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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
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 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.