SEPTEMBER 17, 2009, 1:27 P.M. ET
FedEx Says Economy is Stabilizing
By COREY DADE and BOB SECHLER
FedEx Corp. said the global economy is beginning to stabilize but warned that its earnings in the near term will continue to lag prior years' gains, as first-quarter profit dropped 53% .
The package-delivery giant's optimism, brighter than its June forecast, portends a stronger quarter for many major transportation companies due to upturns in the retail, automotive and housing sectors—the three biggest drivers of manufactured goods shipped to the U.S. by barge or aircraft, and then moved by rail and truck. FedEx, because it handles an average of six million packages a day world-wide, and other major carriers are regarded as economic barometers.
For the U.S., the Commerce Department this week reported retail sales climbed 2.7% in August after falling 0.2% in July. Last month consumers increased spending on nonessential items such as sporting goods and electronics. Auto and parts sales jumped 10.6% in August from the previous month, as the government program allowing consumers to trade in old cars for more fuel-efficient models spurred sales. Excluding autos, sales rose 1.1%.
FedEx Chief Executive Frederick W. Smith said Thursday a number of "encouraging signs" show the downturn has ended. On a conference call with analysts, Mr. Smith said he expects U.S. gross domestic product to grow by 3% in the third quarter, 4.9% in the fourth quarter and 2.9% next year.
FedEx shares were down $2, or 2.6%, to $76.20 in midday trading Thursday. The stock has climbed about 12% this month as overall sentiment regarding the economy has improved.
The company tempered the optimism, noting that year-over-year comparisons would still be difficult in the current quarter and said per-share profit growth for the quarter could be off nearly 60%.
For the quarter ended Aug. 31, FedEx posted per-share growth of 58 cents, hitting the upwardly revised target set by the company last week due to improving shipping volumes outside the U.S., paced largely by Asia.
Also in the period, FedEx posted profit of $181 million, or 58 cents a share, down from $384 million, or $1.23 a share, a year earlier. Revenue slumped 20% to $8.01 billion, and operating margin fell to 3.9% from 6.3%. Revenue at the company's overnight-air business fell 23%, with earnings off 70%.
U.S. domestic package revenue dropped 22%,
as revenue per package declined amid lower fuel surcharges, even though package volume was essentially flat
. FedEx said the results were partly offset by gains from DHL's exit from the U.S. domestic package market and lower expenses due to cost-cutting and fewer flight hours.
Meanwhile, FedEx announced an average 5.9% rate increase for air deliveries beginning early next year
, slightly below an average 6.9% increase that it put in place to start 2009. In both cases, FedEx noted that lower fuel surcharges likely would offset about 2% of the rate increases.