As FedEx Aims For Double-Digit Growth, Key Goal Is Lagging

A person walks past a FedEx van in Manhattan, New York, U.S., May 9, 2022. REUTERS/Andrew Kelly/File Photo

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LOS ANGELES, June 29 (Reuters) – Global delivery company FedEx Corp (FDX.N) presented a strategy to support growth by focusing on high-value customers at its meeting with investors on Wednesday, but the Shares fell after forecasting margins for its ground-unit growth below pre-pandemic levels.

FedEx shares fell 3.3% to $232.09 after executives said floor unit margins would drop from 11% to 12% by 2025. This division, which handles the bulk of deliveries the company’s home-based e-commerce business reported margins of 13% and 13.7% for fiscal years 2019 and 2018, respectively.

As FedEx grapples with cooling economies and runaway inflation, it is under pressure from two competing groups: investors who want FedEx to make more profit from its operations, and unit contractors. company ground wanting more money to offset their rising costs.

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“We are at a pivotal moment in FedEx history as we enter our 50th anniversary,” Chief Executive Raj Subramaniam, who succeeded FedEx founder Fred Smith, said on June 1.

Executives were targeting an average annualized growth rate in adjusted earnings per share of 14% to 19% and compound annual growth of 4% to 6% in revenue through 2025 for the entire company.

Activist investor DE Shaw Group won two FedEx board seats this month and was promised one more. The hedge fund has not publicly shared its targets for FedEx, which also increased its dividend. Read more

Executives said Wednesday they would remove the costs from the ground unit. It came as ground contractors push for a bigger cut in fuel surcharges that help boost the company’s total revenue.

FedEx’s new emphasis on higher-profit deliveries or “revenue quality” echoes the “better not bigger” mantra adopted by rival United Parcel Service (UPS.N) two years ago. Since then, UPS has surpassed FedEx in terms of profitability and service.

A slowing economy could erode the pandemic-era price increases FedEx needs to execute its new strategy and appease investors, analysts warn. Company executives countered by saying that FedEx offers shipping and delivery services that are difficult to replicate.

The change paid off last quarter for FedEx. Revenue jumped 8% even as the company processed fewer parcels. Read more

FedEx Ground saw an 11% increase in revenue per package despite a 6% decline in average daily volume. Ground’s cheapest and slowest “economy” service was the hardest hit, with a 36% drop.

Ground contractors rely on volume to help offset higher gas prices, driver salaries and delivery to remote residential addresses.

Jeff Walczak, CEO of ground contractor consultancy, said 20-25% of his clients struggled to make a profit, about double the normal rate.

“Most people in this business have never seen a drop in volume, and it stings them a lot,” Walczak said.

Many are working on one-year fixed contracts and have struggled to negotiate more money with FedEx. At the same time, FedEx now wants to pass on the cost of lost and damaged packages to those carriers, Walczak said.

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Reporting by Lisa Baertlein in Los Angeles Additional reporting by Nathan Gomes in Bengaluru Editing by Shinjini Ganguli and Matthew Lewis

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