FedEx Profit Doubles; Announces Job Cuts

FedEx Corp. indicated Thursday that the global economic recovery remains uneven. While strength in international shipments is boosting net income, FedEx is cutting 1,700 jobs in its U.S. freight business to offset losses there.

The world's second-largest package delivery company did raise its financial outlook after as it said first-quarter net income doubled. But projections for the second quarter and full year fell shy of Wall Street expectations. FedEx shares dropped more than 4 percent in afternoon trading.

International air shipments have driven FedEx's results for more than a year; international revenue rose 24 percent in the quarter ended Aug. 31. But while FedEx earned $380 million in the first quarter, the FedEx Freight segment lost $16 million and has been unprofitable for four straight quarters.

The unit moves large items like refrigerators and other large appliances from factories to retailers and competes with other large trucking companies such as Arkansas Best and YRC Worldwide, which runs trucks under the Yellow, Roadway and New Penn names. Sluggish demand, combined with the heated competition in this segment of the U.S. shipping market, has forced FedEx to forgo the rate increases that are helping its other segments grow.

The freight unit, started in 2001, is separate from FedEx Ground, which trucks packages directly to consumers.

FedEx will combine its FedEx Freight and FedEx National less-than-truckload operations on Jan. 30 and close 100, or 20 percent, of its service centers. The 1,700 job cuts represent about 5 percent of the freight division's workers. Overall, FedEx has about 280,000 employees.

FedEx says the move, along with other cost cuts, will ensure the freight business is profitable next year. Less-than-truckload shippers take goods from many different manufacturers and consolidate them into a single truck for delivery.

For the current quarter that ends in November, FedEx expects to earn between $1.15 and $1.35 per share. Analysts were expecting $1.36 per share.

Chief Executive Fred Smith thinks the economic hiccups are typical for a recovery.

"We believe slower growth is consistent with historical business cycles," Smith said in a conference call with analysts. "We believe drivers of sustainable growth are in place."

For the fiscal year that ends in May, FedEx forecasts net income of $4.80 to $5.25 per share. That's up from a previous estimate of $4.60 to $5.20 per share. But some analysts had forecasts as high as $5.60 per share, according to Thomson Reuters.

"We expect a very solid peak season," said Executive Vice President Mike Glenn, referring to the important holiday shipping period. "It always gets a little cloudy after that."

While retailers aren't optimistic about the holiday shopping season, FedEx has reason to show more holiday cheer. FedEx benefits from e-commerce business, which now routinely outpaces brick and mortar retail growth as more people order gifts online. Also, retailers placed many holiday orders in the spring when their outlook for consumer spending was brightening. With recent mixed signals about U.S. economic strength, they now fear they may have ordered too much bad for them, but good for shippers like FedEx.

The Memphis, Tennessee, company earned or $1.20 per share in the fiscal first-quarter that ended in August, compared with $181 million, or 58 cents per share a year ago. That's slightly under the $1.21 per share that Wall Street expected. Revenue rose 18 percent to $9.46 billion.

As overall business has improved, costs have risen. The reinstatement of some employee compensation programs, higher pension, medical and aircraft maintenance expenses as well as the loss at FedEx Freight countered improvements at the Express and Ground operations.

Operating income at the Ground division rose 37 percent to $287 million. The Express division, which handles everything from air cargo to overnight documents, had operating income of $357 million, more than double a year ago.