FedEx sees global slowdown, cuts profit outlook

AP News
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Posted: Sep 22, 2011 5:14 PM
FedEx sees global slowdown, cuts profit outlook

FedEx Corp. says consumers are putting off purchases of electronics and other gadgets from China, another example of the global economic slowdown that's prompting fears of another recession.

The slowdown prompted the world's second-largest package delivery company to lower its earnings expectations for the fiscal year that ends in May. But while anxiety over the economy created a rout in the stock markets, and its own shares, FedEx isn't yet ready to predict another recession in the U.S.

"While there's been considerable speculation that the economy has or will soon enter a recession, this is not our view at present," FedEx CEO Fred Smith said Thursday on a conference call. FedEx's larger rival United Parcel Service Inc. said last week that it thinks another recession is unlikely, although it warned of a "bumpy ride" for the global economy.

"Our customers' hair is not on fire. They're just saying we're taking it steady as she goes. It just feels completely different than it did back in `08," FedEx Chief Financial Officer Alan Graf said.

Investors weren't so sanguine. They sent FedEx shares down as low as $64.55, a level not seen in more than two years. The stock closed down $5.92, or 8.2 percent, at $66.58. The shares had already lost about a quarter of their value since FedEx last reported earnings in June. UPS shares dropped 3.3 percent to close at $62.17.

FedEx and UPS are closely watched indicators of broader economic health because they ship so many packages between consumers and businesses every day.

When consumers and businesses are concerned about the strength of the economy, they tend to choose slower shipping options _ like switching from overnight express service to slower ground shipping _ to save money. It's the same move many made during the recession.

FedEx executives said lagging consumer sentiment, driven partly by a lack of confidence that officials in Europe and the U.S. will find effective solutions to their countries' economic challenges, is the biggest impediment to economic growth.

"We've got to turn around this sentiment in order to see some growth beyond what we are expecting right now," Smith said

FedEx now expects to earn between $6.25 and $6.75 per share for fiscal 2012, compared with a previous estimate of $6.35 to $6.85 per share. Analysts expect $6.39 per share, according to FactSet Research.

For the fiscal first quarter that ended in August, FedEx says an increase in deliveries by truck offset a drop-off in shipments by air. Net income rose 22 percent to $464 million or $1.46 per share in the three-month period, compared with $380 million, or $1.20 per share, a year earlier. Revenue rose 11 percent to $10.52 billion.

Analysts expected a profit of $1.45 per share on revenue of $10.32 billion.

Express shipments slowed most notably from China, where growth had been robust. FedEx said the slowdown in that division outpaced its ability to cut costs, which it said it's doing aggressively to balance demand. As a result, the Express division's operating income fell 19 percent, even as revenue rose 12 percent. Average daily express volume in the U.S. fell 3 percent. But revenue per package rose 13 percent as packages weighed more on average and FedEx tacked on higher fuel surcharges.

Operating income in FedEx's ground segment leaped 42 percent to $407 million. Revenue rose 16 percent to $2.28 billion. Average daily package volume grew 5 percent driven by an increase in shipments between businesses and FedEx home delivery service. International priority shipments _ the speediest and most expensive shipping option _ fell an average of 4 percent per day.

FedEx's freight segment, which hauls heavier shipments like refrigerators and car parts, posted an operating profit of $42 million compared with a loss of $16 million a year earlier. Revenue rose 6 percent.

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