FedEx’s Founder Says He Has One Big Job Before Mulling Retirement


(Bloomberg) -- FedEx Corp. founder Fred Smith says he’s nearing the end of his four-decade tenure as chief executive officer, having built a startup into a logistics behemoth with about $70 billion in annual sales.

But first, with the company leaving a trail of disappointment on Wall Street the last two years, he has some unfinished business.

Investors are skeptical about whether Smith’s retooling of the ground network will help FedEx squeeze more profit out of the rise of online shopping. The courier is still trying to integrate a crucial European acquisition, which was crippled by a state-sponsored cyberattack in 2017. And FedEx was in the middle of a major upgrade to its aging fleet of cargo jets when President Donald Trump unleashed a trade war that slowed demand for international packages.

But Smith said he’s confident he has FedEx on the right strategic path and expects benefits to begin kicking in as soon as this spring. Then the 75-year-old will start thinking about calling it a day.

“Even though I’m in good shape and I think I’m in good health, there is a time here in the not-too-near future after the success of these things is apparent,” he said in an interview Dec. 20, without setting a specific timetable. “I’ve got lots of kids, lots of grandkids, so I’ve got plenty to do.”

Succession Plan

And Smith said he’s ready. He said he has laid out a “very formal” succession plan that involves having two position-ready successors for the 40 executive jobs, “and that includes me.”

He recommended to his board that Raj Subramaniam, who was appointed chief operating officer in February, succeed him if he retires or is incapacitated. It will be up to the board whether to keep the CEO and chairman roles combined, Smith said.

“I have named the guy I think should be my successor,” he said. “I don’t plan to stay here indefinitely.”

Smith spoke after a tough week for FedEx, which suffered another earnings miss last week and cut its profit forecast for the second time in three months. Shares have tumbled 41% during the last two years, wiping out more than $28 billion in market value. The shares climbed 1.6% to $150.45 at 10:44 a.m. in New York.

Damaged Credibility

“Their track record isn’t very good and they’ve already burned through a lot of credibility points,” said Rick Paterson, an analyst with Loop Capital Markets.

FedEx is posting its worst underperformance versus the Standard & Poor’s 500 Index since at least 1999, according to data compiled by Bloomberg.

But Smith enjoys advantages possessed by few CEOs at industrial and transportation companies, as Boeing Co.’s Dennis Muilenburg can attest after he was ousted as CEO on Monday. Smith is FedEx’s founder, chairman and third-largest shareholder, a buffer against board members who might agitate for a change in other circumstances.

Smith still faces a formidable turnaround job before he steps down.

A former U.S. Marine who fought in Vietnam, he started FedEx with 14 Falcon private jets converted for cargo and turned the company into a logistics giant. Growth was fueled by international trade and demand from businesses for speedier package deliveries.

Those two market pillars are both under threat. Trump’s trade war has cooled the outlook for trade, and the rise of online shopping is shifting package-delivery demand to less profitable residential drop-offs.

This month’s earnings stumble capped a string of shocks stretching back to the mid-2017 cyberattack that felled TNT Express about a year after FedEx bought the Dutch courier. That caused integration spending to more than double and pushed out the conclusion date.

A year ago, FedEx confounded investors by cutting its profit forecast three months after raising it, citing global economic weakness.

Management Turmoil

Around the same time, Smith replaced a 36-year veteran at the helm of FedEx Express, the company’s air-cargo division. Management turmoil worsened in February when Smith’s heir apparent, David Bronczek, resigned just weeks after joining the FedEx’s board.

Then, in June, the Memphis, Tennessee-based company said it wouldn’t renew its air-cargo contract with Inc., which has been building out its own delivery network. Two months later, the two companies announced the end of their ground-transportation ties.

Hanging over it all is an ambitious investment program designed to spur long-term efficiency gains at the ground-delivery unit and replace decades-old planes that burn more fuel. FedEx was caught off guard by Trump’s trade fight with China, which depressed international package demand in the middle of the fleet upgrade.

“If you’re in the wrong place at the wrong time, which we certainly are with the trade wars at the moment, they can be painful,” he said.

Smith said he decided against deferring aircraft deliveries from Boeing because of the financial pressure the planemaker is under with the grounding of the 737 Max.

Compensation Change

Bu there will be an end to the heavy investment. And despite all the turmoil, Smith said he’s confident enough about FedEx’s comeback that he plans to tie some executive compensation to cash profit for the first time as the spending binge eases next year.

“We probably will put in some sort of cash-flow metric because it’s a good fiscal discipline,” he said.

The incentive would also address Wall Street criticism that FedEx focuses too much on boosting profit margins at the expense of earning a higher return on the capital it invests. The company invests more as a percentage of sales than rival United Parcel Service Inc. and has a lower return on invested capital.

“It’s always been a company that’s been a little bit too spendy,” Matt Arnold, an analyst with Edward Jones, said of FedEx. “We definitely would welcome a mindset where they think about the return they’re going to get on their dollars invested more than they have in the past.”

All of FedEx’s big investment initiatives had to be done, but external factors and timing temporarily have knocked them off plan, Smith said.

The company “had to have” TNT Express to compete with UPS and Deutsche Post AG in Europe, he said. FedEx also had to shed fuel-guzzling planes, but didn’t anticipate a trade war. And a fully “reengineered” ground unit will be more honed for e-commerce demand.

“This has been a tough period,” Smith said. “But I’m very confident that this is a winning strategy.”

©2019 Bloomberg L.P.

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