FedEx surges as e-commerce demand sends profit climbing

Sales at the ground-delivery unit jumped 36% to $7 billion and operating margins rose to 11.8%, the highest in a year, FedEx said in a statement Tuesday. That helped push the courier's total earnings beyond Wall Street's highest estimate in the fiscal quarter ending Aug. 31.

"Demand is so strong at this point that they're emboldened to start taking price to a greater extent, which can be a very powerful driver of profitability," said Matt Arnold, an analyst with Edward Jones.

FedEx is cashing in surcharges for big customers that are making home deliveries more profitable after years in which residential shipments weighed on margins. Like rival United Parcel Service Inc., which dazzled Wall Street with its results less than two months ago, FedEx is getting an early payoff on investments to boost efficiency and automation to handle demand spurred by the rise of online shopping.

"Our earnings growth underscores the importance of our business initiatives and investments over the last several years," FedEx Chief Executive Officer Fred Smith said on a conference call with analysts. "In many ways, the world has accelerated to meet our strategies."

FedEx surged 9.2% to $258.40 before the start of regular trading Wednesday in New York, on track toward the highest close since June 2018. The stock had gained 57% this year through Tuesday, outpacing UPS's 38% advance and a 5.3% increase in the S&P 500.

An additional surcharge of 30 cents a package for large Ground customers is helping FedEx offset the extra costs of operating during the pandemic. Higher pricing pushed package yields to an increase of 2.2%, reversing declines in the previous three quarters.

At the Express air-cargo unit, revenue rose 7.8% to $9.65 billion. Operating margins more than doubled to 7.4% from a year earlier, showing more signs of pricing strength. FedEx is benefiting from the steep decline in passenger flights, which often carry cargo at lower rates.

The gains helped FedEx make up for revenue it lost after parting ways with Amazon.com Inc. FedEx's total sales rose 13% to $19.3 billion. Analysts had expected $17.55 billion.

Adjusted operating profit margins climbed 2.4 percentage points from a year earlier to 8.5%, That helped lift adjusted earnings to $4.87 a share, topping the highest estimate compiled by Bloomberg. Analysts had predicted $2.69.

During the quarter, the company was helped by lower fuel costs, a $65 million reduction in aviation excise taxes under the U.S. Cares Act and an extra operating day that added $130 million of revenue. Coronavirus-related expenses cost the company an extra $100 million in the quarter, said FedEx Chief Financial Officer Alan Graf.

The courier expects higher revenue and operating income at its Ground and Express units for the remainder of fiscal year 2021, which concludes at the end of May, said Graf, speaking on his last earnings call before retiring. He will be replaced by Mike Lenz on Sept. 22.

FedEx already is preparing for the rollout of a potential coronavirus vaccine. The company has 90 "cold-chain" facilities worldwide for speedy distribution if and when a vaccine is ready, said Chief Operating Officer Raj Subramaniam.