AP
FedEx swings to 4Q loss; guidance disappoints
Wednesday June 18, 5:01 pm ET
By Woody Baird, Associated Press Writer
FedEx swings to loss 4th-quarter and issues forecast well below Wall Street expectations


MEMPHIS, Tenn. (AP) -- FedEx Corp. reported a fourth-quarter loss Wednesday and offered a gloomy outlook as it wrestles with a slumping U.S. economy beset by soaring fuel costs and falling prices for homes.

FedEx, considered a bellwether for the broader U.S. economy, predicted 2009 earnings of $4.75 to $5.25 per share, well below Wall Street expectations of $5.92 a share. The international package delivery company expects to earn 80 cents to $1 per share in the first-quarter of the current fiscal year. Analysts forecast $1.27 per share.

"Looking ahead to '09, we do expect conditions to remain extremely challenging and we anticipate in both the first quarter guidance and the yearly target the current economic weakness will continue and the current level of fuel costs will not mitigate," chief financial officer Alan Graf said in a conference call with market analysts.

FedEx posted a loss for the just-ended fourth period of 78 cents a share, or $241 million, compared with a profit of $610 million, or $1.96 per share, for the same quarter last year.

Excluding one-time charges, FedEx earned $1.45 per share for the fourth quarter. Revenue rose 8 percent to $9.87 billion from $9.15 billion a year earlier.

Analysts polled by Thomson Financial expected $1.47 per share on revenue of $9.6 billion.

FedEx, which owns the world's largest cargo airline, spend almost $1.4 billion on fuel in the fourth quarter and those costs represented 14 percent of total operating expenses, said Edward Jones analyst Dan Ortwerth.

FedEx customers pay fuel surcharges, but that does not cover all of the increases. The company's fuel costs for the quarter were 54 percent higher than for the same period last year, Ortwerth said, while the surcharges were up less than 30 percent.

"They don't try to recover the entire increase in fuel because that would really hurt the customer and they have the sense to invest in long-term customer relations," he said.

But higher costs for fuel mean higher prices for FedEx services.

"The prices have gotten high enough that people are looking for other ways to ship their goods," said Morgan Keegan analyst Art Hatfield. And even customers who stay with FedEx may shift from pricey express shipments to less expensive, slower services, he said.

The fuel surcharges, which are added to the company's basic shipping rates, were 28 percent for June and will increase to 32.5 percent in July, Hatfield said.

"So for every dollar you spend to move a product, you're spending an extra 32 and a half cents because of fuel," he said. "If fuel wasn't going up, prices wouldn't be going up. Regular prices they only raise once a year, but fuel surcharges they raise monthly."

The generally sluggish economy, with high fuel cost adding to the troubles, also slows inventory and product shipping by business and industry.

"The weak U.S. economy, particularly in housing, in automotive and financial services, dampened volume growth and substantially affected our bottom line," FedEx chairman Frederick W. Smith said.f

Smith said, however, FedEx was confident it could deal with the economy's troubles by holding down expenses, limiting capital spending and growing the company's international business.

"It's my opinion that great companies always improve their competitive positions in economic downturns," Smith said, "and we intend to do just that."

FedEx said it will continue capital spending on overseas expansion, "significant investments" in more fuel-efficient aircraft and other projects necessary for the company's long-range strategies.

"This is the fourth oil crisis FedEx has weathered," Smith said. "The first was in 1973 when the Arab oil embargo almost killed a nascent FedEx in the cradle."

Smith formed Federal Express, the small airline that grew into FedEx Corp., in 1971.

FedEx said its outlook for the new fiscal year "assumes no additional increases to current fuel prices and no further weakening in the economy."

"Nobody knows when this is going to get better," said Ortwerth of Edward Jones. "In the near term, I say strap in tight and brace yourself, but in the long-term, this company has the strength to weather the storm."

The fourth-quarter earnings included a one-time charge of $891 million for the expected costs of renaming the company's office service and copying division from FedEx Kinko's to FedEx Office.

FedEx had predicted fourth-quarter earnings of $1.45 to $1.50 a share. That projection was lowered last month from earlier company guidance of $1.60 to $1.80 a share, due largely to rising fuel costs.

For 2008, FedEx reported earnings of $3.60 a share, down 44 percent from $6.48 the previous years. Yearly revenue was put at $38 billion, up 8 percent from $35.2 billion.

FedEx shares fell $1.73, or 2.1 percent, to close at $82.60.