FedEx to Hike Delivery Rates 6.9%, Will Close 140 FedEx Office Stores

FedEx Express operating income declined 69% in fiscal Q1 ended Aug. 31 due to an 11% year-over-year reduction in global package and freight volume, said the company Thursday. FedEx announced the negative results a week earlier, plunging the stock to a new 52-week low (see 2209160007).

FedEx expects to generate cost savings of up to $2.7 billion this fiscal year by reducing FedEx Express “flight frequencies,” curtailing some FedEx Ground Sunday operations and closing some FedEx Office and corporate office locations, it said. It’s also imposing an average 6.9% delivery rate increase, effective Jan. 2, across FedEx Express, FedEx Ground and FedEx Home, it said.

Driving costs “rapidly” out of the FedEx network is management’s top priority, said CEO Raj Subramaniam on an earnings call Thursday. FedEx during fiscal Q1 “had costs in the system for volumes that didn’t materialize,” he said. “While we immediately took action, savings from these cost efforts lagged the volume decline due to the scale of our operations.”

Though revenue was up 6% year over year, “these dynamics translated to volumes being down year over year at all our transportation segments,” said Subramaniam. The volume decline “directly impacted our bottom line,” driving operating income down about 18%, he said. The company’s austerity plans include closing nearly 140 FedEx Office retail locations, he said. That’s about 56% more than the number of closures quoted in the Sept. 15 announcement.

Manufacturing, global trade and consumer spending decelerated in fiscal Q1, “particularly late in the quarter and certainly more than we anticipated.” said Executive Vice President-Chief Customer Officer Brie Carere. “Our current expectations for 2022 U.S. GDP growth and U.S. industrial production forecasts have declined by about 100 basis points since June.”

Data shows U.S. consumer spending has slowed, said Carere, citing inflation. “Real” retail sales, after growing 4.6% in calendar 2021, were down 3.1% year over year through July, “and are pacing to have the worst decline since the Great Recession,” she said.

Management faced hostile questions throughout Thursday’s call from analysts asking how FedEx could have been caught so off guard by the sudden downturn in volume late in fiscal Q1. “Our customers missed their own forecasts,” said Carere. “We are working with them furiously to help them manage the difficulties that they are experiencing in their own business.”

The decision to “prerelease” the negative fiscal Q1 results a week earlier “was appropriate for the circumstances,” said Chief Financial Officer Mike Lenz. “That’s consistent with market practices and, quite frankly, allowed us to use more time today to be talking about how we’re going to address it and our future plans.”