FedEx (NYSE:FDX) is set to release its third quarter (fiscal year ending May) earnings on March 19, 2014. In the previous quarter, FedEx posted revenue growth of 3% driven by the growing volumes at its Ground segment. Net profits improved 14% driven by profitability improvements such as the shift to fuel efficient aircraft’s and lower pension expenses. In the third quarter, we expect to see gains in FedEx’s Ground segment driven by the holiday season deliveries. However, similar to UPS, catering to the higher-than-expected deliveries must have resulted in higher costs as well.
Revenues for FedEx’s Express segment have felt the pressure from a shift in customers' preference towards slower but economical shipment options. This has led to declines in revenue and volumes for FedEx’s pricier yet time efficient services. In order to offset the decline in these premium services, FedEx’s Express segment will be highly dependent on yields, or revenue per package.
Ground Segment May See Increase In Revenues
FedEx’s ground segment, which deals with domestic package delivery at lower prices, posted a 10% growth in revenues in the second quarter of FY 2014, driven by customers' shift towards economical package delivery services rather than pricier yet time efficient services. The holiday season and online shopping sales in November also had a positive impact.
In the third quarter, we expect FedEx’s ground segment to benefit from the sales during the December holiday season. Additionally, the sales from Cyber Monday will also add to the segment’s revenue in the third quarter. The majority of these sales can be attributed to an increase in online shopping. The segment also stands to benefit from the increase in FedEx’s shipping rates by an average of 4.9%, which came into effect from January 6.
A matter of concern for FedEx’s ground segment will be the higher costs that it might have incurred in order to cater to the overwhelming number of deliveries during the holiday season. UPS had to increase its temporary staff by 30,000 and increase purchased transportation in order to manage the deliveries, leading to higher costs and lower net profits. Bad weather during the holiday season would have also added to the difficulties faced by logistical services providers. Higher costs will have a negative impact on FedEx’s margins and bottom line. However, in anticipation of high volume of packages during the holiday season, FedEx had already undertaken many of the expansion and maintenance activities in the second quarter. This might ease off some pressure on margins in the third quarter since a portion of the costs had already been incurred in the previous quarter.
Express Segment Revenues May Be Impacted By Change in Customer Preference
FedEx’s Express segment has been facing headwinds due to the increasing shift of customers towards economical package delivery options and the move away from time efficient alternatives. This leads to a shift in revenues from FedEx’s pricier yet time efficient service offerings from International Priority to economical options like International Economy. This is also evidenced by a 10% increase in International Economy volumes and revenues in the second quarter of FY 2014, whereas International Priority revenues and volumes declined 2% and 5%, respectively. The trends from the previous quarter are expected to continue leading to growth in volumes for FedEx’s International Economy service as volumes move away from International Priority. Yields, or revenue per package, will play a major role in determining the whether the segment’s revenues will rise or decline.
We will be revising our price estimate of $139 for FedEx after the company files its results with the SEC.
Disclosure: No positions.