FedEx is hoping a big cost-cutting drive will improve profit margins, but a weakening global economy will put its execution to the test.
FedEx Corp. (FDX) – Get Free Report shares nudged higher Tuesday ahead of the package delivery group’s closely-tracked second quarter earnings report after the closing bell.
Analysts expect FedEx to post a second quarter bottom line of $2.83 per share, with revenues essentially flat to last year at $23.74 billion.
FedEx pulled its full-year earnings forecast in September following an unscheduled update that showed first quarter earnings of $3.44 per share, as more than 21% decline from the same period last year and well south of the Street consensus forecast of $5.14 per share, with revenues pegged at $23.2 billion.
CEO Raj Subramaniam, who is facing notable pressure from activist shareholders since taking over from the iconic Fred Smith earlier this year, vowed to “aggressively accelerate cost reduction efforts” amid what he described as ‘significantly worsening’ global headwinds.
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Subramaniam outlined cost cuts totaling $2.7 billion when he spoke to investors in September, including $700 million over the second quarter as it reduces FedEx Express flights and parks as many as eight planes. It also cut back on Sunday deliveries and closed some domestic sorting warehouses.
FedEx unveiled a series of employee furloughs in its U.S. freight division in November, noting it will ” continue to evaluate the environment and bring back furloughed employees as business circumstances allow.”
“Near term, we are cautious around the weaker macro environment and the lack of visibility into Asian and European markets potentially contributing to further demand deterioration from late-August trends,” said KeyBanc Capital Markets analyst Todd Fowler, who carries a ‘sector weight’ rating on the stock.
“We acknowledge sizable cost actions laid out in late September for Express, but remain skeptical on execution in a moderating demand environment,” he added. “That said, (second quarter) guidance implies a ~40% decline in operating income (~$700 million) despite $700 million of cost takeout, and as a result, we view near-term guidance as largely achievable.”
FedEx shares were marked 0.13% higher in pre-market trading to indicate an opening bell price of $169.00 each.
Earlier this summer, FedEx unveiled a board shakeup just weeks after the departure of founder Fred Smith, and boosted its quarterly dividend by more than 50%, amid pressure from activist investor D.E. Shaw.
FedEx pledged to add three new members to its board of directors while reducing its planned capex-to-revenue targets in order to return more cash to investors and aligning executive pay more closely to shareholder returns.