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On Friday, FedEx noted that global packages were declining, prompting the company to warn of a possible global recession.
Company shares
FedEx stock (FDX) fell 21% on Friday, making it the largest one-day drop in the company’s history.
FedEx also warned late Thursday that a slowdown in the economy would send it $ 500 million below its revenue target.
The slowdown in the global economy, especially in Asia and Europe, has dealt a severe blow to FedEx’s courier business.
The company said demand dropped significantly in the final weeks of the quarter.
FedEx also said it expects a further weakening of trading conditions in the current second quarter, which will last until November.
The company expects global sales for this quarter to remain stable from the previous year, with earnings forecast down more than 40%.
Meanwhile, analysts expect earnings to rise.
Global recession forecast
FedEx CEO Raj Subramaniam was asked last Thursday in an interview with CNBC if he believes the company’s slowdown is a sign of the onset of a global recession.
“I think so,” he said. “These numbers don’t predict very well.”
Subramaniam also said the company is seeing a decrease in the volume of cargo it handles in every region of the world.
While US consumers are safe thanks to the strength of the dollar, which has had an impact on purchasing power, the FedEx CEO said he sees a slowdown in US spending.
Movement in the stock market
The warning led to a large sell-off of US stocks.
The Dow Transportation Index fell 5%. Meanwhile, UPS shares closed down about 5%.
For FedEx, the 21% one-day loss outweighs the 16% drop during the 1987 stock market crash and the 15% drop in the March 2020 stock sell-off.
So far, FedEx shares have fallen 38% in 2022.
FedEx responds
FedEx is responding to the loss by taking a series of actions. The company will practice in:
- Reduce flights and temporarily park aircraft
- Trim hours for the staff
- Delay hiring plans
- Close 90 FedEx Office locations and five corporate office
- Cut $500 million from the capital expenditure budget for the fiscal year until May 2023
“We’re going fully into cost-management mode,” said Subramaniam.
Quarterly revenue
FedEx said adjusted earnings for the quarter (ending August 31) will be 17% ($ 260 million) lower than the previous year.
Sales were also up 5% ($ 1.2 billion), despite the company’s falling short of its previous target.
FedEx issued a sharply lowered outlook for the quarter and said it was withdrawing its full-year guidance beginning in June, citing “the still-volatile operating environment.”
Delivery service
FedEx Ground Service, the primary way they handle deliveries, missed its $300 million sale.
The company relies on independent contractors for deliveries, and many of them complain that rising fuel, labor, and new vehicle costs are making their business unprofitable.
Some contractors are threatening to halt Black Friday operations unless FedEx agrees to change their compensation.
The company insists it will work with struggling entrepreneurs.
Previously, FedEx sued a former contractor who had strongly criticized the company.
“We recognized that current economic conditions are posing new challenges,” FedEx Ground said in an August statement.
“We remain committed to working with service provider businesses individually to address the challenges specific to their situation.”
“Our goal is to enable success for both FedEx Ground and service providers,” the statement added.
More than 1,000 of the 6,000 contractors who worked for the company joined a trade association to campaign for better pay at FedEx.
A survey conducted by Associated Releases revealed that 54% of businesses that work with FedEx have lost money.
35% said it was profitable, while only 11% said it was profitable.
The association’s survey reached more than 1,200 people who have worked or left the company in the past 12 months.
Reference:
FedEx warns of a global recession, cutting sales forecast by half a billion dollars
