FedEx: ‘There’s a big reward from investors for pulling off cost-cutting actions,’ analyst says

Third Bridge Senior Analyst Anthony DeRuijter joins Yahoo Finance Live to discuss FedEx's quarterly earnings and its outlook for the full year.

Video transcript

SEANA SMITH: All right, take a look at FedEx, the company just releasing its most recent earnings report and looking at shares popping just about 8%. A lot of that pop has to do with the forecast, FedEx upping its fiscal 2023 outlook, its full-year guidance for adjusted EPS coming in better than expected. They now expect to see $14.60 to $14.20, initially saw $13 to $14 a share.

When it came to the third quarter, its fiscal third quarter, those results were a bit mixed. The company saying it was negatively affected by continued demand weakness, although they did note that their cost actions are taking hold, driving that improved outlook.

For more on this, we want to bring in Anthony DeRuijter. He is Third Bridge Senior Analyst. Anthony, great to see you here. So certainly the Street is pleased with these results. What's your first take on them?

ANTHONY DERUIJTER: Yeah, thanks so much for having me. I think the thing that's reflected here is that the Street knew a lot about the potential demand issues we were going to see this year. Obviously, with that sales miss, that's what we're seeing. The big surprise is obviously the EPS and, obviously, I guess, what FedEx is doing on the cost front to save some of those dollars and deliver on what it promised in previous earnings.

Now, the people we're talking to indicate that the demand issue could persist through this year, just based on what we're seeing of ocean freight, for example. There's a lot of loose capacity, and that's indicating that we're going to see weakness in things like e-commerce, luxury goods, high-end electronics. And that could hit FedEx. They're talking about anywhere from mid-to-high single digits drop on the volume side.

But at the same time, I think the big question is, are their cost cuts going to be implementable? What are they saying about DRIVE? What are they saying about Network 2.0? The indication from our network is that a lot of these cost cuts they're talking about may not actually be that easy to pull off, even if we see easy and, I guess, short-term relief in things like lay offs, for example, which is what we saw.

INES FERRÉ: That was my question was, what do you think about the layoffs that they have announced, the 12,000 jobs that had been announced, and the cost cutting plan in general and how that's playing out?

ANTHONY DERUIJTER: Yeah, so the people we talk to, they have framed this as sort of, look, short-term P&L benefit, but how do we think about how it impacts FedEx over the next two, three years, which is kind of the game that they're playing, right? We've got multiple big programs that they're running over this two to three-- two to three-year time frame. Whilst there may be a short term, let's say, SGA benefit here, our experts are actually pretty worried about what this means for productivity and culture hit.

I mean, you're starting to see, I guess, articles about the feeling at FedEx being one of where people used to be very strong on people, strong on being a FedEx liver-- lifer, if you will, bleeding purple. And now some of that sentiment has shifted. So it may not necessarily be the bad talent that's leaving. And moving forward, it may be-- start to move towards good talent. That's at least the indication that we're getting from our network.

SEANA SMITH: Anthony, when it comes to some of the skeptics out there, the risks related to FedEx going forward here, what do you think the message needs to be from management at this point to get more of those skeptics on board?

ANTHONY DERUIJTER: Look, so as we saw today, there's a big reward, seemingly, from investors for pulling off the cost-cutting action. So it really comes down to our people telling us that FedEx has to be more clear on what they're planning for these big cost cuts. So, for example, DRIVE, the big DRIVE program for fiscal 2024, $4 billion in savings. Where is that going to come from?

They have a call in early April on this. So I think a lot of people are going to be wondering exactly how do they intend on pulling cost out of their cost structure. For example, the biggest cost item that our experts are talking about is that air fleet of FedEx Express.

There's tens of millions associated with annual OpEx for a single plane, for example. But can you actually pull that out of the system? Hmm, not with minimum flying hours, not with the potential loss of things like landing rights and aircrafts-- aircraft slots, which obviously are very valuable long term.

INES FERRÉ: When you compare FedEx to UPS, UPS has a network that's integrated. FedEx has Express, as you just mentioned, Ground, two separate entities. But there have been recent announcements about integrating initiatives-- integration initiatives, that is. So what needs to happen when it comes to Express and Ground?

ANTHONY DERUIJTER: Well, our people say there simply can't be an Express and Ground. It has to be one single segment, one operating entity without this, I guess, inherent culture of competing against each other for things like resources and capital. A lot of-- when we talk about UPS versus FedEx and why last 12 months UPS has this roughly, let's call it, 700 bps advantage on EBITDA margin over FedEx, a lot of that comes down to the fact that they've got this integrated network where they share resources. And they've got a density benefit, and they've got a service advantage over, say, FedEx that runs two separate networks in Ground and Express, for example.

Can they integrate them? From what we're hearing, it's going to be very difficult. It's going to be hard for the two segments to share tech stacks, to run networks in a singular manner the way that UPS does, especially because there's this-- the fundamental reason for this siloing of the two is so that they could run their operations under different labor regulations, so basically RLA versus N-- NLRA. So until the senior management of FedEx are willing to accept that and look a little bit more like UPS, our specialists indicate that that's just not something that can happen fully in a way that we see at UPS.

SEANA SMITH: Anthony, what about talk of a potential pilot strike? How big of a challenge, how big of a headwind do you see this being to FedEx, at least in the near term?

ANTHONY DERUIJTER: So our experts think that this potential strike that we see and the risk that it poses is actually a direct feedback to the potential risk of FedEx pulling capacity out of its air fleet. I think what's happening here, and what our network is telling us, is that the pilots see this risk that FedEx knows that to cut costs materially long term, they need to cut minimum flying hours.

How do you do that? Well, you've got to start laying off pilots. You've got to start cutting and grounding aircraft capacity. This strike risk is major in the sense that it could drive a big wedge into what FedEx is able to do with regards to cutting costs out of Express. So it's a potentially major risk, and our specialists are watching that very closely.

INES FERRÉ: FedEx stock right now is up more than 7% in after-hours. Anthony DeRuijter, thanks so much for joining us.