There are a lot of good things happening at FedEx Corp. (NYSE:FDX). Maybe too much of the good things.
The Memphis, Tennessee-based company closed out the most tumultuous 12-month period in its history with record fiscal 2021 fourth-quarter results. Revenue rose to $22.6 billion from $17.4 billion a year ago. Adjusted operating income more than quadrupled to $1.97 billion. Operating margin jumped to 8.7% from 5.2%. Adjusted net income more than doubled to $1.36 billion. Earnings per share nearly doubled to $5.01 per adjusted diluted share, in line with analysts’ consensus estimates. The FedEx Express air and international unit doubled its year-on-year operating income, while ground-parcel unit FedEx Ground and LTL unit FedEx Freight posted record earnings.
FedEx’s 2022 fiscal year, which started on June 1, is picking up where FY 2021 left off. U.S. business-to-consumer (B2C) traffic, which accounts for two-thirds of FedEx’s domestic mix, will continue to surge. Industrywide about 107 million domestic parcels will be delivered each day during FedEx’s 2022 fiscal year. E-commerce will account for 88% of U.S. parcel industry growth this fiscal year. FedEx’s U.S. business-to-business (B2B) traffic perked up in the fourth quarter, and with the ratio of inventory to sales currently at record lows — Kevin F. Smith, president and CEO of Sustainable Supply Chain Consulting, said Wednesday that the ratio has hit all-time lows and that retailers are working with only 30 days of inventory to support sales — demand for FedEx’s fast-cycle services are expected to stay strong. Asian exports and intra-European traffic — the latter predominantly B2B — is back at pre-COVID 19 levels.
The physical integration of TNT Express into FedEx, five years in the making, is expected to be finished during calendar year 2022. In addition, international passenger flights, which carry half of the world’s airfreight in their collective lower holds, are not expected to return to pre-pandemic levels until 2024. This gives FedEx and other all-cargo carriers more time to run the table on international business.
It’s the other side of the logistics coin, namely the supply of available workers, that is troubling and what might have led to a more than 4% after-hours drop in FedEx share price following a strong regular trading session. FedEx executives began the post-earnings analyst call by acknowledging that there is an ongoing dearth of labor, at least in the U.S., to handle the burgeoning volumes. FedEx said it is paying higher wages to attract and retain labor and is increasingly shelling out overtime pay for existing workers to stay on the job because it can’t fill positions.
The labor shortage is driving up variable costs and impacting productivity, the company said. Executives were not optimistic that the floodgates would open before the peak holiday shipping season begins three to four months from now. The issue is “reflected in our overall outlook” for the fiscal year, the company said.
To recoup those higher costs, the company is expected to become increasingly aggressive in imposing rate increases on its large “enterprise” accounts, which the company said has taken a back seat to the small to midsize (SMB) business on its to-do list, and in year-round surcharges that are cloaked in “peak season” lingo, such as surcharges that were announced earlier this month. Surcharges are the “new normal,” according to Brie Carere, executive vice president and chief marketing and communications officer.
Carere said FedEx repriced 45% of the contracts of large customers in FY 2021 and will pursue that strategy through the current fiscal year. The large FedEx customer typically has a three-year contract, and when asked by Deutsche Bank Analyst Amit Mehrotra if the company can make midcourse contractual adjustments, Carere replied that every customer’s situation is different.
(Clarification: An earlier version implied that e-commerce would account for 88% of FedEx’s 2022 parcel growth. That is an industry-wide estimate.)