As FedEx Eyes Double-digit Growth, Key Target Lags

Global delivery company FedEx Corp laid out a strategy to bolster growth by focusing on high-value customers during its investor meeting on Wednesday, but shares backtracked after it forecast margins for its growth-driving Ground unit below pre-pandemic levels.

Shares of FedEx fell 3.3% to $232.09 after executives said Ground unit margins would increase to 11% to 12% by 2025. That division, which handles the bulk of the company's e-commerce home deliveries, reported margins of 13% and 13.7% for fiscal 2019 and 2018, respectively.

As FedEx grapples with cooling economies and rampant inflation, it is under pressure from two competing groups: investors who want FedEx to wring more profit from its operations, and the company's Ground unit contractors who want more money to offset their rising costs.

"We are at a pivotal moment in the history of FedEx as we enter our 50th year," said Chief Executive Raj Subramaniam, who succeeded FedEx founder Fred Smith on June 1.

Executives targeted an average annualized adjusted earnings per share growth rate of 14% to 19% and 4% to 6% compound annual revenue growth through 2025 for the entire company.

Activist investor D.E. Shaw Group this month gained two seats on FedEx's board and has been promised one more. The hedge fund has not publicly shared its targets for FedEx, which also boosted its dividend.

Executives on Wednesday said they would take costs out of the Ground unit. That came as Ground contractors push for a larger cut of the fuel surcharges that are helping drive total company revenue higher.

FedEx's new focus on higher-profit deliveries or "revenue quality" echoes the "better not bigger" mantra adopted by rival United Parcel Service two years ago. Since then, UPS has outpaced FedEx on both profitability and service.

A slowing economy could erode the pandemic-era price increases FedEx needs to execute its new strategy and appease investors, analysts warn. Company executives countered by saying that FedEx offers shipping and delivery services that are difficult to replicate.

The shift paid off in the latest quarter for FedEx. Revenue jumped 8% even as the company handled fewer packages.

FedEx Ground reported an 11% rise in revenue per package despite a 6% drop in average daily volume. Ground's least expensive and slowest "economy" service took the biggest hit, falling 36%.

Ground contractors rely on volume to help offset higher prices for gas, driver wages and delivering to far-flung residential addresses.

Jeff Walczak, CEO of Ground contractor consultancy eTruckBiz.com, said 20-25% of his clients are struggling to turn a profit - about double the normal rate.

"Most of the folks in this business have never seen a downturn in volume, and it's stinging them bad," Walczak said.

Many work on fixed one-year contracts and have had difficulty negotiating more money from FedEx. At the same time, FedEx now wants to shift the cost of lost and damaged parcels on to those operators, Walczak said.