FedEx (FDX) gave investors a stark announcement on how business conditions continue to weaken on Thursday, withdrawing its full-year guidance while CEO Raj Subramaniam warned that global volumes “significantly worsened” and are likely to decline even further.
Wall Street noticed: FedEx stock fell more than 21% on Friday following the pre-earnings announcement. Shares are now down more than 37% year to date.
"FedEx preannounced the weakest set of results we've seen relative to expectations in our ~20 years of analyzing companies," Deutsche Bank analysts wrote in a note to clients.
In a statement, the logistics company said it now expects fiscal first-quarter earnings, excluding some items, to come in at $3.44 per share, 30% below the $5.10 consensus estimate compiled by Bloomberg. The company announced it will cut flights, trim labor hours, and cancel network capacity projects to cushion the expected blow of reduced demand for the next several quarters.
The company's air cargo market has shifted as inflationary pressures, elevated inventory levels in the U.S., the war in Ukraine, and COVID-19 lockdowns in China present ongoing challenges for the market. Air cargo volumes in August fell 5% year-over-year, according to a news release from Clive Data Services last week.
“Based on FedEx's pre-announcement, the biggest hit to margin came in their air express unit, not the ground unit," equity research analyst Jordan Alliger said on the Goldman Sachs "Making Logic of Logistics" webinar on Friday, adding: "That would imply that there could be some downshift — not necessarily absolute drops — in demand, maybe in total."
For FedEx Express, the company’s time-definite delivery segment that uses cargo aircraft, revenue came in $500 million short of its revenue target.
"The company did say that revenue in this segment was $500 million short vs. its forecast; but the decremental margins associated with this should not be 100%," Deutsche Bank added. "This implies a concerning inability to respond with cost mitigation, which we believe is more indicative of operating execution than macro forces. And this is not the first time we've observed weak execution from FedEx, but the magnitude of the numbers in today's release was simply staggering. We simply can't explain it, even after our discussions with the company this evening."
Morgan Stanley research analyst Ravi Shanker said he was expecting a miss but "not of this magnitude." He added that the miss appears to be revenue driven and that this is not likely to be transitory. Although many of FedEx's issues are specific to the company, Shanker believes this is the start of the post-pandemic unwind and cost pressures will add another leg to the risk.
"We believe a discount is merited given the decelerating core and fuel pricing support in Ground and Express, in addition to increasing risks of a recession," JPMorgan’s Brian Ossenbeck wrote in a note. "The stock could trade at a higher multiple if management can deliver on the FY25 financial targets outlined in the 2022 Investor Day although the suspension of FY23 guidance is a step in the wrong direction."
Ossenbeck downgraded shares to Neutral.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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