FedEx cuts profit outlook as shippers take to the seas

Tue Sep 18, 2012 2:13pm EDT

A FedEx delivery truck is seen in New York City, December 16, 2010. REUTERS/Mike Segar

A FedEx delivery truck is seen in New York City, December 16, 2010.

Credit: Reuters/Mike Segar

(Reuters) - FedEx Corp (FDX.N) lowered its fiscal 2013 forecast on Tuesday, saying earnings could slide as much as 6 percent for the year, as a weakening economy prompts customers to shift toward lower-priced and slower shipping options.

The world's second-largest package delivery company said its corporate customers had begun shipping personal computers, auto parts and even cut flowers by ocean rather than air to cut costs because of pressure on their products' selling prices.

"A lot of traffic is moving onto the water because moving goods by air is very energy-intensive," Chief Executive Officer Fred Smith told investors on a conference call. "You can't have jet fuel going up to close to $4 a gallon on occasion without it having a big effect on the choices people make."

The Memphis, Tennessee-based company plans to take a "significant amount of cost" out of its express air freight operation, Smith said. It will provide details at an October investor meeting, but does not plan layoffs or "draconian steps," he added.

Smith founded the company in 1971 as an air shipper, but today it also moves a large amount of goods by truck.

FedEx said it expected a profit of $6.20 to $6.60 per share for its current fiscal year, which ends in May. That is below both its prior forecast of $6.90 to $7.40 and Wall Street's estimate of $7.03.

FedEx shares fell 2.6 percent to $87 on the New York Stock Exchange, while larger rival United Parcel Service Inc (UPS.N) dipped 0.9 percent to $73.53.

LOSING ALTITUDE

Profit in the just-ended first quarter suffered from the performance of FedEx's express segment, which handles overnight package delivery by aircraft. The segment's operating earnings fell 28 percent, and U.S. package deliveries were down 5 percent.

Most of that decline reflected the decision of one customer -- a phone company that FedEx did not name -- to shift from express shipments to ground, said Executive Vice President Mike Glenn.

FedEx is not alone in facing pressure on its shipping business. UPS cut its 2012 profit forecast in July, but the midpoint of the revised range would still represent roughly 9 percent growth.

The contrast in the two companies' fortunes reflects FedEx's much greater focus on air freight, while UPS has been stronger in trucking.

The slow, steady state of the U.S. economy is working against FedEx because, without sharp spikes in demand, companies have less need to rush-order goods. UPS has also felt pressure on its air business: In July, company officials said more of their customers were choosing to have next-day shipments arrive in the afternoon, a cheaper option than in the morning.

"Companies can adjust their supply chains and inventory levels because demand is so predictable right now," said William Blair & Co analyst Nathan Brochmann. "If all of a sudden we had a spike, it would force them to go back to air because they would have to replenish their inventory faster."

Companies are most likely to drop air freight for products that are relatively heavy for their price -- meaning they are less likely to air freight a computer printer than a cell phone, said FedEx spokesman Jess Bunn.

Smith said the occasional spikes in demand sparked by new electronics products were not enough to offset the overall slow pace of growth.

Product introductions from Apple Inc (AAPL.O) and Microsoft Corp (MSFT.O) are "not going to provide the type of sustained growth in international trade that the world has seen historically," Smith said.

Apple last week unveiled a new model of iPhone, early orders of which exceeded expectations, and Microsoft is due to issue the latest generation of its Windows operating system in October.

QUARTERLY PROFIT DOWN

Net income fell 1 percent to $459 million, or $1.45 per share, in the first quarter ended on August 31, from $464 million, or $1.46 per share, a year earlier.

That latest figure is well below the analysts' average estimate of $1.56 a share before the company's September 4 profit warning, but above Wall Street's revised target of $1.40, according to Thomson Reuters I/B/E/S.

Revenue rose 3 percent to $10.79 billion.

FedEx said its average shipping rates would increase 3.9 percent in the United States starting January 7.

At Monday's close, FedEx shares had risen about 17 percent over the past 12 months, lagging the 20 percent climb of the broad Standard & Poor's 500 index .SPX but ahead of UPS's 11 percent gain.

(Reporting by Scott Malone; Editing by Gerald E. McCormick, Maureen Bavdek and Lisa Von Ahn)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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