FedEx Has a Ground Problem, Here’s How It Plans to Dig Out of It

The ascent of online shopping via e-retailers like Amazon  (AMZN) – Get Amazon.com, Inc. Report has resulted in a boon in the ground business for shipping companies like FedEx  (FDX) – Get FedEx Corporation Report and UPS  (UPS) – Get United Parcel Service, Inc. Class B Report

This boon is especially pronounced during the holiday season as consumers do much of their holiday shopping online, a trend that was accelerated during the coronavirus pandemic over the past two years. 

FedEx for example now reports Ground revenue of more than $30.5 billion of its total revenue over the past 365 days. The Ground segment has jumped from 22% of FedEx’s revenue 10 years ago to nearly 40% of revenue last year. 

Increased online shopping was not enough to overcome supply chain issues that dulled some of the luster from the most recent holiday season.  

Still, FedEx reported its most profitable December ever despite “softer than anticipated volume,” according to its third quarter earnings release this week. 

FedEx Ground’s Profitability Problem

FedEx ground revenue has jumped $17 billion since 2013, but the unit’s profits have only increased by $400 million over that same period. Those numbers imply a contribution margin of only 2.5%.

Analysts on the company’s earnings call took FedEx to task for the performance, but the company said it has a plan to turn it around. 

 “If you look at the history of FedEx Ground, from the very beginning, starting with the acquisition of RPS, when we launched home delivery and now we doubled down in e-commerce, there were periods of time we had to invest and we are working with our customers and retailers for them to succeed in e-commerce and it is a strategic relationship that we are building,” FedEx Chief Operating Officer Rajesh Subramaniam said on the call. 

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“So, that period of investment in many ways is behind us. That pace is behind us. Now, we are focused on getting revenue quality, making sure we put the right package in the right network, and making sure that we generate margins and growth going forward.”

The company expects consolidated operating margins to increase in the current quarter across the company, but it did not go into details about segment projections. 

The company says historically that ground margins are higher in the fourth quarter than the third and the expectation is for that trend to continue. 

There is another trend forming. There have been three straight quarters where cost inflation in the Ground segment has outpaced revenue per package and yield growth. 

But the company sees those problems as a function of issues regarding labor, which led the company to become “inefficient” in moving some of its packages.  The company is also seeing its cost of labor go up. 

FedEx Had an Uneven Quarter

FedEx reported adjusted earnings of $4.59 per share in the latest quarter, missing analyst estimates by 5 cents as the company’s bottom line was impacted by worker shortages, especially in its air operations. 

Omicron also affected its clients, who also experienced staff shortages dues to the Covid variant.

Revenue of $23.6 billion was slightly ahead of analyst expectations of $23.4 billion.