FedEx Earnings Miss the Mark: Bad Weather Is Bad for Business

Source: Thinkstock

Source: Getty Images

The winter was not kind to FedEx (NYSE:FDX). Shares of the package delivery company edged lower in early trading on Wednesday after third-quarter results fell below expectations. Revenue increased 3 percent on the year to $11.3 billion, below the mean analyst estimate of $11.43 billion, and adjusted earnings increased about 8.8 percent to $1.23 per diluted share, below the mean analyst estimate of $1.46 per share.

“Historically severe winter weather significantly affected our third-quarter earnings,” said FedEx President and CEO Frederick Smith in the company’s earnings report. This year, “On days when the weather was closer to normal seasonal conditions, our volumes were solid and service levels were high. The FedEx strategy of maintaining separate express and ground networks with multiple hubs proved to be an especially important advantage for our package customers during this quarter’s severe weather and peak shipping.”

On the other days, though, uncommonly severe winter storms impeded delivery. FedEx estimates that the company lost $125 million this winter due to decreased shipping volume and increased operational costs.

The news is more inconvenient than it is bad. Investors knew that severe winter weather would impact FedEx just as it has the United Parcel Service (NYSE:UPS) and just about any other business that relies on transit systems, especially roads. UPS won’t report earnings until April, but it would be surprising if the company’s management didn’t also cite abnormally severe weather as a headwind. Shares of the package delivery business fell slightly in early trading after FedEx reported its results.

It’s worth pointing out that despite the weather, FedEx still managed to improve its operating margin by 30 basis points to 5.7 percent. Operating income increased 9 percent on the year to $641 million and net income increased 5 percent to $378 million. The company is apologizing for slower-than-expected growth, which is what it is. As Smith noted, the business appears to be firing on all cylinders sans severe winter weather.

But there is this bit of news to digest: Alan Graf, FedEx’s executive vice president and chief financial officer, said that ”While severe winter weather often affects our third-quarter results, the impact from multiple severe storms and frigid temperatures was significantly more pronounced this year and we are reducing our full-year earnings per share guidance as a result of the weather impact.”

Fourth-quarter earnings are expected in a range between $2.25 and $2.50 per diluted share, which compares against the current mean analyst estimate of $2.33 per share. Full-year earnings are expected in a range between $6.55 and $6.80 per diluted share, below the current mean analyst estimate of $6.90 per diluted share. FedEx also reduced its capital spending outlook by about $200 million to $3.8 billion. The forecasts assume continued moderate economic growth and relatively stable fuel prices.

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