After many consecutive quarters of disappointing results, FedEx Corp. (NYSE:FDX) navigated its fiscal 2020 fourth quarter with numbers it could feel good about. Ironically, it happened during the ugliest three-month period for the world in decades.

The weak headline numbers released late Tuesday were expected given that the quarter coincided with the worst part of the coronavirus pandemic. Revenue was down slightly, while the company posted a net loss of $334 million. Operating income and operating margin, respectively, were halved year-over-year. Increases in scheduled and charter air demand from Asia to the U.S. boosted revenue but also increased the company’s cost to serve. FedEx incurred a $125 million operating cost increase to pay for additional cleaning and security services, and to buy large volumes of personal protective equipment, and medical and safety supplies.

Beneath the surface, however, there were significant positives. Earnings before interest and taxes (EBIT) were $907 million, well above expectations. Sequential margins in its FedEx Express air and international unit more than doubled. Margins at its FedEx Ground unit exceeded 10%. Ground volumes rose, up 23% year-over-year and 7% sequentially. Revenue per piece rose 2.6% sequentially while cost per piece fell 2.6% sequentially, underscoring the company’s ability to efficiently manage the tsunami of business-to-consumer (B2C) traffic as government shelter-in-place orders and business closures led to substantial increases in online ordering activity. B2C accounted for 72% of FedEx’s mix in the quarter, up from 56% a year ago.

FedEx Freight, the company’s less-than-truckload (LTL) unit, also showed strength in the quarter with a 10% year-on-year gain in revenue for every 100 pounds transported. Revenue “per hundredweight” is considered a key metric of yield performance.

Taken together, the numbers led to an 11-cent earnings-per-share beat based on so-called non-GAAP results, which exclude temporary and irregular events in a company’s income statement. Analysts apply non-GAAP results when forecasting FedEx’s financial performance. As a result, shares spiked in after-hours trading Tuesday.

As of 7 p.m. ET, shares were trading up 9.4% from the close of regular trading at $153.26 a share. To put Tuesday’s activity in perspective, FedEx shares were trading in the $270-a-share range two-and-a-half years ago. 

Analysts who had grown accustomed to tarring and feathering the company for the past two-plus years were almost nirvana-like in their comments after the fourth-quarter results. Amit Mehrotra of Deutsche Bank, who has been sharply critical of FedEx’s performance, called the quarter a “blockbuster” in light of expectations, adding that the announcement was a “bit of shock and awe (in a positive way).” 

Mehrotra said the solid performance could be a positive read-through into rival UPS Inc.’s (NYSE:UPS) results, which will be released July 22.

FedEx declined to offer guidance for the full 2021 fiscal year, which began on June 1. CFO Alan B. Graf Jr. said global trade and transport patterns are too murky for the company to feel comfortable providing a road map for the next 11 months. Graf said FedEx’s ground network is well positioned to scale with the expected elevation in e-commerce volumes. He also said the company will start to see a tailwind from a return of its core business-to-business (B2B) traffic, which was obliterated during the quarter. “B2B is coming back,” Graf predicted.

Brie Carere, FedEx’s executive vice president and chief marketing and communications officer, said she expects e-commerce will dominate FedEx’s mix patterns for the foreseeable future. Carere said a wider range of consumers, including older consumers who might not have previously been comfortable with online ordering, took the plunge during the quarter and are unlikely to return to their old behavior. “I don’t see how this reverses,” she said, referring to perpetually elevated e-commerce levels.

Carere also telegraphed that significant increases in holiday-season delivery surcharges will be with the market for years to come. FedEx has imposed delivery surcharges designed to offset the higher costs of managing its network through the pandemic.

Company executives expressed optimism about opportunities for FedEx in the trans-Atlantic air cargo market due to the grounding of international passenger flights that took large amounts of lower-hold cargo capacity with them. Because 70% of trans-Atlantic cargo is shipped in the bellies of passenger planes, the elimination of international services has tightened cargo capacity and left shippers scrambling for alternatives. 

It may take years for trans-Atlantic service to ramp up to levels that achieve supply-demand equilibrium for cargo users, executives said Tuesday. In the meantime, all-cargo carriers like FedEx can take share, especially as Europe begins to open up more widely, they said.


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