves efficiency and asset utilization of the entire FedEx system, he said the expectation is that the firm will continue to lower its capital intensity and grow free cash flow, among other benefits.
“We have a clear line of sight for achieving 10 percent adjusted operating margin on $100 billion revenue,” Subramaniam said.
He also addressed the possibility of trade policy changes due to the upcoming presidential election in the U.S., and potential impact on direct e-commerce customers in China. While Subramaniam said that trade patterns are “fundamentally shifting,” the good news for FedEx is that its network is “here, there, and everywhere.” He explained that market intelligence at the ground level allows FedEx to react very quickly.
“When manufacturing moves to Mexico, we have a significant presence in Mexico and the United States….[W]hile we see the overall trade trends flatten out, there are opportunities as supply chain patterns change,” Subramaniam said, adding that “our established networks that we have in place and the digital tools that we now have makes us very compelling.”
The company posted fourth-quarter earnings results for the period ended May 31 after the close of trading Tuesday. Net income for the quarter fell 4.5 percent to $1.47 billion, or $5.94 a diluted share, from $1.54 billion, or $6.05, a year ago. But on an adjusted basis, net income was up 7.2 percent to $1.34 billion, or $5.41 a diluted share, from $1.25 billion, or $4.94, a year ago. That was more than enough to best Wall Street’s expectations of adjusted diluted earnings per share (EPS) at $5.35. Revenue for the period rose 0.9 percent to $22.1 billion from $21.9 billion, representing a beat on Wall Street’s consensus of $22.07 billion.
For the year, net income grew 9.1 percent to $4.33 billion on a 2.8 percent revenue decline to $87.7 billion.
For fiscal 2025, FedEx expects revenue growth in the low-to-mid single-digit percent range, and diluted EPS between $18.25 to $20.25 on a non-GAAP basis after excluding costs related to business optimization initiatives and before certain retirement plan accounting adjustments.
Investors liked the results. Shares of FedEx were up on Wednesday, rising 14.8 percent to $294.32 in early-afternoon trading.
Brie A. Carere, executive vice president and chief customer officer, said revenue growth turned positive in the fourth quarter due to volume stabilization and modest yield improvement. She said revenue at FedEx Ground rose 2 percent on a 1 percent increase in yield and a 1 percent increase in volume, driven by ground commercial. FedEx Freight saw revenue rising 2 percent, driven by higher yields and average daily shipments that rose slightly. Revenue for the quarter was flat at FedEx Express, but package yield was up 2 percent, pressured by a “tapering of international export demand surcharges and an increasing mix of deferred services.” She also noted that international yields were pressured by an increased capacity in the global air cargo market.
According to Carere, volumes continue to stabilize as declines in the U.S. domestic package moderated, while international export package volume increased 8 percent.
As part of its restructuring and consolidation, FedEx has also been cutting jobs. The company plans to shutter operations at four facilities in North Carolina and South Carolina on Sept. 3, impacting 310 positions. In April, the company decided to close four facilities in southwestern Florida on July 29, resulting in the layoff of 200 couriers and eight managers. And last week, FedEx said it will cut up to 2,000 staffers in Europe as it reduces headcount across back-office and commercial teams.
