FedEx warned of a possible global recession as demand for packages around the world declines.
Shares of FedEx plunged 21% on Thursday — the biggest one-day drop in its history — after the company warned Thursday that a slowing economy would cause it to fall $500 million short of its revenue target.
A weakening global economy, particularly in Asia and Europe, hurt FedEx’s express delivery business. The company said demand for packages weakened significantly in the final weeks of the quarter. CNN reported on this.
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Moreover, FedEx said it expects business conditions to weaken further in the current second quarter, which runs through November. While global revenue this quarter is expected to be flat from a year ago, FedEx’s earnings are expected to decline by more than 40%. Analysts were predicting an increase in profits.
During an interview Thursday on CNBC, FedEx CEO Raj Subramaniam was asked if he believed the slowdown in business was a sign of the start of a global recession.
“I think so,” I replied. “These numbers don’t reflect very well.”
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According to him, FedEx is seeing a decrease in the volume of cargo it carries in every region of the world. While he said U.S. consumers were somewhat protected by the strength of the dollar, which boosted their purchasing power, FedEx also saw a slowdown in American spending, he said.
The warning triggered a broad sell-off in US stocks. In addition, the Dow Transportation Index closed down 5%, while shares of FedEx rival UPS closed nearly 5% lower.
The 21% one-day loss for FedEx shares dwarfs the 16% loss on the day of the 1987 stock crash and the 15% drop during the March 2020 stock selloff in the early days of the pandemic. FedEx shares are down 38% so far this year.
The company said it responded by reducing flights and temporarily parking aircraft, reducing employee hours, delaying some hiring plans and closing 90 FedEx Offices as well as five corporate offices. It also cuts $500 million from the capital spending budget for the fiscal year that runs through May 2023, bringing that spending down to $6.3 billion.
“We’re going into full cost management mode,” he told CNBC.
FedEx said its adjusted profit for the quarter ended Aug. 31 would fall $260 million, or 17%, from a year earlier. Revenue rose $1.2 billion, or 5%, despite the company missing its previous target.
Although it issued sharply reduced guidance for the current quarter, FedEx said it was withdrawing its full-year guidance in June due to a “continued volatile operating environment.”
FedEx Ground, the company’s primary method of handling the delivery of online purchases made by U.S. consumers, missed its sales target by $300 million.
The company uses independent contractors rather than employees to make deliveries, and many of those contractors complain that rising costs for fuel, labor and new vehicles make their businesses unprofitable. Some are threatening to shut down operations on Black Friday at the start of the holiday shopping season unless FedEx agrees to change compensation.
FedEx insists it will work with contractors in trouble. He sued the former contractor who was the harshest critic of the company.
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“We recognize that current economic conditions present new challenges,” FedEx Ground said in a statement last month. “We are committed to working individually with service providers to address issues specific to their situation. Our goal is to achieve success for both FedEx Ground and service providers.”
About 1,000 of the 6,000 contractors employed by FedEx have joined a trade union to lobby the company for better compensation.
According to a survey released by the association this week, 54% said their business with FedEx was losing money, 35% said it was bad, and only 11% said it was profitable. The association said the survey reached 1,200 contractors who worked for the company or left the company in the past 12 months.
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