FedEx (FDX, Financial) shares dropped 15% after a slow start to FY25. The package delivery giant reported a significant EPS miss in its Q1 (Aug) report, with revenue falling 0.5% year-over-year to $21.58 billion, missing expectations. The company also lowered its FY25 adjusted EPS outlook to $20.00-21.00 from $20.00-22.00 and reduced its revenue growth forecast to low single digits.
- FedEx cited a challenging demand environment, particularly in the US domestic package market. The company faced a mix shift with reduced demand for priority services and increased demand for deferred services, which constrained yield growth. Weakness in the industrial economy also pressured B2B volumes, especially in the US.
- By segment, Express revenue declined 0.7% year-over-year to $18.31 billion, affected by one fewer operating day and a shift towards deferred services. Slightly lower US domestic volume was offset by higher international export volume. Freight segment revenue fell 2% to $2.33 billion due to reduced weight per shipment, lower fuel surcharges, and one fewer operating day.
- In terms of pricing, FedEx is operating in a competitive but rational environment. The company is focusing on revenue quality and continues to grow yield, albeit at a lower rate than expected, especially in the US. Package yield increased 1% overall, driven by US priority and international domestic services. FedEx's contract with the US Postal Service expires on September 29, prompting network adjustments post-expiration.
- Despite lowering FY25 revenue guidance, FedEx expects the demand environment to improve moderately throughout the year, driven by a slight recovery in the industrial economy, e-commerce growth, and low inventory levels. The company anticipates some improvement in the pricing environment and modest growth in US domestic ground parcel volume, particularly in the second half of the fiscal year.
- On the cost side, FedEx continues its structural cost reductions through DRIVE initiatives, partially offsetting revenue and expense pressures. The company expects DRIVE-related savings to increase sequentially by quarter, aiming for $4 billion in savings in FY25 compared to the FY23 baseline. Recent pricing actions related to demand and fuel surcharges are expected to benefit FedEx in the coming quarters. Significant progress in network transformation is also expected to improve profitability by unlocking efficiencies and creating a more flexible network.
After shares surged following the last earnings report, investors were not expecting such a significant EPS miss. However, we had cautioned that UPS reported a big EPS miss in Q2, which made us nervous. FedEx was impacted by lower demand and a mix shift, with customers opting for longer delivery times to save costs. The silver lining is that the FY25 EPS guidance was lowered by less than the Q1 miss, indicating FedEx still feels optimistic about Q2-Q4. Additionally, the company is making progress in reducing costs and expects modest demand improvement as the fiscal year progresses.
