The Great Recession was not kind to global shipping giant FedEx Corporation (NYSE:FDX). Whereas the company’s Express division typically posted an 8%-9% operating margin prior to the recession, customers have increasingly tried to cut costs by using slower shipping methods. As a result, FedEx Express’ adjusted operating margin plunged to 5% in fiscal years 2011 and 2012 and just 3.9% in the fiscal year that ended in May.
FedEx Corporation (NYSE:FDX) set out on an ambitious cost-cutting campaign last year in order to reverse this margin decline. However, investors were not satisfied when management projected that FY14 earnings would rise just 7%-13%. Many analysts think that the company lowballed its guidance, so the average estimate for full-year earnings implies growth near the top of the guidance range.
This week, FedEx Corporation (NYSE:FDX) is on deck to report earnings for the first quarter of fiscal year 2014. The company is also expected to update investors on its annual outlook. Investors should be looking for Q1 earnings to improve by at least 7% (the bottom of the full-year guidance range). A boost to the full-year guidance would also be a bullish sign.
Profit improvement initiatives
FedEx Corporation (NYSE:FDX)’s profit improvement actions started to have a positive impact in the fourth quarter of fiscal year 2013 due to cost-cutting measures earlier in the year. Q4-adjusted EPS improved 7% year over year to $2.13. The company achieved strong growth in the FedEx Ground segment while cuts in costs boosted margins in the Express business.
Moreover, FedEx Corporation (NYSE:FDX) implemented a number of cost-cutting moves after the quarter ended. First, employees began leaving under the company’s voluntary early retirement program at the end of the fourth quarter. Approximately 40% of the 3,600 employees (or 1,440) who accepted buyouts left the company on May 31. (Another 35% will leave during the current fiscal year, and the last 25% will retire on May 31, 2014.)
Secondly, FedEx reduced Express capacity between Asia and the U.S. again in July in order to better match capacity to demand for priority shipments. Lastly, FedEx Corporation (NYSE:FDX) has continued to retire older, inefficient aircraft. In June, FedEx finally retired its last Boeing 727, a 1960s-era airplane with three engines (modern aircraft of that size only need two) and a flight crew of three (modern aircraft only need two pilots ).
The key question for investors is whether these cost-reduction efforts will be enough to offset a relatively weak macro environment. The average analyst estimate calls for a 4% increase in earnings per share to $1.51, but FedEx’s cost cuts create some upside to that number.