Restructuring, investments at FedEx catch analysts unaware in Q2

FedEx’s second fiscal-quarter operating income increase of 3 percent underperformed analysts’ expectations as they failed to account for the integrator’s US$2 billion investment into sorting hubs and distribution centers, and automation of ground operations to accommodate growing e-commerce shipments.

The Ground and Freight divisions saw operating income fall by 12 and 13 percent, respectively, to $465 million and $88 million. FedEx attributed declines in the Ground segment to “higher rent, depreciation and staffing, as a result of network expansion, and increased purchased transportation rates.” In Freight, the decline was a product of lower average weight per shipment and “higher information technology expenses,” the company said.

The Memphis-based integrator’s Express segment, which accounts for the majority of total operating income, saw its operating profits rise by 2 percent to $636 million, which was enough to offset losses in other segments, but not enough to satisfy analysts.

FedEx explained that operating results improved due to “increased base rates and ongoing cost efficiencies.” The company also noted that, “results include $18 million of TNT Express integration expenses,” and that fuel and currency exchange rates “had a minimal impact on the quarter’s results.”

TNT Express, which FedEx purchased at the start of the 2016 calendar year, contributed $70 million in operating income and $1.9bn in revenues.

Chief Financial Officer Alan Graf called the decline in the unit’s profit margins “a bit shocking,’’ but insisted that the investments needed time to play out. Results will “pop back up’’ on the back of growing volume in the expanded Ground business, FedEx CEO Fred Smith said.