FedEx Income Rises But Misses Estimates

By Bill Dries

Memphis-based FedEx Corp. posted net income of $500 million, or $1.57 per share, in its fiscal second quarter, which ended Nov. 30.

While that was a 14 percent increase from $438 million a year ago, it fell short of analysts’ expectations of $1.64 a share.


FedEx founder, president and chief executive officer Fred Smith said on an earnings call Wednesday, Dec. 18, that the numbers reflected “improved performance at FedEx Express, as the profit improvement plan introduced more than a year ago continues to gain momentum.”

Express is the oldest and largest division of FedEx and at the center of an overhaul with a goal by the company of generating $1.7 billion in annual profitability over 3.5 years. The goal was set in October 2012.

Express revenues of $6.84 billion for the quarter were down from $6.86 billion a year ago. Its operating income of $326 million was a 42 percent increase from $230 million in the second quarter of 2012.

“I don’t think I’ve seen more mythology in the press about anything than I have about e-commerce.”

–Fred Smith
FedEx founder, president and CEO

FedEx also benefited by comparison with the second quarter a year ago because the 2012 numbers reflected the impact of Hurricane Sandy on FedEx operations on the East Coast.

Company executives also reported a compressed holiday shipping season this year with the past three Mondays setting records for average daily volume – 22 million packages this past Monday.

During the hour-long call, Smith also took aim at what he called “mythology” in the press about e-commerce and, in particular, the idea of drones delivering packages.

“I don’t think I’ve seen more mythology in the press about anything than I have about e-commerce,” Smith began.

Earlier this month, CEO Jeff Bezos said his company is testing package delivery using the small, unmanned aircraft. Bezos debuted the concept he calls “Prime Air” on the CBS news program “60 Minutes” with a company video of such a delivery.

Smith was specifically asked if he believed Amazon could become a competitor to FedEx in making such deliveries.

“There are two enormous transportation networks that are built around moving light packages and freight. They are FedEx and UPS,” Smith said. “The size and scale of these operations are so big that it’s almost amusing, some of the comments about delivering items by drones.”

He referred to FedEx Chief Information Officer Rob Carter as the company’s expert on drones.

“He actually owns a drone and he reported that it can operate about eight minutes and carry four Budweiser beers,” Smith said. “We’ve got a lot of studies underway in that area ourselves. But at the end of the day, the inner-city transportation networks of FedEx and UPS, and to a lesser extent the Postal Service, which is designed around delivering very lightweight items – all you have to do is look in your neighborhood with the small jeeps that drive down the road.”

Smith believes those inner-city networks are the future for home delivery of lightweight e-commerce items “as far as the eye can see.”

“The whole issue about e-commerce at the end of the day is that it’s very expensive to deliver things to residences. Not every residence gets a package every day,” Smith said. “And it’s quite unlikely that every residence will start getting an item every day.”

This holiday season, what some FedEx executives call “cyber week,” coincides with FedEx’s busiest shipping week of the year, which will also be the case in the 2014 holiday shipping season.

Normally the week of peak e-commerce shipments is in November, not December.

“This year, we had to do some unprecedented things to prepare,” FedEx Ground president Henry Maier said, referring to network expansion costs that were not just for the peak but also serves to build base capacity FedEx sees coming from e-commerce year round.

But Mike Glenn, FedEx executive vice president of market development and corporate communications, said it is important to keep the growth in perspective.

“It will be 2017 before online sales represent a total of 10 percent of all revenue,” he said. “We are still at the tip of the iceberg on e-commerce and its potential.”