On December 20, we dubbed FedEx “Patient Zero” as our text analytics platform revealed it was among the first companies to call out weakening European macro and increasing supply chain pressures. On Tuesday, March 19th after the close the patient is due for a checkup when it reports FY3Q earnings.
What’s the prognosis? Expect confirmation of Europe macro struggles, while Amazon is the topic to watch.
Please note: This in no way represents investment advice. All transcript text provided by S&P Global Market Intelligence.
Europe has emerged as the “new China” amid global growth concerns. The following commentary from the logistics ecosystem suggest the headwinds facing FedEx in Q2 were not just a blip, and unlikely to show improvement this quarter:
"Cargo had a fantastic 2018. But you are right,the market is now towards the very end, and the beginning of 2019 is starting to be a little bit weaker. It’s too early to say. As you know, visibility in Cargo business is very, very short. But it’s too early to say are we seeing a trend or is this a temporary dip"
"And then there’s the macro in Europe, not great."
"We miscalculated the weakness in France and the U.K."
"I think we could spend an entire call along international. I would just say, the way we look at headwinds is from our perspective. And do we see global headwinds? Absolutely. We see many of the ones that’s been identified by others."
Amazon’s relationship with the logistics industry is a complicated one. Amazon’s sheer volume makes them a valuable customer, while their interest in bringing more of the supply chain in-house is no secret. Are we starting to see the shift from “valuable customer” to “existential threat”?
Last quarter, FedEx dismissed any notion of Amazon becoming a significant competitor. However, since then, Amazon attributed some of its margin headwinds to increasing the mix of its own logistics network, and XPO reported a significant shortfall due to Amazon insourcing:
"We look at Amazon as a wonderful company in service and they’re a good customer of ours. We don’t see them as a pure competitor at this point in time for many reasons. We think it is doubtful that that will be the case."
"I think it’s also important to recognize, and again, there is a significant misunderstanding, the Amazon Air network is set up to move inventory within the Amazon system,which is prodigious. It’s big, it moves not-in-stock and low-turn SKUs and forward stocked items for their third-party customers, who can’t duplicate inventory and replace."
"Some of the (margin) headwinds, I would say,were outbound shipping costs, including the free shipping that we did, but mostly it was the higher Amazon Fulfilled units and the greater use of Amazon Logistics."
"In December, our largest customer pulled back their postal injection business, which is part of last mile. That affected our EBITDA in December. This had a significant impact in December and in the quarter."
This will come as no surprise, but FedEx’s Q2 was a significant downtick when analyzed through the Amenity Analytics NLP platform. Overall, the Amenity Score of the earnings call was -2, down 52 points from Q1. It was driven by more cautious forward-looking commentary, macro headwinds, and competitive pricing:
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Transcript text provided by S&P Global Market Intelligence.
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