FedEx earnings miss could signal a slowing economy
CNN
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FedEx said a weaker industrial economy produced a "challenging" quarter that caused it to trim its outlook for later this year, a sign of possible cooling in the wider economy.
The company, sometimes seen as a bellwether for the US and global economies by investors, focused most of its concerns on industrial customers who ship goods to other businesses, not on consumers who make up the overwhelming majority of US economic activity. In fact CEO Rajesh Subramaniam said the company is seeing e-commerce shipments "start to grow again."
But the industrial customers are the source of worry for FedEx, and for investors, who sent shares of FedEx (FDX) down 14% on Friday.
"The soft industrial economy is clearly weighing on the (business-to-business) volumes, and it was definitely much weaker than we expected and we have to make adjustments accordingly," Subramaniam told investors in a call Thursday following its late-day report. "And as you know, shipments linked to industrial production are our highest-yielding and the most profitable."
The company said that led to "reduced demand for priority services (and) increased demand for deferred services."
FedEx is a company created and built on the need of people to get packages moved fast, it's in the name, after all. When people stop doing that in the interest of saving money, it's bad news for the company.
FedEx experienced "pretty dramatic changes" in the shift in the mix from priority to deferred, according to CFO John Dietrich in the investors call, even though he said the total volumes "were, for the most part, pretty strong."
The weaker-than-expected results came the day after the Federal Reserve made a bigger-than-expected interest rate cut of half a percentage point in an effort to spur US economic activity. Subramaniam cited that cut in his remarks to analysts.
"The magnitude of the Fed rate cuts yesterday signals the weakness of the current environment," he said. "Now, we're not assuming a significant comeback on the industrial environment in the rest of this (calendar year)."
Chair Jerome Powell on Wednesday, however, said the Fed was cutting interest rates to support the labor market. "The labor market is in solid condition, and our intention with our policy move today is to keep it there," Powell said. "You can say that about the whole economy: The US economy is in good shape. It's growing at a solid pace, inflation is coming down. The labor market is at a strong pace. We want to keep it there. That's what we're doing."
Subramaniam said FedEx is "cautiously optimistic" that industrial production will moderately improve in early 2025, "but we are dialing in pretty low growth expectations at this point because of the environment we are seeing."
Among other issues FedEx dealt with were increased costs, particularly for wages.
Shares of FedEx had been up 21% year-to-date through Thursday's close before Friday's decline.
