The FedEx Story: A Cautionary Tale That Wasn't (2024)

It was almost one year ago that courier and global bellwether FedEx warned of a drastically slowing global economy – one that would cause it to fall short of its revenue target by $500 million and send its shares tumbling by the biggest margin in its history, taking with it benchmarks around the world.

When asked if this was the start of a worldwide recession, CEO Raj Subramaniam said in a televised interview that he thought so, adding “we’re going fully into cost-management mode.”

A little over nine months later, that couldn’t be more true. In fact, FedEx has served as the perfect model for a phenomenon we’re seeing in a lot of corporate America – the ability to adapt and evolve at a much faster pace than investors had ever expected, perhaps prolonging the onset of a recession that's been on the horizon for two years and counting.

In light of the historically speedy rate at which the Federal Reserve has raised rates from zero, one of the biggest predictions that has yet to come to fruition is an upcoming wave of fallen angels. The logic is simple – few expected companies – large and small -- would be able to cope with an aggressive tightening regime of this scale. Just take a look at the regional banking turmoil in which rate risk wasn’t sufficiently hedged or insured. But broadly speaking, corporate America has done just fine, partially thanks to the massive cash piles accrued off record debt issuance in 2020 and 2021.

Last year, FedEx attributed the decline in volume (and therefore its revenue) to three factors; a slowing industrial economy, the consumer shift to services from goods, and a reset in e-commerce trends. The shipping giant reported its fiscal fourth quarter results after the bell yesterday and saw a lot of the same things in play. In the most recent earnings call, Subramaniam said the first two factors “are basically along the same lines we’ve seen in the last few months,” but e-commerce would grow into the next calendar year. The company even expects volume decline to moderate in the next quarter.

The logic around interpreting FedEx’s earnings used to be far more straightforward. If volumes are declining, then so is the economy as shipping is seen as a proxy for growth and activity. By that reasoning, the results still paint a fairly bleak picture. Volumes declined materially across all three business units and fourth quarter sales were down 10% year-over-year. So the economy is slowing. We knew that.

What sets FedEx apart is how it’s handling it, especially relative to rival UPS. These two shipping companies initially tackled the post-Covid environment very differently. The labor market was tight and the supply chain was fraught. It took far longer to have a package delivered. So, FedEx went on a hiring spree. After all, a sound and reliable network is how you keep customers (including the United States Postal Office) happy. The market rewarded that.

UPS, on the other hand, focused in on its margins. Targeting smaller businesses and hiking prices became the priority. By redirecting attention away from bigger customers, its approach wasn’t originally viewed as sustainable by the market. Fun fact: Amazon Logistics is a customer of UPS. Any overflow the Amazon network can’t handle goes to UPS.

In the long haul, zeroing in on margins won out. FedEx shares are now lagging both UPS and DHL on a percentage basis. But a restructuring is coming as it looks to combine its Express and Ground units, the latter of which relies on a network of independent contractors. Layoffs are also part of that equation. In fiscal 2023, FedEx laid off 29,000 people equivalent to ~15% of its global workforce.

It all sounds quite grim, but the takeaway is that in just nine months, amid a slew of a recession calls that have yet to pan out, FedEx adapted. For the first time in its history of its Ground unit, operating margin expanded while volumes declined. That means the cost-cutting is working, albeit slowly.

FedEx is just one example. There is a large swath of companies across industries innovating at a historically fast rate, and able to improve on profit margins while they’re at it. It’s clear that even as consumer spending slows down, corporations are able to weather the storm to an extent they likely wouldn’t have been able to in other downturns. It's no wonder this inevitable economic contraction is taking ages to pan out.