Extrapolating FedEx’s Fiscal 1Q22 Results

FedEx’s fiscal 1Q22 results, reported yesterday after market’s closed yesterday, may provide a snapshot of the U.S. economy. Earnings per share of $4.37 fell well short of the $4.92 S&P consensus estimate while revenue of $22.0 billion was in-line with the $21.9 billion consensus forecast. About ninety minutes before trading opens FDX shares traded $15.50, or 6.1%, lower at $236.57. Shares of FDX are not included in any accounts or model portfolios either personally or at Solyco Wealth. Also, I’ve got no view on FDX’s investability; I’m just using its results as an example of what potentially is going on across much of the U.S. economy and in the minds of management teams.

Management cited a litany of factors that, in sum, amounted to an estimated $450 million in elevated 1Q22 costs: labor, inefficiencies, wages, and outsourcing. The “outsourcing” component of these higher-than-anticipated expenses particularly caught our eye. Theoretically, if FDX management expected current conditions to persist beyond the short-term, they would consolidate those 3rd-party outsources. Doing so, given the stellar abilities of FDX management in the past to drive efficiency and reduce costs in their businesses, would go a long way towards alleviating the other three phenomena negatively impacting expenses as doing so would increase labor access, offer opportunities to improve efficiency, and – potentially – consolidate wages as they would no longer need to fund outsourcers’ margins. The conventional explanation for FDX management NOT doing this: they assess these pressures as transitory.

Sure I’m oversimplifying FDX’s capital budgeting processes and decision-making, but I thought the exercise worthwhile. The fact that management pulled down full-year fiscal 2022 guidance from a range for EPS of $19.75 to $21.00 from a prior EPS range of $20.50 to $21.50 maybe points to a timeframe that management anticipates these expense pressures persisting. If 1Q22 missed EPS forecasts by $0.52, an extrapolation of this figure across the change in guidance appears to stretch into fiscal 2Q22 or 3Q22. Notably, given the accelerated shipping activities occurring around the holiday season, though, FDX’s inefficiencies could be WORSE through the company’s fiscal 2Q22. The recent jump in fuel costs probably don’t help expense levels either.

Looking at the larger economy, package volumes remained strong for FDX at 6.2 million units – flat year-over-year (y/y). Revenue per package scaled 15% higher to $21.05 y/y with international volume and pricing notably stronger than domestic measures. Another nod towards “transitory” here as well: with pricing already +15% and volumes flat FDX presumably could have moved pricing even higher. In fact, FDX management did just that a two days ago, announcing a 5.9% price increase starting in calendar 2022. Interesting: raise prices to pay for increased costs to outsource deliveries rather than consolidate those outsourcers.