FedEx beat expectations last quarter, announcing earnings report almost 20% higher than analysts predicted. The carrier closed the fiscal third quarter with adjusted earnings per share of $3.72, higher than the predicted $3.11 and well above the $2.30 the company posted a year earlier. Unadjusted earnings per share were $7.59, up from just $2.07 the previous year.
That boost was largely due to a $1.5 billion tax benefit after the U.S. government approved a tax overhaul in December, FedEx said. Leaders also credited the jump in revenue to increased volume in its FedEx Ground and FedEx Freight services, low fuel prices and higher base rates.
As reported in the Memphis Commercial Appeal, company founder, chairman and CEO Frederick W. Smith said on the March 21 earnings call: “economic growth around the world remains broadly based and we expect U.S. tax reform to continue to increase economic growth and investment.”
These earnings suggest that FedEx’s business remains strong despite headwinds in the shipping industry. Demand is up, even against rate increases; fuel prices are down even as truckers are harder to find; tax policy is favorable even though the company is worried about potential new tariffs that will affect the market.
Inside FedEx’s Third-Quarter Results
FedEx’s earnings release shows that demand remains very strong. The company announced record peak-season volume, counting the weeks between Black Friday and Christmas.
FedEx cleared $16.52 billion in revenue in the third quarter. This is up from $15 billion the same quarter a year earlier. So far in the 2018 fiscal year, FedEx’s adjusted revenue is up 16% year over year. The company’s is operating margin is 5.4%.
And all that business is rolling in despite a standard 4.9% across-the-board rate increase last year. Since FedEx and UPS maintain a near-duopoly in the shipping industry and raise rates almost in lockstep, it makes sense that both can raise rates without losing much business.
But challenges from competitors keep getting stronger. Amazon is on the cusp of its own delivery service. Further, the U.S. Postal Service keeps growing in popularity with about than 84% of companies reporting they now use USPS for at least some of their shipping needs.
If FedEx is to stay ahead of those challenges, it needs to invest in its own supply chain.
Hints About FedEx’s Next Steps
After the passage of the tax bill in December, FedEx announced a $1.5 billion investment—the same amount it will save in tax revenue—to update and expand an Indianapolis shipping hub. The company pledged an additional $1 billion to its Memphis site. Both modernization plans will take years to implement, but the financial investment shows FedEx is committed to competing.
Amazon deserves credit for much of the increased demand for FedEx’s services. Amazon normalized online shopping thus forcing other retailers to follow its lead, and then normalized free two-day shipping.
Today, the average American orders 15 parcels online every year. But now, Amazon wants to start handling its own deliveries. Shipping with Amazon is rumored to begin servicing Los Angeles this spring. This represents a direct challenge to legacy carriers: Amazon sent them millions of packages to deliver. Now it wants them back. FedEx’s investments are a sign that it plans to fight.
What Does This Mean for Shipping-Based Companies?
As competition in the shipping industry heats up, carriers have to work harder than ever to maintain their contracts with shippers. Carriers still have to meet shareholder expectations, so unfortunately for shippers that probably doesn’t mean rates will fall. But it does mean that performance matters; not only to shippers, but also to shareholders.
Like FedEx, UPS delivered a record-breaking number of parcels during the 2017 holiday season. But it struggled to keep up with demand and announced a $6.5 billion investment to improve its delivery network. Increased operating costs and infrastructure spending worried investors and analysts. As a result, UPS’s stock fell 7% after a February earnings call.
Shippers can take advantage of this hyper-competitive environment by strategically reviewing and renegotiating their contracts. Anytime your company undergoes a merger or acquisition or sees a significant change in its shipping profile, you should consider renegotiation. And every time your carrier announces rate changes, you should examine your shipping data to understand exactly how those changes will affect you.
It’s wise to check competing carriers’ rates at the same time as there may be a better deal out there. Switching carriers is a big decision, but it may be the right one.
If you need help gathering your shipping data, evaluating your invoices, reviewing your current contract or preparing for renegotiation, reach out to Reveel. Our experts can help your company save as much as 20% on shipping by understanding your needs and strategically negotiating certain aspects of your contract.
As carriers spar with each other and await Amazon’s challenge, now might be the perfect time to push for better rates. Call today to talk with an expert.