FedEx warned there could be a global recession as demand for parcels plummets around the world.
Shares of FedEx (FDX) plunged 22% in early trading after Friday’s open after it warned late Thursday that a slowing economy will cause it to fall $500 million below its revenue target. The weakening global economy, particularly in Asia and Europe, has hurt FedEx’s (FDX) express delivery business. The company said demand for parcels has declined significantly in the final weeks of the quarter.
FedEx said it expects business conditions to weaken further 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 earnings are expected to fall more than 40%. Analysts had forecast an increase in earnings.
During an interview Thursday on CNBC, FedEx CEO Raj Subramaniam was asked if he believes the slowdown in his company is a sign of the beginning of a global recession.
“I think so,” he responded. “These numbers don’t predict very well.”
He said FedEx is seeing a drop in the volume of cargo it handles in every region around the world. While he said US consumers are somewhat protected by the strength of the dollar, which boosts their purchasing power, he said FedEx is also seeing a slowdown in US spending.
The company said it responded by cutting flights and temporarily parking planes, shortening hours for its staff, postponing some recruiting plans and closing 90 FedEx office locations and five corporate offices. It also cuts $500 million from its investment budget for its fiscal year, which runs through May 2023, cutting that spending to $6.3 billion.
“We’re going completely into cost management mode,” he told CNBC.
FedEx (FDX) said adjusted earnings for the quarter ended August 31 will be $260 million or 17% lower than a year earlier. Revenue rose $1.2 billion, or 5%, despite missing the company’s previous target.
While it gave the sharply lowered forecast for the current quarter, FedEx said it was withdrawing its full-year forecast issued in June due to the “continued volatile business environment.
FedEx Ground service, the company’s primary way of handling deliveries of online purchases by US consumers, fell short of its sales target of $300 million.
The company uses independent contractors, not employees, to make deliveries, and many of those contractors complain that rising costs for fuel, labor and new vehicles have made their business unprofitable. Some threaten to shut down operations on Black Friday, just at the start of the Christmas shopping season, unless FedEx agrees to change their compensation.
FedEx insists it will work with contractors who have problems. It has sued the former contractor who was the firm’s most outspoken critic.
“We recognize that the current economic conditions pose new challenges,” FedEx Ground said in a statement last month. “We remain committed to working individually with service providers 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 published this week found that 54% said their FedEx business was losing money, 35% said it was break even and only 11% said it was profitable. The association said the survey reached 1,200 contractors who worked for or left the company in the past 12 months.