FedEx warned that a global recession could be coming, as demand for packages around the world tumbles.
Shares of FedEx plunged 21% Friday – the biggest one-day drop in its history – after the company warned late Thursday that a slowing economy will cause it to fall $500 million short of its revenue target.
The weakening global economy, particularly in Asia and Europe, has hurt FedEx’s express delivery business. The company said demand for packages weakened considerably in the final weeks of the quarter, CNN reported.
What’s more, FedEx said it expects business conditions to further weaken in the current second quarter, which runs through November. While global revenue this quarter is likely to be flat compared to a year earlier, FedEx’s earnings are expected to plunge more than 40%. Analysts had been forecasting a gain in profit.
During an interview Thursday on CNBC, FedEx CEO Raj Subramaniam was asked if he believes the slowdown in his business is a sign of the start of a global recession.
“I think so,” he responded. “These numbers, they don’t portend very well.”
He said FedEx is seeing a decline in the volume of freight it is handling in every region around the world. While he said US consumers are somewhat protected by the strength of the dollar, which is increasing their purchasing power, but he said FedEx is seeing a slowdown in Americans’ spending as well.
The warning sparked a broad sell-off in US stocks. Additionally, the Dow Transportation Index fell 5%, while shares of FedEx rival UPS closed about 5% lower.
The 21% single-day loss for FedEx shares easily tops their 16% plunge the day of the 1987 stock market crash, and a 15% drop during the stocks sell-off in March 2020 in the early days of the pandemic. Shares of FedEx are now down 38% so far this year.
The company said it is responding by reducing flights and temporarily parking aircraft, trimming hours for its staff, delaying some hiring plans and closing 90 FedEx Office locations as well as five corporate offices. It is also cutting $500 million from its capital expenditure budget for its fiscal year, which runs through May of 2023, trimming that spending to $6.3 billion.
“We’re going fully into cost-management mode,” he told CNBC.
FedEx said its adjusted earnings for the quarter that ended August 31 will be down $260 million, or 17%, from a year earlier. Revenue rose $1.2 billion, or 5%, despite missing the company’s earlier target.
While it gave the sharply lowered guidance for the current quarter, FedEx said it was withdrawing its full-year guidance issued in June due to the “continued volatile operating environment.
FedEx Ground service, which is the primary way the company handles deliveries of online purchases made by US consumers, missed its sales target by $300 million.
The company uses independent contractors, not employees, to make deliveries, and many of those contractors are complaining that rising costs for fuel, labor and new vehicles has made their business unprofitable. Some are threatening to halt operations on Black Friday, just at the start of the holiday shopping season, unless FedEx agrees to change their compensation.
FedEx insists it will work with contractors who are having problems. It has sued the former contractor who has been the most vocal critic of the company.
“We recognize that current economic conditions are posing new challenges,” FedEx Ground said in a statement last month. “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.”
About 1,000 of the 6,000 contractors who work for FedEx have joined a trade association to lobby the company for better compensation.
A survey conducted by the association released this week found 54% saying their business with FedEx was losing money, 35% saying it was breaking even, and only 11% saying it was profitable. The association said the survey reached 1,200 contractors working for the company or who left the company within the last 12 months.
