FedEx reports 76 percent increase in net income for fiscal second quarter 2012

Driven by a continued focus on yield management, FedEx reported today that fiscal 2012 second quarter net income at $497 million was up 76 percent annually.

The company’s quarterly revenue of $10.59 billion was up 10 percent from last year’s $9.63 billion, and operating income at $780 million was up 66 percent from $469 million. Its operating margin—at 7.4 percent—was up from 4.9 percent. FedEx reported earnings per share of $1.57, which topped Wall Street estimates of $1.52 per share.

Along with yield management, company officials said that the quarterly improvements were spurred by strong demand for FedEx Home Delivery and its FedEx SmartPost offerings.

“Our improved performance was largely a result of effective yield management programs and strong demand for FedEx Home Delivery and FedEx SmartPost services,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “With the healthy growth in online shopping this holiday season, demand is increasing for these residential delivery services.”

And T. Michael Glenn, FedEx executive vice president, market development and corporate communications, said on an earning conference call that FedEx’ e-commerce rates have been growing in the mid-teens for the last two years and continue to account for a growing share of retail sales. He added that FedEx’ residential deliveries have benefited from strong e-commerce demand, however, he said the company continues to manage demand for its services as part of its yield improvement strategy.

Glenn said FedEx expects economic growth to continue at a “moderate pace as inventory destocking has been a headwind for GDP and shipping demand in recent months. The combination of record-low inventories relative to sales in the distribution sector and continued growth in demand should lead to restocking in the coming months, which would benefit [FedEx].” He added that while consumer confidence remains at record-low levels, there has been improvement recently, with November’s consumer confidence level hitting its highest point since July and its biggest monthly gain since April 2003.

Individual unit quarterly performances: FedEx Express quarterly revenue was up 10 percent at $6.58 billion, with an operating margin of 5.2 percent, up from last year’s 4.4 percent and an operating income of $342 million for a 30 percent annual decrease. Revenue at FedEx Ground was up 13 percent at $2.34 billion, with an operating margin of 17.0 percent, compared to 14.3 percent last year, and an operating income of $398 million for a 34 percent annual gain. FedEx Freight revenue at $1.33 billion was up 9 percent from $1.22 billion last year, with an operating margin at 3.0 percent compared to -7.5 percent a year ago.

FedEx Freight yield was up 8 percent due primarily to higher LTL fuel surcharges and yield management efforts, which also saw average daily LTL shipments fall 3 percent. The LTL market leader handled 86,800 shipments per day, which was down 3 percent annually, with average weight per LTL shipment at 1,147 pounds up 3 percent.

Average daily package volumes at FedEx Ground were up 4 percent at 3.979 million packages per day, due to increases FedEx Home Delivery service and business-to-business markets, according to company officials, with revenue per package up 9 percent due to higher fuel surcharges and increased rates. FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service saw daily volume up 17 percent at 1.737 million average daily packages per day and revenue per package at $1.79 up 4 percent

Total U.S. domestic express packages were down 4 percent at 2.588 million per day, while International Priority was down 3 percent at 569,000 packages per day and International Domestic was up 49 percent at 529,000 packages per day. Total revenue per U.S. domestic package at $17.01 was up 12 percent, while total revenue per package for International Priority and International Domestic at $60.56 and $6.51 were up 11 percent and down 12 percent, respectively.

FedEx Chief Financial Officer Alan Graf said on the conference call that FedEx Express will be parking additional aircrafts in the second half of the fiscal year as the company continues to align capacity with demand.

“Ongoing weakness in global growth and global inventory destocking reduced our average daily volume for U.S. domestic package 4 percent and International Priority package by 3 percent,” said Graf. “This was heavily impacted by weakness in Asia, but our combined IP package and freight pounds increased 2 percent with 8 percent higher revenue year-over-year.”

Jerry Hempstead, president of Orland-based Hempstead Consulting, told LM that the quarterly numbers for FedEx are “frightening” in that if FedEx air and ground services are viewed as an indication of the general economic health of the United States, some of its key metrics point to a stalled economy, despite some recent positive signs of life.

As an example, he pointed out the U.S. Overnight Envelope quarterly volume at 582,000 pounds were down 7 percent, as part of total U.S. Domestic Packages at 2.588 million ponds per day, which was down 4 percent.

“This is unhealthy,” he said. “The revenue growth is there for things like Overnight Boxes, which saw volume down 2 percent but revenue up 12 percent. How does this happen? It has to do with rate increases, rather than yield management. Shippers should note that FedEx is handling less air packages but bringing in far more revenue per package, regardless of discounts. Ground is growing but the fact is that Ground shipments were only up 4 percent [at 3.979 million daily packages], and growth there is really coming from SmartPost, which is basically independent of ground. The darling has been the SmartPost business, which had a fiscal first quarter growth rate of 28.6 percent compared to this quarter’s growth rate of 17 percent [with 1.737 million packages per day] and its revenue per package of $1.79 was up 3 cents from the previous quarter.”

Hempstead added that quarterly revenue growth for FedEx is coming from much higher prices for the packages they are handling and as long as they are moderate some of their growth and expenses their margins should improve. But much of the company’s margin growth this year, he said, was created by a change in the dimensional weight rule it made in January, which will continue to benefit FedEx through the end of December, while in January it will no longer have the benefit of it unless it was to again change how dimensional weight is calculated.