FedEx announced a 5 percent rise in their profit margin compared to last year, which fell short of expectations of analysts.
The announcement was made last Wednesday and proclaimed net income of $378 million, which translates to $1.23 per share for the quarter which ended on February 28. This fell short of the prediction by analysts of $1.45 per share.
Revenue climbed by 3 percent to $11.3 billion, also lower than Wall Street’s expectation of $11.43 billion. Most of the increase can be credit to improvements in the ground shipping business since express-delivery has been languishing.
By the end of FedEx’s fiscal year, which will be in May, earnings are expected to reach between $6.55 and $6.80 per share. Not bad, but below the expected $6.89. In pre-market trading FedEx shares fell by 2 percent. Their shares had dropped by 3.6 percent this year after gaining a startling 57 percent last year.
Sandy’s power is extending beyond the immediate time and place her winds blew and waters surged as businesses see delays hindering their ability to get merchandise into stores in time for the holiday shopping season.
The superstorm not only closed down shipping terminals and covered warehouses with floor to ceiling water. Deliveries were also hindered by fallen power lines, blocked and closed roads, and severe gasoline shortages in New Jersey and New York.
At any other time of year this would be seen as a serious hinderance to business, but now, just as retailers usually begin to prepare for the frenetic shopping of the Christmas holiday season such a backup or cancellation of orders can spell complete disaster. For many merchants the holidays are when the bulk of their business is contracted.
“Things are slowing down,” said Chris Merritt, vice president for retail supply chain solutions at the trucking company Ryder. “This whole part of the supply chain is clogged up.”
Several examples include:
• FedEx has rented fuel tankers to insure that its delivery trucks have a steady supply of fuel in the face of commercial stations running dry.
• Ryder has been looking for trucks to rent to add capacity.
• The major railroad company CSX has been advising their customers to expect delays at least 72 hours long on their shipments.
• Retailers such as Amazon and Diane von Furstenberg informed customers to expect shipping delays.
Economic analysts are predicting that the storm will reduce economic growth by as much as a half of a percentage point in the last quarter of 2012. This is a large decrease considering the entire economic growth for all of 2012 was expected to be only about 1-2 percent.
Direct losses from Sandy are going to be much less than the losses caused by Hurricane Katrina in 2005, but the impact of Sandy may well be greater in its aftermath due to the dense population in the Northeastern states where Sandy let lose her destructive forces.
The Northeastern US is responsible for about $3 trillion in output, which is about 20 percent of the nation’s total gross domestic product.
“Part of what was lost will be delayed, but part is lost forever,” said Gregory Daco a senior economist with IHS Global Insight.
FedEx Corp is experiencing a decrease in the demand for their fastest and also most profitable services as companies are deciding that cost-cutting trumps speed of delivery. This trend is not necessarily linked to the slowing economy, the world’s largest cargo airline is noting; it may be a permanent feature of the new business climate. Overnight delivery is simply not as important as it once was to business.
“There has been a secular shift from ‘got to get it there overnight’ to more deferred products,” said Jeff Kauffman, a Sterne Agee & Leach Inc. analyst in New York. “Not because they can’t afford it, but because they are finding out the deferred choices are just as time specific.”
This trend will affect other shippers besides FedEx, including United Parcel Service (UPS) and Deutsche Post AG (DPW)’s DHL Worldwide Express.
Fred Smith, the CEO of FedEx was a pioneer in the early days of the modern air-freight industry. The idea was hatched in a college essay which Smith turned into the reality of the company he still runs 41 years later.
“When It Absolutely, Positively Has to Be There Overnight” was the popular cry of FedEx in its early days during the 1970s, made popular as the trademarked slogan of their fast-growing brand which put a premium on speed and reliable delivery.
Today speed is becoming less of a concern for many businesses as the US continues its lagging economic growth and demand from overseas customers who have never used overnight delivery services. Often three to four day delivery is fast enough.
“You’re seeing a demand for slow instead of a demand for fast. That’s a structural change,” said David Vernon, a Sanford C. Bernstein & Co. analyst in New York. “You either create a service that takes more of that volume shift or you end up in a much worse position.”
