While the S&P 500 rose nearly 29% in 2019, in a market of stocks not all stocks beat the average. Some even severely lag the broader stock market gains. After closing out 2019 at $151.21 a share, FedEx Corp. (NYSE: FDX) ended nearly 5% lower for the entire year, after adjusting for dividends. It turns out that FedEx’s stock chart had posted a series of lower highs starting in 2018, but what really seemed to plague the shares, before and after its earnings calls, was the loss of business from Amazon.com Inc. (NASDAQ: AMZN).
While Amazon is one of those customers that are so big no business really wants to lose it as a customer, Amazon has been crafty over the years in getting its way. Now it seems that FedEx may be out of the penalty box.
FedEx shares rose on Tuesday after news broke that Amazon had notified its army of third-party merchants that they could again start using FedEx Ground shipments to customers ordering within the Amazon Prime member program. FedEx was a shipping partner for years, and the move appears to have lightened up some of the strife after FedEx was cut-off during much of the Christmas and holiday shopping season and for a couple weeks after that.
The ban was lifted for third-party merchants for the FedEx Ground and Home service, and sellers had been able to use FedEx Express shipping or FedEx Ground and Home for purchases that were not made within the Amazon Prime service.
It remains to be seen how long the move will last or whether Amazon will keep the status quo going forward. Amazon already has committed over $1 billion to a 50-plane air shipping hub in Kentucky, but that currently is not slated to open until sometime in 2021. Needless to say, the company’s effort to in-house that shipping business away from FedEx and UPS is one more step that may remove profits that Amazon would have to consider as its own cost.
FedEx last reported earnings for its fiscal second quarter on December 17, 2019, and it did not even represent the full impact of the Amazon holiday shipping ban under the Prime program. Its quarterly revenues of $17.3 billion were roughly a half-billion dollars shy of the prior year.
Even then, FedEx blamed weak global economic conditions, higher FedEx Ground costs from expanded service offerings, the loss of business from “a large customer,” a shorter season due to Cyber Week’s timing, an ongoing shift to lower-yielding services and a more competitive pricing environment. Frederick Smith, FedEx board chair and chief executive, said at that time:
Fiscal 2020 is a year of continued significant challenges and changes for FedEx, particularly in the quarter just ended due to the compressed shipping season. We have significantly enhanced our e-commerce capabilities with strategic initiatives including year-round seven-day FedEx Ground delivery, enhanced large package capabilities and the insourcing of FedEx SmartPost packages. These changes have been well-received by the marketplace as reflected in our record volumes this peak season. While we have experienced some higher-than-expected expenses this quarter, we forecast FedEx Ground operating margins to rebound to the teens in our fiscal fourth quarter as the bow wave of costs for these changes is absorbed.
It is unclear whether this new news will help FedEx in its outlook for 2020. The comments about guidance back in December said:
FedEx now forecasts fiscal 2020 earnings of $9.10 to $10.35 per diluted share before the year-end mark-to-market retirement plan accounting adjustment, and earnings of $10.25 to $11.50 per diluted share before the year-end mark-to-market retirement plan accounting adjustment and excluding TNT Express integration expenses and aircraft impairment charges. The company’s effective tax rate is now expected to be 23% to 26% before the year-end mark-to-market retirement plan accounting adjustment. The capital spending forecast remains $5.9 billion.
FedEx shares closed up almost 1.8% at $162.13 on Tuesday, but that is down from a 52-week high of $199.32 and a 2018 high of about $262.