FedEx Sees ‘Transition Year’ as Trade Damps E-Commerce Gains

(Bloomberg) -- FedEx Corp. predicted a “transition year'' for fiscal 2020, with an improving outlook for e-commerce profits tempered by concerns that international trade tensions will worsen.

Revenue per package in the ground-delivery operation rose 2.2% in the quarter ending May 31 as volume growth accelerated to 8.8%, FedEx said in a statement late Tuesday. That signaled progress in the courier's push to extract higher profits from the surge in home deliveries driven by online shopping.

FedEx is stepping up efforts to become the low-cost provider of e-commerce deliveries, paring jobs and partnering with companies such as Dollar General Corp. to add pickup and drop-off sites. But FedEx is struggling to shore up its Express air-delivery division -- the unit most threatened by escalating trade tensions, especially between the U.S. and China.

“The utilization of the ground network and the opportunity they feel that they have with e-commerce to significantly grow is the positive that people are taking out of this,” said Trip Miller, managing partner at Gullane Capital Partners, which owns FedEx shares. “But certainly, we didn't hear anything positive about China. We didn't hear anything positive about Europe.”

The shares fell 1.1% to $154.21 at 9:45 a.m. Wednesday in New York. The shares had dropped 3.3% this year through Tuesday, while rival United Parcel Service Inc. was little changed and a Standard & Poor's index of industrial companies advanced 19%.

Weak Forecast

FedEx has been struggling to keep up with Wall Street's expectations as the company pours money into making deliveries more efficient and struggles with a cloudy trade outlook.

Adjusted earnings for the current fiscal year will drop by “a mid-single-digit percentage” from $15.52 a share in the year just ended, FedEx said in the statement. Analysts were expecting $16.15 in fiscal 2020 -- an estimate that had already been whittled down from $20 about six months ago.

“Our fiscal 2020 performance is being negatively affected by continued weakness in global trade and industrial production, especially at FedEx Express,” said Chief Financial Officer Alan Graf.

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That impact extended a longstanding sense of frustration at FedEx with President Donald Trump's willingness to stoke trade tensions, said Chief Executive Officer Fred Smith.

“Clearly, we've been very disappointed over the last few years with the assumptions that we made on the growth in international trade, particularly with the Trump administration,” Smith said on a conference call with analysts and investors. “We have become a protectionist country.”

FedEx fired a new weapon in the simmering U.S.-China trade war this week, suing the Trump administration to block enforcement of trade restrictions that have placed the company in Beijing's crosshairs.

The federal lawsuit came after the White House barred U.S. companies from selling technology to Chinese telecommunications giant Huawei Technologies Co.

While trying to comply, FedEx employees mistakenly flagged packages involving Huawei. Now China is considering adding the courier to a list of so-called unreliable entities.

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E-Commerce Challenge

Closer to home, the next 12 months will be pivotal for FedEx as it seeks to stem the decline in profit margins at the company's ground unit. Recent moves include extending deliveries to seven days a week and reducing reliance on the U.S. Postal Service.

FedEx's Express business cut ties with Amazon.com Inc. as the largest online retailer muscles into the delivery business. FedEx said it would focus on more profitable customers.

The challenge for FedEx -- and UPS -- is that deliveries to homes, where drivers often handle a single package at each stop, tend to be less profitable than business deliveries, where they might pick up or drop off several parcels.

“Fiscal year 2020 is in many ways a transition year for FedEx as we continue to reinvigorate our business to capitalize on e-commerce growth and execute significant initiatives to reduce our cost to serve in the U.S.,” said Chief Operating Officer Rajesh Subramaniam.

Those efforts are softening the blow from the weak profit forecast for fiscal 2020 -- but the pressure will remain on FedEx to show sustained gains from the rise of online shopping.

“FedEx is not out of the woods,” Cowen analyst Helane Becker said in a note to investors, “but base expectations are lower and if there is any shift towards a more optimistic macro environment, we expect shares to move higher from current levels.”

--With assistance from Karen Lin.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson, Cécile Daurat

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