FedEx Records Higher 2Q Profits, Agrees to Buy Logistics Firm Genco

This story appears in the Dec. 22 & 29 print edition of Transport Topics.

FedEx Corp. last week said stronger results at every unit boosted its fiscal second-quarter net income 23% to $616 million, while also announcing plans to buy logistics specialist Genco to broaden its product line.

On the financial front, net income increased to $2.14 a share from $1.57, or $500 million net income, in the year-earlier period, both ended Nov. 30. Revenue climbed 4.7% to $11.9 million.

Profit before interest and taxes rose 36% at FedEx Express, where revenue rose 3% to $7.02 billion. Ground boosted profit on that basis by 6%, as revenue rose 8% to $3.02 billion. Freight’s operating income rose 35% to $112 million. Revenue climbed 11% to $1.59 billion.

FedEx also said it has acquired cross-border technology provider Bongo International, based in St. Petersburg, Florida, to expand its e-commerce offerings. Terms of both deals weren’t announced.

“Genco is a good fit for FedEx because it fills a gap in its service offering and integrates well with the company’s Ground and SmartPost businesses,” said a report by William Blair analyst Nate Brochmann.

The Genco acquisition, slated for completion in the first quarter of 2015, adds the company ranked No. 13 on Transport Topics Top 50 Logistics Companies to No. 30 FedEx Trade Networks. Together, their annual revenue approaches $3 billion. Bongo’s revenue wasn’t disclosed.

By comparison, rival UPS’ Supply Chain business posted 2013 revenue of $5.5 billion.

FedEx CEO Frederick Smith explained the strategic shift on a conference call.

“In years past, we were not particularly enamored of the so-called ‘3PL’ business,” he said. “It was a relatively low-margin business that saw a lot of loss of contracts on first renewal. What of course has happened over the decade since we expressed those remarks is the entire logistics and retailing sector has changed.”

He also praised Pittsburgh-based Genco for its “substantial market presence” in services such as reverse logistics.

Smith also addressed two other issues related to the holiday-shipping season, which last week included FedEx’s busiest day of the year.

He highlighted cargo slowdowns during the protracted West Coast ports’ labor talks and retailers’ order-fulfillment difficulties.

“The slowdown in the West Coast ports has been a much bigger deal than people think and a tremendous amount of inventory was simply not put through the ports in the timeframe that the retailers had expected,” he said. “I suspect that you’ll see a lot of purchases of gift cards in lieu of merchandise and in January you’ll see some of that traffic moving in the truckload sector.”

Smith continued: “A lot of traditional retailers have gotten very, very good at e-commerce in terms of their marketing. What they haven’t gotten as good at in some cases is processing those orders.”

A National Retail Federation official offered a different assessment.

“For the most part, most folks have their products in, and retailers are trying to do anything they can to ensure the product will be there when customers walk in,” Jon Gold, vice president of supply chain and customs policy, told Bloomberg News.

An International Longshore & Warehouse Union spokesman challenged Smith to prove his assessment.

Meanwhile, the Pacific Maritime Association, management’s negotiators, last week said the two sides still were far apart despite exchanging recent contract offers.

Fuel prices also are an issue.

FedEx Chief Financial Officer Alan Graf dampened expectations that recent fuel-price declines would sharply boost company profits.

He said factors such as timing of fuel surcharges not tied to spot fuel prices affect costs.

FedEx’s jet-fuel costs fell just 10%, though the spot price has declined 30%. New fuel surcharge calculation methodology is slated for February.

Graf did say lower costs provided a slight benefit without saying how much.

However, he and other FedEx officials did say fuel prices would help the consumer.

Smith cautioned against what he termed “euphoria”.

“Be a little bit careful that the economy is off to the races,” he said.

The reason, he explained, is that lower prices could reduce capital spending in the oil and gas sector, which “has been a huge driver of the economy.”

The quarterly profit missed analysts’ estimates of $2.25 per share. Robert Salmon, an analyst at Deutsche Bank, said earnings expectations “were overly aggressive due to the lag effect of its purchase agreements for jet fuel.”

Unit results highlights included a 1.2 percentage point improvement in the Express operating ratio to 91.5, reflecting 3.4% higher revenue per package and cost reductions.

Ground operating ratio slipped to 84.8 from 84.6, hurt by higher wage costs and lower-than-planned November volume.

Freight’s operating ratio improved to 92.9 from 94.2, reflecting 8% more shipments and 3% higher revenue per shipment despite a 9% rise in wage costs. Revenue per 100 pounds of freight rose 39 cents to $20.37.

Priority LTL shipments rose 10%, and economy climbed almost 5%.