FedEx (FDX, Financial) fell short of investor expectations as it wrapped up FY25. The company posted a significant EPS beat for Q4, marking its largest upside in the past five quarters. Revenue increased slightly by 0.5% year-over-year to $22.22 billion, slightly exceeding forecasts. However, Q1 EPS guidance was notably below analyst predictions.
Management expressed satisfaction with Q4 results despite a weak demand environment. Growth was mainly driven by deferred services, which offer longer delivery times at lower rates, indicating that customers are prioritizing cost savings over speed.
Despite challenges, FedEx reported a 1% revenue increase at Federal Express, although FedEx Freight continued to struggle. A better-than-expected May offset a weaker April, with US domestic volumes holding up well and growth accelerating in late April and May.
Internationally, volume trends mirrored global trade developments. March showed strength, but after the April 2 tariff announcement, customer concerns grew and volumes softened. When tariffs were enacted in early May, China to US volumes declined sharply and remained weak for the remainder of the quarter.
Higher margin B2B volumes remained under pressure in Q4, affecting both Express and Freight results. However, FedEx was encouraged by sequential improvements at FedEx Freight, maintaining a 20.8% operating margin in Q4. FedEx plans to spin off its Freight segment as a separate publicly traded company by mid-2026.
The weak guidance was attributed to ongoing industrial economy challenges and the expiration of a US Postal Service contract, posing near-term growth obstacles. For FY26, FedEx anticipates around $1 billion in incremental year-over-year benefits from transformation-related efforts, including cost reductions from DRIVE and Network 2.0.
Overall, FedEx's Q4 results were solid considering macroeconomic headwinds and mid-quarter tariff announcements. However, the weak Q1 guidance and management's cautious outlook are likely impacting shares. Results may remain under pressure until the industrial economy recovers. UPS is set to report Q2 results in late July, and this report makes us more cautious about UPS.
