FedEx's Mystery Management Shuffle Raises Stakes for Earnings

(Bloomberg) -- FedEx Corp. investors will finally get some answers Tuesday on an abrupt management change and their growing questions about the health of the delivery business -- and maybe the U.S. economy.

“Are they seeing a slowdown? If so, where?” Kevin Sterling, an analyst at Seaport Global Holdings, said in an interview. “Is it just the slow environment, or is there something else going on? These are questions on everybody’s mind.’’

FedEx’s earnings, posted a month before the quarterly flood from other companies, generally attracts close attention because the delivery business is a proxy for economy. Interest will be particularly keen this quarter, during the crucial holiday delivery season, as investors seek insight on the fallout from the U.S.-China trade war. FedEx also faces a threat as Amazon.com Inc. builds its own shipping capabilities.

And then there’s Chief Executive Officer Fred Smith’s decision to replace 36-year veteran David Cunningham at the helm of FedEx Express. That air-delivery segment, around which Smith founded FedEx roughly a half-century ago, accounts for almost 60 percent of revenue.

Bad Timing

Investors want to know why a company known for long management tenures ousted the chief of its largest unit after less than two years in the job and with no explanation.

The timing of the announcement –- during the peak season and about two weeks before the earnings report -- raised questions about the Express business and whether FedEx will scrap its goal of improving operating income at the division by $1.2 billion to $1.5 billion within two years.

“One can only think this is bad news. Otherwise, the company would have announced it during its earnings release,’’ Credit Suisse Group AG analyst Allison Landry said in a Dec. 12 note. “With no further information from the company, the logical conclusion by the market appears to be: Kiss the $1.2 billion-$1.5 billion target goodbye.’’

Those concerns stoked a 20 percent decline in FedEx shares this month through Dec. 14, compared with a 14 percent drop at United Parcel Service Inc. and a 7.7 decline for a Standard & Poor’s index of U.S. industrial companies. FedEx 0.7 fell percent to $182.90 at 9:41 a.m. in New York, on track for its ninth straight decline -- the longest losing streak since 2008.

The Express unit has been struggling. Operating profit shrank to 5.8 percent of sales for the fiscal year through May, from 7 percent a year earlier. The margin has been dropping steadily as costs climbed to integrate TNT Express, a European courier purchased in 2016. The company hit a snag last year when a global cyberattack spurred TNT Express customer defections and cost FedEx $400 million.

Smith said in September said that he was “confident’’ the unit would meet the operating-income goal at Express. But analysts grew skeptical after FedEx said it would replace Cunningham with Raj Subramaniam, a 27-year FedEx veteran who is the company’s marketing and communications chief.

FedEx’s earnings expectations dropped to $3.94 a share for the fiscal second quarter, down 6 cents from the Dec. 6 average of analyst estimates compiled by Bloomberg. Revenue for the quarter, which ended Nov. 30, is projected to rise about 9 percent to $17.7 billion.

The biggest weight on FedEx is President Donald Trump’s extended sparring with China, which could lead to higher tariffs and cause the U.S. economy to contract, according to Trip Miller, managing partner of Gullane Capital Partners.

“If there is anything that could dampen their guidance, it would be trade. If this really goes into effect, I think this could be a potential catalyst for recession in the U.S., as well,’’ the longtime shareholder said.

“We’re really looking forward to hearing what their insight is on both the domestic and international economies -- and, obviously, updating us on that leadership transition,’’ Miller said.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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