FedEx reported lower-than-expected revenue and earnings for FY3Q, and lowered its outlook for FY4Q. Consistent with our expectations, there were both cyclical and secular issues at play which we explore with our text analytics platform.

Evidence of Secular and Cyclical Issues

The Secular: Amazon Effect arrives in the form of margin pressure

FedEx management came out swinging in its insistence that Amazon is not impacting its business:

We have been clear that this is not a threat to our business because Amazon represents less than 1.3% of our total revenue

Do they protest too much?

There may not be a direct impact on FedEx’s revenue from Amazon taking more delivery in-house, but that’s not the whole story. As the grocery industry can attest to, the cost of keeping up with Amazon can be more painful than lost direct revenue.

Amazon’s relationship with the logistics industry is a complicated one. Amazon’s sheer volume makes them a valuable customer, while their interest in bringing more of the supply chain in-house is no secret. Are we starting to see the shift from “valuable customer” to “existential threat”?

Adding an additional day of operation hurt margins this quarter. Why is that necessary? E-commerce is pressuring yields. Why is the mix of e-commerce increasing? 

The answer: Amazon

FedEx (3/19/19):

• "Higher costs related to staffing and network expansion in the January launch of year-round 6 day per week operations also impacted Ground’s performance. While the launch of 6-day operation was a headwind for the quarter, the use of existing assets more efficiently is a positive for the FedEx Ground business as it ultimately drives improved performance and enhances our competitive position."
• "Although e-commerce will put pressure on yields with lighter and shorter distance packages, we continue to make structural changes to address the profitability, which Raj just spoke to."
• "And so the mix had a big impact and one of that is the fact that we are striving to hit the e-commerce demands at the same time as we’re reducing our cost structures, and we’re getting there. We just aren’t getting there as fast as we would like to."

The Cyclical: International weakness as expected, but green shoots in China?

The impact of international macro weakness was not surprising given what FedEx had seen in December and what has transpired since. However, FedEx did call out a recent uptick in China, which bears watching:

FedEx (3/19/19):

• "We see solid economic growth in the U.S., but somewhat below last year’s pace."
• "We expect earnings to decrease year-over-year at FedEx Express in the fourth quarter due to lower yields and continued softness in international package volumes resulting from weakening global economic conditions, particularly in Asia and Europe."
• "The peak was very muted, and the post-Chinese New Year was very, very soft. Having said that, in the last few days, we are starting to see some pickup in the business, and I think that’s looking good. What I’m not going to sit here and project what’s going to happen for the rest of quarter 4, I cannot do that at this point. There’s still uncertainty in the market. But if the trend continues, then, of course, it’ll be good news."

Overall sentiment did improve somewhat from December lows

As shown below, the FedEx earnings call sentiment improved somewhat from the miss in December, with an Amenity Score of 19, up from -3. This remains well below levels seen in the June/September quarters. In terms of Key Drivers identified by the Amenity NLP platform, increasing macro pressures (Headwinds), and increasing focus on cost reductions (Cost-Price) stood out:

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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