FedEx's higher employee compensation costs sends shares lower

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Transportation services firm misses first quarter estimates as company accelerates pay raises and bonuses.

FedEx (NYSE: FDX) reported fiscal 2019 first quarter earnings that were well below consensus estimates due to higher salaries and compensation for many of its employees.

FedEx slightly raised its full-year earnings outlook. But it said it could not forecast potential contributions to its pension plan, which would impact full-year earnings.

The Memphis-based transportation giant reported adjusted earnings per share of $3.46 per share, up 37% from a year ago. But the results were short of a $3.82 per share consensus estimate from sell-side analysts.

FedEx shares fell 2.65% in after hours trading to $248.95 after the earnings release.

The adjusted earnings exclude $121 million in one-time integration costs for the acquisition of TNT Express. Including those costs, FedEx reported earnings of $3.10 per share.

FedEx reported revenue of $17.1 billion for the first quarter. Adjusted operating income was up 9% to $1.19 billion, with an operating margin of 7%, flat with last year.

FedEx said results were impacted due to higher costs for variable compensation during the quarter. Variable compensation costs for last year were negatively impacted by the NotPetya cyberattack at TNT Express.

FedEx also accelerated already planned wage increases for hourly employees. The company said it plans $200 million in higher compensation for certain hourly employees due to the enactment of the Tax Cuts and Jobs Act. FedEx said these items affected year-over-year results by $170 million, or $0.48 per share.

“As expected, the quarter’s results were affected by our decision to invest in our team members following the passage of the Tax Cuts and Jobs Act,” said FedEx Chief Financial Officer Alan Graf. “We remain committed to increasing earnings, margins, cash flows and returns this year.”

The FedEx Express segment, the company’s largest, saw revenue rise 10% to $9.2 billion with operating income of $367 million up 14% from a year ago. FedEx says that it expects Express’ operating income to be between $1.2 billion and $1.5 billion in fiscal 2020.

FedEx Ground saw revenue up 13% to $4.8 billion with operating income rising 10% to $667 million.

The company boosted its fiscal 2019 earnings per share thanks to expectations of revenue growth of 9% and full-year operating margin of 7.9%. It said full-year adjusted earnings would be in the range of $17.20 and $17.80 per share, up from an earlier forecast of $17.00 to $17.60 per share.

But it said it could not provide a full-year, non-adjusted earnings forecast due to an inability to forecast “fiscal 2019 year-end mark-to-market retirement plan accounting adjustments.”