Trade wars impinging on FedEx growth delivery

Blaming a weakening global economy, FedEx has slashed its profit outlook. It is the latest sign that trade tensions are dragging down US corporate titans.

The forecast signalled deepening trouble for the courier, as the US and China battle over tariffs.

The standoff has also ensnared manufacturing giants, such as Caterpillar and Deere. FedEx, which announced an employee-buyout programme in January, said it would pare its cargo-jet fleet to contend with the diminished expectations.

“The global economy continues to soften and we are taking steps to cut capacity,” chief executive, Fred Smith, said. The slowdown is being “driven by increasing trade tensions and policy uncertainty,” he said.

US president, Donald Trump’s trade manoeuvres are tormenting Mr Smith, a free-trade advocate and long-time Republican donor, who has sounded the alarm, quarter after quarter, that tariffs would hurt economic growth.

Commercial tensions are complicating FedEx’s costly integration of a European acquisition and are putting the company under the microscope of the Chinese government. FedEx is also girding for a revenue drag, after severing most ties with Amazon.com.

Its shares tumbled 11% before the start of regular trading in New York on Wednesday. The drop wiped out FedEx’s year-to-date gain and spurred declines at rivals, such as United Parcel Service (UPS) and Germany’s Deutsche Post.

FedEx was already trailing the returns, this year, of UPS and a Standard & Poor index of US industrial companies.

“This global macro weakness couldn’t hit them at a worse time,” said Kevin Sterling, an analyst at Seaport Global Holdings.

They’ve kind of lost their way here, for what seems like a year or so. People are becoming more sceptical.

The US-China trade war has weighed on manufacturers, disrupting a key market for FedEx. A surge in industrial jobs in the first two years of Donald Trump’s presidency has reversed in parts of the country, and some corners of the US economy are sliding toward recession.

Companies have slowed business investment and capital expenditures, as uncertainty over trade policies has clouded the outlook for future growth. For FedEx, the weaker outlook underscored the hurdles in introducing costly changes to its ground network to handle surging e-commerce deliveries, while contending with rising competition from Amazon.

FedEx stuck with its plan to invest $5.9bn (€5.3bn) for fiscal year 2020, which ends in May, and will probably match that in 2021, chief financial officer, Alan Graf, said. The company needs to spend on new aircraft and to modernise sorting hubs.

But to reduce capacity at the Express air-shipping network, FedEx will retire as many as 20 older planes and park additional aircraft to adjust to the weaker economic outlook.

The company already announced a $575m employee-buyout programme in January.

“FedEx is implementing additional cost-reduction initiatives to mitigate the effects of macroeconomic uncertainty, including post-peak reductions to the global FedEx Express air network to better match capacity with demand,” Mr Graf said.

The Memphis, Tennessee-based company failed to renew contracts with Amazon for US ground deliveries and air shipments, as the e-commerce retailer builds out its own transportation network.

The move will dent FedEx’s sales, since Amazon had accounted for about 1.3% of annual revenue. But FedEx is betting that the decision will boost profit margins, because the business fetched below-average prices.

Earnings are already under pressure from the weaker global economy.

The courier’s best-case scenario, for adjusted earnings in the fiscal year ending in May, was only $13 a share — a dollar short of the lowest of 25 analyst estimates compiled by Bloomberg. The forecast implied at least a 16% drop from the previous year’s level. FedEx had predicted, in June, a decline of a “mid-single-digit percentage point.”

In the fiscal first quarter, adjusted earnings dropped to $3.05 a share, FedEx said. That trailed the $3.15 average of analyst estimates complied by Bloomberg. Sales were little changed, at $17bn. Operating income fell 8.8%, to $977m, in the quarter. Operating margins narrowed to 5.7%, from 6.3%.

An economic slowdown in Europe is hampering FedEx’s effort to turn around operations at TNT Express, a Dutch company acquired in 2016 for $4.8bn. Integration spending will be about $350m over the 12 months ending in May 2020, FedEx said in June, pushing the expected total to about $1.7bn by May 2021.

For now, the company is running both the TNT and FedEx networks in Europe, which drives up costs.

In China, FedEx has been under scrutiny since Huawei said documents that it asked to be shipped from Japan to China were instead diverted to the US without authorisation.

Earlier this month, China said it was investigating FedEx on suspicion of illegally handling a package to Hong Kong that contained knives that are controlled by law, according to a report by state-run Xinhua News Agency.

Bloomberg