FedEx (FDX, Financial) reported a concerning Q3 performance. Despite decent headline results, with earnings narrowly missing estimates and a slight top-line beat, the company reduced its FY25 guidance for the third consecutive quarter. FedEx now expects adjusted EPS between $18.00-18.60, down from the previous $19.00-20.00, with revenues either flat or slightly lower year-over-year.
Key Issues
CEO Raj Subramaniam highlighted ongoing pressure from a weak industrial economy, impacting FedEx's higher-margin B2B volumes. Economic conditions remain challenging, exacerbated by tariffs and persistent inflation.
- Q3 economic headwinds significantly affected FedEx Freight, with a 5.3% revenue decline year-over-year to $2.09 billion. Although challenges were less severe than the previous quarter, the segment experienced fewer shipments and lower weight per shipment. The Federal Express segment saw a minor 2.7% revenue increase to $19.18 billion, supporting a 2.1% total revenue rise to $22.2 billion in Q3.
- Federal Express volumes improved, achieving the highest year-over-year average daily growth since Q4FY21, driven by a 5% package volume increase. LTL volumes faced pressure, but the decline rate improved sequentially. U.S. domestic express services saw a slight volume increase, while international volumes grew by 8%.
- FedEx managed a 60 bps year-over-year adjusted operating margin expansion, highlighting the positive impact of its DRIVE and Network 2.0 initiatives. Adjusted EPS of $4.51 narrowly missed estimates. DRIVE savings increased quarter-over-quarter, reaching $600 million in Q3, with a target of $2.2 billion for FY25.
- Network 2.0, aimed at streamlining package networks, is progressing well. FedEx optimized five U.S. stations in 2025 and plans 45 more in Q4, with completion in Canada expected by next month.
- On the Freight separation front, FedEx has established a Separation Management Office since announcing plans to separate the segment. Progress includes a $16 billion debt exchange offer, with separation anticipated by mid-2026. Although Freight is a smaller part of FedEx's business, it offers attractive margins compared to Express. Post-separation, Freight would be the largest carrier by revenue.
Investor expectations were low ahead of Q3 results, but FedEx struggled against significant macroeconomic challenges, impacting the transportation sector. Peers like UPS, KNX, XPO, ARCB, WERN, SAIA, and ODFL also saw declines.
