FedEx Share Drop: Faces Challenges as Demand Declines

Key points:

1. FedEx shares dropped 13% after cutting revenue forecast and reporting profit decline
2. Weak demand for priority deliveries and shift to cheaper options impacted profits
3. FedEx lowered its full-year adjusted operating income forecast
4. The company is undergoing a complex restructuring to reduce costs

FedEx, one of the largest shipping and logistics companies globally, is encountering challenges as demand for its premium fast-delivery services declines.

The company recently reported a significant drop in quarterly profits and revised its full-year revenue forecast downward, leading to a nearly 13% plunge in the shares during premarket trading.

The shift in customer preferences

The Memphis-based company attributes this decline to a shift in customer preferences, with many businesses opting for slower, more affordable shipping options to cut costs. This trend has particularly impacted FedEx's high-margin priority delivery services, which have historically been a major profit driver for the company.

CEO Raj Subramaniam highlighted that industrial demand was weaker than anticipated, reflecting broader economic concerns. FedEx now expects revenue growth for fiscal 2025 to be in the low single-digit percentage range, down from its previous estimate of low-to-mid single-digit growth.

In light of these challenges, FedEx has revised its full-year adjusted operating income forecast, projecting earnings per share to fall between $20 and $21, down from the earlier range of $20 to $22.

This adjustment underscores the company's expectations of a continued competitive pricing landscape and ongoing difficulties in the industrial economy.

Other challenges FedEx is facing

While UPS noted increased volume from China-linked e-commerce businesses as a contributing factor, FedEx emphasized a decline in priority shipments between companies as the main reason for its profit drop.

FedEx is also facing the loss of a major contract as it begins to wind down its work with the United States Postal Service, its largest client. This transition is anticipated to lead to a $500 million drop in revenue for the current fiscal year.

This includes plans to cut billions in overhead costs and merge its separate Ground and Express delivery units. Additionally, the company is exploring the possibility of spinning off or selling its FedEx Freight business as part of a strategic review.

The latest quarterly results reveal the impact of these ongoing changes. While cost-cutting measures have been implemented, they were insufficient to counterbalance the decline in demand for profitable priority services. The company also noted that having one fewer operating day in the latest quarter contributed to the profit drop.

FedEx’s challenges reflect broader trends in the shipping and logistics industry. As businesses and consumers prioritize cost savings, there is an increasing preference for slower, more affordable shipping options. This shift is prompting major players like FedEx to adapt their business models and seek new strategies to maintain profitability.

FedEx’s stock performance

FedEx’s share has reflected these challenges, with shares dropping significantly following the announcement of the quarterly results. This decline also had a ripple effect on the industry, causing a dip in the stock price of rival UPS.

FedEx cut its guidance for fiscal 2025 earnings per share to a range of $20 to $21 (down from $20 to $22 previously), and cut its outlook for revenue growth to a low-single-digit percentage from the low- to mid-single-digit percentage range it had earlier targeted. Management has rolled out a cost-cutting program, but that will take time to fully implement.

The revision of the price target came after FedEx announced its first-quarter financial results for fiscal year 2025, revealing adjusted earnings per share (EPS) of $3.60. This figure was nearly 25% below consensus estimates. The company attributed the disappointing results mainly to a change in the mix of shipments it managed, with a decline in priority shipments and a rise in deferred and economy options.

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