FedEx earnings: Company unveils plan to cut more than $2 billion in costs

FedEx announced disappointing results in its first-quarter earnings Thursday, especially in its FedEx Express segment.  As a result, the company plans to cut costs by between $2.2 billion and $2.7 billion in fiscal year 2023.

The Memphis logistics giant made $23.2 billion in revenue for the 2023 fiscal year’s first quarter, a 5.4% increase from the year-before quarter’s $22 billion. The company posted an adjusted net income of $905 million, a 23.9% drop from last year's $1.19 billion.

The figures came as no surprise after the company released a preliminary earnings report last week for its first quarter, ended Aug. 31, in which it withdrew its previous guidance for fiscal year 2023 and declared that the slowing of the global economy had impacted business more than expected. CEO Raj Subramaniam blamed decreased demand and volume softness as well as increased operating costs due to inflation, prompting the company to announce the aggressive cost-reduction plan.

FedEx said it expected those economic factors to persist, predicting the world market to enter a recession. On the day of the announcement, Sept. 15, FedEx stock plunged more than 20%, one of its biggest single-day drops ever.

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“We’re moving with speed and agility to navigate a difficult operating environment, pulling cost, commercial, and capacity levers to adjust to the impacts of reduced demand,” said Subramaniam in Thursday's earnings report. “As our team continues to work aggressively to address near-term headwinds, we’re meaningfully strengthening our business and customer experience, including delivering an outstanding peak.”

FedEx’s largest company, FedEx Express, took the biggest hit, underperforming analysts’ expectations by $500 million.

The company made $11.1 billion in revenue for the quarter, a 1% increase from $11 billion the year before. Its operating income dropped 69% from $567 million last year to $174 million this year.

The earnings report projected expected cost savings of $1.5 billion to $1.7 billion at FedEx Express in fiscal 2023, most of which would encompass reducing flight frequencies, specifically on trans-Pacific routes, and temporarily parking eight planes.

FedEx Ground, meanwhile, fared only slightly better, coming in $300 million below expectations. The company made $8.2 billion in revenue versus $7.7 billion in the year-before quarter. Its operating income increased from $671 million to $694 million.

The earnings report projected expected cost savings of $350 million to $500 million at FedEx Ground in fiscal 2023, including closing select sort operations, suspending certain Sunday operations and other linehaul expense actions. On the company's scheduled earnings call Thursday, executives elaborated that they are also deferring plans for future Ground facilities.

Analysts on the call brought up the recent dispute between FedEx Ground and its contractors, and questioned how executives planned to address the issue. However, Subramaniam said this was "much more a perception issue than reality" and that 96% of their contractors have signed onto the peak season incentive program. Executives affirmed that the company still expects strong service for peak.

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FedEx Freight, one segment that did well this quarter, made $2.7 billion in revenue, up from $2.3 billion the previous year, and increased operating income by 67%, from $390 million to $651 million.

Other cost-saving initiatives include closing nearly 140 FedEx Office locations and five corporate office locations and reducing vendor utilization to save the company another $350 million to $500 million. Executives did not provide specifics on which locations are expected to close or how many jobs the closures would represent.

Additionally, the report announced package rate increases going into effect Jan. 2. Rates for FedEx Express, FedEx Ground and FedEx Home Delivery will rise by an average of 6.9%, and FedEx Freight rates will increase by an average of 6.9%-7.9%. On the earnings call, analysts questioned whether this rate increase, even higher than the previous year's, might exacerbate the issue of low volumes.

"We felt that the 6.9 was appropriate," said Brie Carere, FedEx executive vice president and chief customer officer. "Given the inflationary backdrop, we thought this was the right increase for the year."

After the preliminary earnings release last week, FedEx stock continued to drop, trading at $151.77 per share Thursday afternoon, a 43% decrease from its 52-week high of $266.79. However, stock prices increased slightly following the final report, closing at $155.20.

FedEx reported adjusted earnings per share of $3.44.

Niki Scheinberg is the FedEx and logistics reporter at The Commercial Appeal. She can be reached at monika.scheinberg@commercialappeal.com.

This article originally appeared on Memphis Commercial Appeal: FedEx earnings: Q1 results, details on cost-cutting measures