FedEx Corp forecast on Thursday profit for the current quarter below analysts' expectations, raising concerns that the U.S. economy was not recovering as fast as had been expected, and sending its shares down more than 6 percent.
The company, a bellwether of U.S. economic strength because it relies on a strong economy for growth, also said on Thursday that its fiscal second-quarter earnings fell 30 percent compared with a year ago, which was in line with its announcement earlier in December.
The pre-announced earnings were better than the company's previous forecast, which buoyed expectations for a stronger and faster recovery of the U.S. economy.
The market had decided this meant the economy was going gangbusters. Then out comes the details. The economy is improving but it's still on shaky ground, so the stock is back to where it was before the pre-announcement, said Edward Jones analyst Dan Ortwerth.
Inventory restocking instead of true demand was behind much of the company's fiscal second-quarter results, Ortwerth said.
Restocking can be a sign of economic recovery, but it can also mean that inventories have run down so far that even if there is not enough demand companies must replenish inventory.
Knowing how much of shippers' volume is restocking, and how much is real demand in 2010 will reveal much about the state of the economy, Morningstar analyst Keith Schoonmaker said. FedEx said during the conference call that it would not have a sense of that until February at the earliest.
That's the critical thing that the whole industry, and industry in general, is going to be looking at. Is the recovery going to be steady or erratic? FedEx has taken costs out, but it's going to take improved demand before any of the shipper post sterling numbers, Schoonmaker said.
FedEx shares closed down 6.09 percent at $84.47 on the New York Stock Exchange. Shares hit their year high on Wednesday, when they reached $92.59.
On Monday, its busiest day of the year, FedEx shipped 14.1 million packages, a million more than it had estimated. On that peak day of FedEx's peak week, the company's main hub in Memphis flew 150 planes, 12 more than normal, and handled 1.7 million packages in 3 and 1/2 hours.
A surge in free shipping incentives and online retailing also gave FedEx a boost.
But seasonal slowness follows the holidays, accounting for some of the gap between the company's forecast and Wall Street's expectations, Chief Financial Officer Alan Graf Jr. said during a conference call with analysts to discuss results for the quarter ended November 30. FedEx reported a profit of $1.10 per share compared with $1.58 in the same quarter last year.
For a graphic on the second quarter's results, click http://link.reuters.com/huw47g.
FedEx said in a statement that it expects earnings for the fiscal third quarter of 50 cents to 70 cents a share and $3.45 to $3.75 per share for its full fiscal year 2010. Analysts' average forecast is for 84 cents per share for the third quarter and $3.46 for the year, according to Thomson Reuters I/B/E/S.
The company said its outlook reflected the current market outlook for fuel prices and a continued modest recovery in the global economy. FedEx earned 31 cents per share in last year's third quarter.
Schoonmaker said FedEx could still beat expectations for the year because seasonal slowness and an increase in expenses due to the reinstatement of compensation suspended during the recession were specific to the third quarter.
MERIT INCREASES, 401K CONTRIBUTIONS
FedEx said that with an outlook for modestly improving economic conditions and business performance it would resume merit salary increases for calendar 2010 and a 50 percent resumption of the 401K company match for most U.S. employees. These programs were suspended a year ago.
The company said its second quarter results reflected expenses to accrue for expected payouts under its variable incentive compensation programs, designed to pay base incentives to most hourly, professional and manager-level employees prior to paying any amounts to senior managers. It said these costs were included in its earnings forecasts.
Our balance sheet is strong, volumes are growing, and we are encouraged by our performance as we emerge from the worst economic downturn in FedEx history, Graf said in the company's statement.
While there is some uncertainty regarding the sustainability of current demand trends after our peak shipping season, we expect our strong operating leverage to provide improved year-over-year profitability in the second half of our fiscal year. Effective cost management remains a priority and should continue to benefit results.
(Reporting by Helen Chernikoff; Editing by Toni Reinhold)