FedEx says economy is stalling, cuts outlook
FedEx Corp. says the global economy is stalling, and it’s going to get worse next year.
The conditions are shrinking earnings at the world’s second-largest package delivery company. Factories are making fewer items for FedEx to ship, and customers are opting for cheaper delivery options to save money.
FedEx on Tuesday cut its outlook for global growth and industrial production while slashing the forecast for company earnings. CEO Fred Smith suggested trade has slowed to levels reminiscent of the last two significant economic downturns.
It’s more evidence that the global economy has a way to go to a full recovery. Several countries in Europe are in recession, and the United States is struggling with high unemployment and weaker manufacturing growth. Smith said some experts have underestimated the severity of the slowdown in exports from China, where FedEx has invested heavily in the last several years, adding planes to export goods and expanding its hubs and network.
FedEx’s forecasts are closely watched for signals of the economy’s health. Its results provide insight into the global economy because of the number of products it ships, and the number of countries in which it does business. Bigger rival UPS said in July that it expects the global economy to get worse before it gets better. UPS also cut its earnings forecast.
The slow pace of economic recovery is hurting FedEx because it relies on sharp spurts of demand to feed its air network. Demand for air freight is usually strong coming out of a period of slow economic growth, because retailers have whittled their inventory and need to replenish quickly when demand picks up. The recovery in the United States is the slowest since World War II.
FedEx lowered its expectations for U.S. economic growth to 2.2 percent in 2012 and 1.9 percent next year. Those are mostly in line with economists’ views.
FedEx, based in Memphis, cut its earnings forecast for the fiscal year ending in May to between $6.20 and $6.60 per share, from $6.90 to $7.40 previously. Its FedEx Ground division is based in Moon and employs 3,000 workers in Western Pennsylvania, including more than 2,200 at headquarters.
For the quarter that ends in November, FedEx forecasts earnings of $1.30 to $1.45 per share, compared with $1.57 per share last year. That’s well below analysts’ forecasts. FedEx will get a boost from major technology product debuts, like the recently announced iPhone 5, but not enough to make up for the slowdown elsewhere.
In the three months that ended in August, FedEx Corp. earned $459 million, or $1.45 per share. That hit the top end of its recently lowered estimate. Revenue rose 3 percent to $10.79 billion. It earned $464 million, or $1.46 per share, on revenue of $10.52 billion in the same quarter a year ago.
The company’s FedEx Ground unit performed better in the quarter, accounting for $2.46 billion of the parent’s revenue, which was an 8 percent increase from $2.28 billion in revenue the year before.
Average daily package volume in the quarter expanded by 5 percent, driven by business-to-business volumes and by home delivery volumes. In addition, an increase in rates raised revenue per package by 2 percent.
FedEx Ground’s operating income increased 9 percent to $445 million from $407 million the year before. In addition, operating margins grew to 18.1 percent from a year-ago 17.9 percent.
Economic growth around the globe has slowed over the last several months. Output has declined in Japan, China and elsewhere in Asia.
U.S. industrial production last month fell by the largest amount in more than three years.
FedEx shares dropped $2.72, or 3.1 percent, to $86.56, contributing to a mixed performance in the stock market.
The Associated Press and Trib Total Media staff writer Thomas Olson contributed to this report.