A record quarter for FedEx — plus mattresses and gym equipment, too!

FedEx reported revenue up 21.2% y-o-y in its fiscal fourth quarter (ended 31 May) to a record $15.73 billion. Net income for the quarter was $1.02 billion, up from a net loss of $68 million in 4QFY16, and operating income for the quarter was $1.58 billion (compared to a $70 million loss).

As usual, though, the as-reported net and operating income numbers come with a caveat. After adjusting for a variety of one-off factors, including the costs associated with the acquisition last year of TNT, things look somewhat different: Adjusted net income was up 28.2% to $1.15 billion, and adjusted operating income was up 16.5% to $1.76 billion.

There was much of interest in FedEx’s report, and also in the conference call the company hosted to discuss the results. We’ll start with a few comments on the operating and financial numbers, then move on to more interesting issues such as home gym equipment and mattresses.

Overall, FedEx said operating results in the quarter benefited from higher base rates, increased package volume, and the inclusion of TNT Express results. Beginning with the first quarter of fiscal 2018, FedEx will include TNT in its Express segment, but because TNT was acquired part-way through 4QFY16, it is shown separately in both the quarterly and full-year results for fiscal 2017.

As can be seen in the chart, FedEx’s Express segment had a very good quarter. Excluding TNT, total segment revenue was up 6.9% y-o-y to $7.18 billion, operating income rose 14.0% to $863 million, and operating margin increased 0.7 percentage points to a very healthy 12.0%.

Average daily US domestic package volume was nearly flat (up just 0.3%), but this hides significant differences by product:

  • Overnight Box volume was down 5.1%, Overnight Envelope volume was up 1.3%, and Deferred volume was up 7.9%
  • US domestic volumes may not have been spectactular, but yields were up substantially. Per-package yield was up 9.5% for Overnight Box, 5.1% for Overnight Envelope, and 6.3% for Deferred.
  • International Export package volume and per-package yield were up 5.3% and 2.2%, respectively. International Domestic package volume was up 8.1%, while per-package yield declined 2.7%

In fact, the Express segment did well enough in the quarter and the year that FedEx said it has brought forward delivery of two 777 freighters from Boeing. Discussing the results during the conference call, FedEx President and COO Dave Bronczek said: “we have pulled 2 planes forward with Boeing, and we’re in the middle of talking to Boeing about future opportunities.” He went on to add: “the Boeing 777s are so valuable to us on a global basis. They connect the Asian, Chinese market overnight to the United States without a fuel or tech stop right into our hub in Memphis. So of course it was a good opportunity for us, and we took advantage of it.”

Turning to the TNT segment, since the acquisition occurred less than a full year ago, there is no comparison data, but the operating and financial results shown are all positive. FedEx CFO Alan Graf said of the fourth quarter: “For TNT Q4, I can tell you that the integration is on track.” He also pointed out that after adjusting for integration- and acquisition-related expenses, operating profit for the TNT segment was $83 million, and operating margin was 4.4%.

Now, we promised you mattresses and gym equipment, right? Here’s what FedEx boss Fred Smith had to say on the subject: “We also continue to experience growth in demand for large, heavy package delivery as a growing array of items are now being sold online. Furniture, mattresses, sports and exercise equipment are increasingly moving to the FedEx Ground network for residential delivery. This trend has accelerated over the past 12 months, and we have made adjustments to facilities and investments in sortation technology that enable outstanding service for these larger packages. We’re continuing to analyze pricing and surcharges for oversized packages to ensure that we have appropriate pricing for the service provided.”

That’s right. Because when you want new mattresses for your bedrooms, or I want a new squat rack for my home gym, we no longer go to the local mall, we just order them online. And, as Mr. Smith pointed out, we are not alone. More and more people are ordering mattresses, couches, and squat racks online, and FedEx has had to upgrade its sortation facilities to handle these items.

This demand has also had an impact on FedEx’s Freight segment. Smith again: “At FedEx Freight we are acquiring a significant number of the smaller 24 foot straight trucks with lifts because a fair amount of FedEx Freight shipments are going into neighborhoods, and those are more compatible. So as the market turns more towards these oversized deliveries, I think you’ll see FedEx Freight lean into that space in a big way.”

However, while the shift to e-commerce is often thought of in terms of packages delivered to the consumer’s door, FedEx was quick to point out that B2C was just the tip of the iceberg. Executive VP Raj Subramaniam said that “B2B traffic represents a majority of our business.” Fred Smith expanded on that theme, saying that while the impact of e-commerce on FedEx was often looked at through the lens of “residential or individual e-commerce,” there was much more to it. “The bigger story is the enormous upstream network operated by FedEx. And there’s only one other one of a similar size and scope, and that is UPS.”

He suggested that the best way to grasp the scope of this upstream network was to go to fedex.com/dream and “click on the e-commerce film.” So that’s what we did. And, if you are looking for a bit of video entertainment this weekend, you can click on it right here…

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