The Drags at FedEx: It's Not Just Fuel Any Longer

Implications: FedEx Corp.'s reported $241 million loss in its fiscal fourth quarter ending May 31 compares with a year-ago profit of $610 million. The huge swing is attributed to a $696 million after-tax asset-impairment charge connected with its  disastrous acquisition of Kinko's, higher fuel costs and a weak U.S. economy.  Looking ahead to 2009, FedEx CFO Alan Graf labeled the outlook to remain "extremely challenging." He is not optimistic that either freight demand will grow or that fuel costs will recede.

Analysis:    To show how rapidly financial conditions are worsening in all transportation modes, when FedEx issued its original fourth-quarter guidance in arch, crude oil had just surged over the then-unheard-of level of $100 a barrel.
  When FedEx actually released its fourth-quarter earnings for its quarter that ended May 31, crude was closer to $135 a barrel. That's a 35 percent increase in less than three months.
  And they say this isn't a bubble?
  FedEx's quarterly report was a disaster, no two ways about it. First, there is the economic softness that caused FedEx to miss even the lower end of most analysts' estimates. Then there is the writedown for its disastrous Kinko's purchase three years ago. FedEx thinks that buy is going so well that it is actually going to eliminate the name "Kinko's" in the next year or two.
  Can anyone say "Zap Mail?"
  But digging more deeply into FedEx's $241 million quarterly loss (compared to $610 million profit a year ago), that's an $851 million swing to the negative in a year.
  Weakness is seen across the board in FedEx's numbers. FedEx Ground, the beleaguered small-package segment whose very business model of owner-operators is being in challenged in several court cases yet to be determined, remains bogged down.
  Anytime anybody competes with UPS it's time to strap on your helmets. UPS plays for keeps. FedEx Ground continues to tread water. Although FedEx officials somehow remain optimistic the legal challenges will just disappear, it's clear to neutral observers they are not going to just go away. FedEx Ground already has been forced to change its business model in California. More changes may be coming elsewhere.
  But it's not as if the only thing wrong with FedEx is its Ground operation. FedEx Express, its flagship, suffered a 27 percent drop in operating income while Ground had a 26 percent drop. FedEx Freight, its LTL unit which had been performing well, suffered a 21 percent year-over-year drop in operating revenue.
  Looking ahead, the most optimistic thing that can be said is, "Thank god for fuel surcharges."
  FedEx Express's average fuel surcharge in the most recent quarter was 21.2 percent, compared to 13.7 percent just three quarters ago. FedEx Ground's surcharge was 6.7 percent, compared to 4.5 percent a year ago in the first quarter of FedEx's fiscal year.
  FedEx's stock was hammered, down 3 percent on the day it released its financial report. I'm surprised it actually didn't drop more--it remains a pricey buy at nearly $85 a share--but the days of it being a $100-a-share stock appear over for now.