The rise of online shopping through e-tailers like Amazon (AMZN) – Get Amazon.com, Inc. Reports A boon for the ground operations of shipping companies such as FedEx (FDX) – Get FedEx Corporation Report and UPS (UPS) – Get United Parcel Service, Inc. Class B Report.
The benefits are especially pronounced during the holiday season, when consumers do most of their holiday shopping online, a trend that accelerated during the coronavirus pandemic over the past two years.
FedEx, for example, now reports over $30.5 billion in trailing 365-day ground revenue of its total. The ground segment has jumped from 22% of FedEx revenue a decade ago to nearly 40% last year.
Increased online shopping isn’t enough to overcome supply chain issues that have dented some of the luster of the recent holiday season.
Still, FedEx’s third-quarter earnings report this week showed its most profitable December on record despite “lower-than-expected sales.”
FedEx Ground’s Profitability Issues
FedEx’s ground revenue has grown by $17 billion since 2013, but the segment’s profits have only risen by $400 million over the same period. These figures imply a contribution rate of only 2.5%.
Analysts on the company’s earnings call held FedEx accountable for the performance, but the company said it had a plan to turn things around.
“If you look at the history of FedEx Ground, from the very beginning, starting with the acquisition of RPS, when we launched home delivery, and now we’ve doubled down in e-commerce, there was a time when we had to invest, we had a relationship with our customers Working with retailers to make them successful in e-commerce is a strategic relationship we are building,” FedEx Chief Operating Officer Rajesh Subramaniam said on the conference call.
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“So the time for investment in many ways is over. That pace is over. We are now focused on improving the quality of our revenue, making sure we put the right package in the right network, and making sure we generate profits and future growth .”
The company expects company-wide consolidated operating margins to increase in the quarter, but did not elaborate on segment forecasts.
The company said that historically, fourth-quarter ground margins were higher than third-quarter, a trend it expects to continue.
Another trend is forming. Cost inflation for the ground segment has outpaced revenue per pack and yield growth for the third consecutive quarter.
But the company sees these issues as a function of labor issues that have caused the company to become “inefficient” in delivering some packages. The company also saw its labor costs rise.
FedEx’s quarterly imbalance
FedEx reported adjusted earnings of $4.59 a share in the most recent quarter, 5 cents below analysts’ expectations, as the company’s bottom line was hurt by a shortage of workers, especially in its airline business.
Omicron has also affected its customers, who are also experiencing staffing shortages due to Covid variants.
Revenue was $23.6 billion, slightly ahead of analysts’ expectations of $23.4 billion.