FedEx expects rebound in Ground unit as e-Commerce fuels expansion

Dallas: FedEx said investments to expand its ground-delivery business are finally poised to pay off, while a major expansion in Europe will produce greater returns sooner than expected.
The current quarter will yield "excellent” results as profit margins widen at the ground unit, Chief Executive Officer Fred Smith said on Tuesday on a conference call with analysts. Integration of TNT Express, the Dutch shipper FedEx bought last year, is going "extremely well,” the US company said.
Improved outlooks for both segments sent shares up after the carrier reported profit that fell short of analysts’ estimates for the second straight quarter. The Memphis, Tennessee-based courier reaffirmed its full-year earnings guidance despite the lag in quarterly results.
"Those two combined, ground and TNT, were the bigger wild cards, and that’s what’s propelling shares higher,” Logan Purk, an analyst at Edward Jones, said in a telephone interview. "It gives more credibility to them maintaining guidance.”
FedEx Ground
FedEx Ground’s margin will swell to "15 per cent plus” this quarter, Smith said, compared with 11 per cent in the three months ended on Feb. 28. The unit’s margins have been under pressure as the operator of the world’s largest freight airline has spent about $2 billion this year to add capacity and automation because of surging demand for home deliveries of goods ordered over the Internet.
FedEx has increased its ground facilities by 10 million square feet, or 15 per cent, in about the past year, BMO Capital Markets said in a March 5 report.
Adjusted earnings were $2.35 a share for the third fiscal quarter ended on Feb. 28, falling short of the $2.62 average of estimates compiled by Bloomberg. Sales rose to $15 billion, matching estimates. One fewer operating day in this year’s quarter also weighed on results, as did a 30 per cent jump in fuel costs that hurt results at the Express air-delivery business.
"Each segment was a bit below our target with the largest miss from Express,” Christian Wetherbee, an analyst at Citigroup Inc., said in a note to clients before the conference call. "Express profit decline will be a key question for sustainability of growth.”
TNT integration
The weak results are unlikely to be repeated as earnings improve in the next quarter, Chief Financial Officer Alan Graf said on a conference call with investors and analysts.
FedEx will stop reporting TNT Express as a separate segment starting in fiscal 2018, instead folding it into its Express business, where the company is targeting operating income improvement of $1.2 billion to $1.5 billion in fiscal 2020. FedEx initially forecast annual pretax benefits of $750 million a year from TNT.
"We continue to have a great degree of confidence in the TNT acquisition,” Graf said. "The integration is going extremely well. We see the combination of these as transformative and expect significant synergies from the integration.”
FedEx also is driving costs lower at the unit through agreements such as one recently reached with Walgreens Co. to let consumers drop off and pick up packages in thousands the retailer’s stores starting later this year. Delivering parcels to individual homes drives up costs because of the time involved to get an individual package to its destination.
The shipping company had a strong peak holiday season, handling the most packages ever and achieving "record service levels,” Smith said, without offering specifics.