FedEx Corporation (NYSE: FDX) in a multinational delivery services company founded in 1971 and headquartered in Tennessee, USA. But for some time now, FedEx has not been performing well in the market after peaking at $270 per share in 2018. Since then the global courier’s stock has been slashed in half.
The company’s strength is in its express or air unit, which mainly supports business to business logistics. But they desired to take a larger piece of ground deliveries. This prompted them to shift their capital allocation to projects serving e-commerce companies.
FedEx’s journey with Amazon
FedEx had been making last-mile delivery for Amazon (NASDAQ: AMZN). Amazon comprised about 10% of all the orders fulfilled by the shipping company. But in August of last year, FedEx severed its ties with Amazon when it opted out not to renew its ground shipping contract with the eCommerce giant.
One of the reasons behind this fall out was Amazon’s investment in its own delivery infrastructure which will become a competition of companies like FedEx and UPS (NYSE: UPS). As, Amazon is working towards fulfilling its shipping requirement in-house removing third-party shippers form the equation. Also, FedEx faced problems as the orders from Amazon were high but the margins were low. Hence, this discrepancy between profits and volumes made this decision a smarter choice for FedEx.
On 16th December, 2019 Amazon had banned its third-party sellers from using the FedEx ground delivery network for Prime shipments. Blaming FedEx for not being fast enough in delivering the goods. But have lifted the ban in January of this year, allowing the third-party sellers to use FedEx.
Third-quarter results of FedEx
In the most recent quarter, the company reported a close 60% drop in profit year over year. Operating margins for them were 2.4% which amounts to half of their previous decade low of 5.4%. The main reason behind the drop is massive capital projects. Additionally, the lockdown has also slowed down the business to business shipping. Though FedEx Ground saw a growth in revenue and home delivery shipments last quarter, but its operating income fell from $586 million in the year-before quarter to $355 million.
The CEO of the company said they will combine it’s express and ground fulfillment to increase efficiency. This move is expected to recover the company’s profit for a company with a market capitalization sitting around $30 billion.
FedEx’s recent contracts
The global courier has won logistics contracts with retailers like Dollar General, Walmart, and Target. This represents their ability to replace Amazon with higher quality customers. Along with moving Walmart’s online shipments, FedEx is also rolling out office locations in 500 Walmart stores.
After entering into a brand-new partnership with Microsoft (NASDAQ: MSFT), FedEx announced a multiyear collaboration that is set to help more efficient in managing their supply chains, especially amidst the global pandemic. FedEx will marry their data with Microsoft Azure cloud and data analytics solutions. This will help the shipping company get near-real-time analytics into shipment tracking, which will drive more precise logistics and inventory management.
The positive side
Amazon-free future relieves FedEx from margin pressure. It also makes the company more approachable for retailers of all kinds. Now operating independently from Amazon’s mega-cap inflicting existential doom on retail vendors all across the globe. Even iconic brands like Nike have pulled their merchandise from Amazon due to unfair selling practices. Making FedEx a more natural choice for their shipping needs.
The global courier is in a situation offering promise that moving past capital-intensive projects will leave a more fundamentally sound company. Operating cash flow approaching $6 billion in 2019 indicates the profit potential of the global courier when large investments are completed.
The volume spike due to Pandemic
With more people confined to their homes and fewer stores open, FedEx Ground is seeing an influx in packages. Which some delivery contractors said has even surpassed the holiday shopping rush. Digital orders are up 128.6% and 112.2% for online-only companies and traditional retailers respectively in the U.S. Delivery companies now have to hire workforce in bulk just to keep up with the skyrocketing demand.
Increase in workforce requirement
FedEx Ground unit, which is the one that does most of the business-to-consumer deliveries, is adding about 4,000 drivers a week. FedEx Ground had started Sunday home delivery as well as upgraded its sorting capabilities for large packages delivered to homes. Extra delivery stops have provided. In the midst of the pandemic, FedEx says it has suspended most mark prerequisites for U.S. conveyances. They have set up no-contact pickups and deliveries for driver and client security. The drivers are additionally getting temperature checked and wearing personal protective equipment.
FedEx expects online orders will continue rising as well. In 2019, the logistics giant projected U.S. e-commerce volume to balloon from 50 million daily packages to 100 million by 2026.