Many are interpreting FedEx's weakness as a warning sign that commercial activity is slowing, and the economy may not be as strong as suggested by other measures. Bulls are attributing FedEx's weakness to its deteriorating relationship with Amazon
Amazon Prime Effect
Although FedEx has lost nearly all of its Amazon business, it was its least profitable segment. Because of its free next-day delivery for Prime members and volume, Amazon pays carriers very little. Additionally, Amazon has been building out its own delivery system to better compete with carriers, reduce reliance, and keep a lid on prices.
While there is speculation about the fallout, a bigger theme is that FedEx which was once the original disruptor in the space is now being disrupted by Amazon and other competitors nipping at its heels. In fact, FedEx was forced to add Sunday delivery to keep up with the USPS adding Sunday delivery.
Disappointing by Every Measure
While the most glaring takeaway from the report was the lowered guidance, its second-quarter net income dropped to $560 million which is quite disappointing given last year's second-quarter net income came in at $931 million. Revenue also dropped from $17.8 billion to $17.3 billion.
Clearly, these trends are discouraging. For almost a decade, the carriers have thrived as online shopping exploded and demand for services increased. Any margin compression was more than offset by the increased volume. However, Amazon's recent efforts show that the easy times are over.
Amazon's aggressive entry into the sector is going to lead to lower margins for all carriers. Amazon has an incredible amount of resources and is willing to break-even on its endeavor as its primary goal is to keep costs low for its customers. It has a remarkable record of entering new segments and becoming dominant like it did in cloud computing, inventory management, and logistics.
Given its operational struggles and looming threat, there's little reason for optimism in the report. Revenue was down across every segment, and costs were up across every segment. The company's struggles were clear in the stock's underperformance even prior to the earnings miss. FedEx is up 1% for the year, while the S&P 500 is up 28%. It continues to make lower lows and lower highs and looks to be a promising short candidate in the coming months and especially when the economic cycle turns lower.