3 key strategies of fedex in 2015

2014 was a bit rough for FedEx. Its annual earnings were tempered by the
impact of harsh winter weather and overwhelming package volumes during
the holiday season. The increase in e-commerce packages led to an
unfavorable mix that presented headwinds to margin growth. Additionally,
declines in fuel prices led to a decrease in fuel surcharge revenue, which led to
FedEx missing market expectations. It seems that 2015 will likely be a good
year for the company. In this article, we take a look at the three most
important strategies implemented by FedEx that will help drive growth this
year.
See our complete analysis of FedEx here
FedExs Holiday Season Performance Improves Significantly
FedEx had forecast an 8.8% year-over-year increase in its package volumes for
the holiday season between Black Friday and Christmas Eve. In order to
handle the 290 million packages, FedEx had taken measures which included
increasing seasonal workers, using six-sided cameras to read package labels,
investing in improving its network and capping deliveries of retailers. Looking
at its significantly improved delivery rates, it seems that FedExs preparations
paid off.
According to ShipMatrix, a logistics software firm, FedEx achieved a 91% ontime delivery rate during Thanksgiving week, compared to 83% last year. The
companys performance through the days leading up to Christmas was
exceptional. On December 22 and 23, FedEx delivered 99% of the packages on
time, compared to a low 90s delivery rate a year ago. Even on December 24,
FedEx managed to reach a delivery rate of 98%, compared to 90% last year.
Though FedEx has had to incur some expenses to ensure that its package
delivery rates remained high, it has been able to save itself from the bad press
and millions of dollars in refunds it suffered last year.
Change In Pricing Mechanism To Drive Revenue, Margins
In May 2014, FedEx had announced that it would be applying dimensional
weight pricing for all FedEx Ground packages. Instead of charging for a
package simply based on its weight, FedEx will be charging its FedEx Ground

customers on the basis of dimensional weight, which can be calculated by

multiplying the length, breadth and height of the package, and then dividing
by 166. The change in pricing mechanism could result in a 30-50% increase in
package shipping costs for bulky-yet-light products ordered online such as
toiler paper rolls, towels, shoes, diapers and purses. These packages occupy a
lot of space in trucks but fetch lower revenues due to their light weight. The
new pricing mechanism allows FedEx to charge a fair value for its most
important asset, the space in its trucks, and also more efficiently cover
operating costs. This should help drive improvement in the companys revenue
and margins in 2015.

FedEx Earnings Preview: E-Commerce Growth Will

Continue To Drive Ground Segment
FedEx is set to release its fiscal second quarter earnings on December 17. For
the second quarter, we expect to see continued growth at FedExs Ground
segment driven by e-commerce volume growth, partially offset by loss of
volumes from one customer for FedExs SmartPost service. Declining fuel
prices will likely impact the companys top line and margins.
In the first quarter, FedExs revenues grew 6.0% year-on-year to reach $11.7
billion. Strong volume growth across all three segments - Express, Ground and
Freight contributed to the revenue growth. Higher fuel surcharges and
profitability improvement programs boosted net profits by 24%. FedExs
earning per diluted share for the quarter increased 37.2%, to reach about
$2.10, due to the increase in net profit and buyback of 5.3 million shares of
FedEx common stock, which added $0.15 per diluted share.
In its fourth quarter earnings release, FedEx reaffirmed its guidance of $8.509 earnings per diluted share in the fiscal year 2015, a growth of 26-34% from
fiscal year 2014. The capital spending forecast for fiscal year 2015 remains
$4.2 billion.
See our complete analysis of FedEx here
E-Commerce Will Continue To Drive FedEx Ground
We expect to see continued growth in e-commerce sales to drive FedExs
Ground revenues in the second quarter. According to preliminary estimates by
the U.S. Census Bureau, e-commerce sales grew 16.2% in the three months

ended October. Since FedExs second quarter ends November, it will also
benefit from holiday season e-commerce sales, which are expected to
increase 16.6% in November and December.However, similar to last
year, Cyber Monday or Cyber Week sales, which historically has accounted for
around 25% of FedExs holiday season sales, will not be a part of the second
quarter. The Ground segment should receive a favorable boost from the rate
increase which was effective from the beginning of the year.
FedExs Ground segment will likely suffer from the loss of a large customer of
its SmartPost service. The service, which uses the U.S. Postal Service to make
final delivery to any residential address or PO Box in the U.S., saw an 8%
decline in volumes in the previous quarter. FedExs management believes that
they will be able to replace the lost volume. However, a lack of information
regarding any development in the service makes us believe that SmartPost
volumes may decline in the second quarter as well.

FedEx Earnings Preview: SmartPost And Express May Present

Headwinds
FedEx is set to release its first quarter (fiscal year ending May 31) earnings on
September 17. In the fourth quarter, its revenue grew 4% year-over-year to
$11.4 billion, driven by revenue growth at FedEx Ground and FedEx
Freight. Its net income grew a staggering 141% due to adjustments made to
FedExs Express segment in the fourth quarter of fiscal year 2013 which led to
zero net income from the segment. These adjustments included business
realignment and impairment charges. The high net income and repurchase of
9.9 million shares of FedEx common stock during the quarter helped drive up
earnings per share by 159% to reach $2.46.
During their fourth quarter earnings meet, FedEx announced its guidance of
$8.50-$9.00 earnings per diluted share in the fiscal year 2015, a growth of
26%-34% from fiscal year 2014. FedEx had recently increased its quarterly
dividends by 33% citing strong cash flows during the fourth quarter.
For the first quarter, we expect to see continued growth at FedExs Ground
segment driven by e-commerce volume growth. However, loss of volumes
from one customer for FedExs SmartPost service will be a matter of concern.
Additionally, a shift in demand towards low-priced services may continue to
impact FedEx Express segment.

See our complete analysis of FedEx here

E-commerce and rate increase will likely drive FedEx Ground
Similar to the previous quarter, we expect to see FedExs Ground service to
grow driven by the strong e-commerce market. E-retailers prefer using
cheaper means of shipping their products so that they may pass on the
benefits of low costs to their customers. Many e-retailers are able to offer free
shipping service because of the low shipping cost incurred by the e-retailer. In
the fourth quarter fiscal year 2014, FedExs Ground service volumes increased
8% due to the booming e-commerce market. With the e-commerce market
forecast to grow 20% in 2014, we believe FedExs Ground service should
continue to grow in the first quarter fiscal year 2015.
For the fiscal year 2015, we believe that the new dimensional weight pricing
mechanism, which will be effective from January 2015, will have a major role
to play in FedExs Ground segment. The new pricing mechanism will not only
help growth in revenue but also help improve margins due to better price
realization.

High Volume And Fuel Surcharge Drive FedEx's Earnings

FedEx Corporation announced its first quarter fiscal year 2015 results
ending August 31, 2014, (fiscal year ends May 31) reporting a 6.0% year-onyear growth in revenues to reach $11.68 billion. Strong volume growth across
all three segments - Express, Ground and Freight contributed to the revenue
growth. In addition, higher fuel surcharges helped drive up revenue per
package leading to improvement in revenue, operating margins and yields,
which increased 130 basis points to reach 8.5%. The higher operating margin,
which was also driven by FedEx profitability improvement programs initiated
in fiscal year 2013, boosted net profits by 24%.
FedExs earning per diluted share for the quarter increased 37.25%, to reach
$2.10, due to the increase in net profit and buyback of 5.3 million shares of
FedEx common stock, which added $0.15 per diluted share. The company
reaffirmed its guidance of $8.50-$9.00 earnings per diluted share in the fiscal
year 2015, a growth of 26%-34% from fiscal year 2014. The capital spending
forecast for fiscal year 2015 remains $4.2 billion.

See our complete analysis of FedEx here

Strong volume growth across all segments
All three segments of FedEx saw an increase in volume. Express volumes grew
4.0% driven by higher demand for its economical services such as U.S.
Overnight Box, U.S. Deferred and International Economy. Its premium
services, which include U.S. Overnight Envelope and International Priority,
continued to suffer due to customers prioritizing cost over timely delivery. U.S.
Overnight Envelope volumes declined 6.4% and International Priority
managed a weak 0.7% growth. FedEx Freight average daily shipments
increased 10.6% driven by low-teens growth in its Priority service.
FedExs Ground segment volumes continued to benefit from the e-commerce
boom. The U.S. Retail e-commerce sales grew 15.5% and 15.7% in the first two
quarters of 2014, benefitting FedEx?s Ground services average daily volumes,
which grew 6.1% during the first quarter fiscal year 2015. We expect Ground
volumes to continue to increase in throughout fiscal year 2015 driven by
growth in the North American e-commerce industry, which is forecast to
grow 32.9% in 2014 and 31.7% in 2015. However, this growth may be
partially offset by the declining volumes for FedExs SmartPost service. Similar
to the fourth quarter fiscal year 2014, SmartPost average daily volumes
declined 10.2% due to a change in shipping patterns from one large customer,
whom once again FedEx has not named. We believe that the loss of this
customer will continue to impact SmartPost volumes throughout the fiscal
year 2015. Though FedExs management believes that they will be able to
replace the lost volume, they have not outlined any plans that have been set in
place to do so.
Higher fuel surcharge contributed to yield improvement
Complementing the increase in volume, higher fuel surcharge helped drive
revenue and yields. FedEx Express fuel surcharge is based on the two month
lagged U.S. Gulf Coast spot price for a gallon of kerosene-type jet fuel. This
means that fuel surcharge for the months of June, July and August are based
on the average spot price in the months April, May and June respectively. As
per our calculations based on the FedEx Express Fuel Surcharge chart and
kerosene-type jet fuel spot price, fuel surcharges for FedEx Express U.S.
packages for the first quarter fiscal year 2015 increased 120 basis points to
9.5%, compared to 8.3% in the first quarter fiscal year 2014. This increase
contributed 0.5% to the 1.0% improvement in U.S Packages yield. Similarly,

fuel surcharges contributed 1.0% towards the 2.9% increase in international

export package yield.
FedEx Grounds fuel surcharge is based on the two month lagged average price
of the U.S. on-highway diesel fuel. As per our calculations based on the FedEx
Ground Fuel Surcharge chart and U.S. on-highway diesel fuel prices, fuel
surcharge for FedEx Ground packages for the first quarter fiscal year 2015
increased 16 basis points to 6.83%, compared to 6.66% in the first quarter
fiscal year 2014, contributing 0.1% to the 3.1% improvement in Ground
yield. The remaining increase in margin was driven by rate increases which
were effective from January 2014. FedEx Freights yield per shipment
improved 2.6%, of which 1.4% was contributed by an increase in fuel
surcharge.
Operating margins and yields should continue to increase
A day before the release of its first quarter earnings, FedEx announced that
will be increasing the rates of all its services by an average of 4.9% effective
January 5, 2015. The increase in rates should help drive revenues and
operating margins. For FedEx Ground, this comes as an addition to the prior
announcement of following dimension based pricing for all shipments.
Dimension based pricing, as opposed to weight based pricing, will lead to
better price realization for bulky yet light weight e-commerce packages. This
will significantly improve margins at FedExs Ground segment. Dimensional
pricing for all Ground packages will also be effective from January 5, 2015.
We will shortly be updating our price estimate of $140 for FedEx after
incorporating this quarters results in our model.