FedEx Corp. said Wednesday that its fiscal second-quarter profit rose 14 percent as the operator of the world’s largest cargo airline began seeing the results of a $1.7 billion, three year cost reduction plan.
Net income rose to $500 million, or $1.57 a share, the Memphis-based company said in a statement. Earnings on that basis fell short of the $1.65 average of analysts’ estimates compiled by Bloomberg, partly because of a reduced operating margin at the firm’s FedEx Ground unit.
Improved international yields and operating margin growth at FedEx Express showed some success in efforts to counter a shift by customers away from expensive overnight shipping methods, said Logan Purk, an Edward Jones & Co. analyst. Retiring older aircraft and moving some shipments to the bellies of passenger aircraft are two of the steps taken to reduce operating costs.
“We’re seeing a little bit of yield improvement in the Express business,” Purk said Wednesday. “We’re seeing a little bit of a volume pickup. Not a lot, but in terms of the Express business, that does reverse a trend that we’ve seen. If you look on the international side in particular, we haven’t seen positive yields in over a year.”
Revenue per package for each international priority shipment rose 3 percent as volume slipped 5 percent. International economy yield increased 1 percent and volume climbed 10 percent. Express expenses fell 2 percent.
FedEx is “on track to be where we need to be by the end of 2016,” with the $1.7 billion plan, Chief Financial Officer Alan Graf said during a conference call with analysts and investors. “We are managing very aggressively the trade down in international.”
FedEx raised its full-year earnings-per-share growth forecast 1 percentage point to as much as 14 percent, or $7.10, as share repurchases under a record buyback plan announced in October are predicted to add about 4 cents a share.
Sales rose 2.7 percent to $11.4 billion from $11.1 billion a year earlier. Analysts had forecast $11.5 billion. The company spent 8 percent less on fuel during the quarter as fuel prices and use fell.
FedEx shares rose 63 cents Wednesday to close at $139.72. They climbed 52 percent this year through Tuesday, leading rival United Parcel Service Inc.’s 38 percent gain and a 25 percent increase for the Standard & Poor’s 500 index.
The operating margin at FedEx Ground dropped one point to 14.9 percent, a change the company blamed on a later start of the peak Christmas shipping season that moved much of the volume into this quarter compared with the second quarter last year.
“A lot of people are giving 100 percent credit to this improvement plan working flawlessly,” Purk said of investors. “A lot of that optimism is now baked into the price today. It might be slightly aggressive.”
The financial results were the first by FedEx since activist investor Daniel Loeb disclosed on Nov. 12 that his Third Point LLC had taken a stake in the shipping company.
Regulatory filings disclosed that George Soros’ Soros Fund Management LLC and John Paulson’s Paulson & Co. also had taken stakes of 1.52 billion shares and 646,800 shares, respectively.
Loeb said at the time that he had met with FedEx Chief Executive Officer Fred Smith and would not push for his ouster. The purchase focused new attention on succession plans for Smith, 69, who has run the company since its founding more than 40 years ago. He also is FedEx president and chairman.
Business, Pages 27 on 12/19/2013