FedEx's 'breathtakingly bad' earnings has investors scrambling to find the bottom as Amazon's skyrocketing logistics network looms
- The week before Christmas 2019 has been perhaps the worst in FedEx's turf war against Amazon, which has turned from customer to competitor in just a few years.
- The Memphis-based package giant was trading at $168 per share on Monday morning. As of Thursday evening, that number sank to $147 per share - a 14% slash.
- It's part of what has been a remarkably bad year for FedEx as Amazon's network expands to deliver 3.5 billion of its own packages. Soon, analysts expect it will deliver third-party packages.
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Following a disappointing earnings report, FedEx just had one of its worst weeks amid an already challenging year. The package giant was trading at $168 per share on Monday morning. That number sank to $147 per share as of Thursday evening, a 14% slash.
And investors aren't sure when it will end, especially as FedEx throws itself into an e-commerce field that's already crowded with UPS, Shopify, Stamps.com, and - most dauntingly - Amazon.
By next year, according to a recent Morgan Stanley report, Amazon will already be moving more packages than FedEx. The retailer is poised to snag as much as $100 billion from the top lines of USPS, FedEx, UPS.
FedEx began as a parcel delivery network in 1971, with overnight, highly-dependable package delivery as its trademark service. But now, it's rushing to keep up with an e-commerce landscape that values free shipping over white-glove services.
Some say FedEx is no longer setting the standards for global commerce, but catching up to what others in the field are doing. "FedEx is a little more reactionary rather than proactive," Seaport Global managing director Kevin Sterling told Business Insider. "Amazon is very proactive."
FedEx did not respond to a a request for comment, and an Amazon spokesperson sent a press release on the company's creation of 100,000 jobs in its last-mile network. It will move 3.5 billion parcels this year, according to the release.
FedEx's unfortunate week began with an Amazon policy shift
On Sunday night, Amazon told its third-party sellers that they could no longer use FedEx Ground and Home shipping services for Prime shipments.
A FedEx spokesperson told Business Insider on Monday that the move would affect "a very small number of shippers," but the news still dinged FedEx's stock by 3%. Amazon didn't provide a comment to Business Insider about the policy change.
Indeed, FedEx's on-time delivery rates on Cyber Monday were lower than that of UPS, the US Postal Service, and Amazon, according to consultancy ShipMatrix numbers provided to Reuters. FedEx delivered 90.4% of its packages on time, several percentage points lower than Amazon's in-house network (93.7%), USPS (92.3%), and UPS (92.7%).
Cathy Roberson, Logistics Trends & Insights analyst, told Business Insider that Amazon was right to cut off FedEx if the company's delivery rates were below standards. Still, announcing that days before FedEx's second-quarter fiscal year 2020 earnings was "perfect timing."
For Sterling, the timing was a little too perfect, and matched up with FedEx's twice-dumping of Amazon earlier this year. FedEx Express ended its US business with Amazon in June, followed by FedEx Ground doing the same in August.
"FedEx broke up with Amazon and Amazon is now giving them a stick in the eye," Sterling said.
Then FedEx announced 'breathtakingly bad' earnings
At 4 p.m. ET on Tuesday, FedEx announced its 2020 Q2 earnings. (The company's fiscal year begins on June 1.)
The package giant, investors learned, was lowering its earnings-per-share guidance - for the fifth time in a row. According to a Business Insider analysis, FedEx's Q2 operating margins were the lowest since 1990, the earliest year for which that number was available. It sank from 6.55% in 2019 to 3.20% this year.
How leading analysts wrote to investors following the earnings announcement reflected a collective shuddering on Wall Street.
"FedEx reported results that we can only characterize as breathtakingly bad," Deutsche Bank's Amit Mehrotra wrote in a note.
Stephens' Jack Atkins asked in a note, "With a stocking full of coal investors ask, is this finally the bottom?"
Credit Suisse's Allison Landry believes that 2021 will improve, but her tone was hardly reassuring. "At this risk of sounding like a broken record calling a bottom for FedEx earnings, at this point it is truly a challenge for us to think that things get materially worse from here," she wrote.
FedEx leadership pointed to headwinds from a shortened peak season, macroeconomic headwinds, and cost challenges around scaling from six-day to seven-day delivery.
Industry watchers didn't buy it. "While international trade and tariff uncertainty, combined with weak Industrial Production in the U.S., certainly do not help, we note that FedEx's own macro assumptions are largely unchanged from a quarter ago, which makes it hard to pin the about 15% effective FY guidance reduction on further macro deterioration," Morgan Stanley's Ravi Shanker wrote to investors.
The morning after FedEx announced earnings, the package giant's stock tumble wiped out $3.5 billion in value.
No longer 'fantastical'
FedEx's founder and CEO Fred Smith has long referred to the concept that Amazon could challenge his company's giant logistics network as "fantastical."
The company once regularly emphasized that it considers Amazon small beans. Apropos of nothing, FedEx announced in January that Amazon comprised less than 1.3% of the company's bottom line. It was apparently the first time FedEx released a statement on one of its own customers and how much (or little) that customer claims the shipper's bottom line.
Read more: FedEx wants to make it clear how little it relies on Amazon
That tone has quickly changed.
The December 17 earnings call featured several remarks about the shoddy earnings as partly a result of it ending its Amazon business. Don Colleran, president and CEO of FedEx Express, said his division lost "a significant customer."
And in answering an analyst question on record low operating margins, CFO Alan Graf pointed to reasons to be optimistic - FedEx's seven-day delivery expansion, cost management, modernization of Express air hubs, and improved global conditions.
"I think if you think about all the positive things we've said and that we're seeing, as we get into 2021, we will start lapping Amazon," Graf said. The e-commerce company got four mentions in the earnings call, while executives didn't say "UPS," FedEx's classic competitor, once.
That tone change is also clear in the company's annual report, released on July 16. There, FedEx mentioned Amazon six times - highlighting it alone in a section called "We face intense competition."
The attention on Amazon over UPS is especially striking considering the 111-year-old UPS has 564 cargo jets, thousands of facilities and fulfillment centers around the world, and more than 123,000 vehicles. Amazon, meanwhile, has a logistics network that's barely four years old. By 2021, it will have 70 planes and one air hub.
But before the December 17 call, FedEx leadership told investors that it would retire 10 planes.
That call began at 5:30 p.m. At that same minute, The Wall Street Journal published an article announcing Amazon was adding 10 new planes.
