FedEx labor shortfall hits quarterly profit, earnings forecast

© Reuters. FILE PHOTO: A FedEx truck is driven through downtown in Los Angeles, California, U.S., July 22, 2019. REUTERS/Mike Blake/File Photo

By Lisa Baertlein

(Reuters) - U.S. delivery firm FedEx Corp (NYSE:FDX) posted a 7% drop in quarterly profit and cut its full-year forecast on Tuesday, after labor shortages crimped earnings, slowed packages and drove up costs ahead of the all-important holiday peak season.

Shares in the Memphis, Tennessee-based company fell 4.6% to $240.50 in extended trading after FedEx said staffing problems resulted in a $450 million year-over-year increase in costs due to higher wage rates and overtime, increased spending on third-party transportation services and shipping hiccups.

"The impact of constrained labor markets remains the biggest issue facing our business" and was a key driver for the first-quarter underperformance, FedEx Chief Operating Officer Raj Subramaniam said on a conference call with analysts.

Most of the excess labor expense hit the company's Ground network - which is now rerouting 600,000 packages a day, or 6.4% of the segment's average daily volume during the quarter - to work around woes stemming from the labor shortfall, executives said.

As an example, Subramaniam said its hub in Portland, Oregon, is just 65% staffed. That requires FedEx to pay more and send packages to other hubs - adding time, package miles and spending on outside help.

"We anticipate the cost pressures from network inefficiencies, such as the one I just illustrated, to persist through peak," Subramaniam said. "Overcoming staffing and retention challenges is our utmost priority."

FedEx said adjusted net income fell to $1.19 billion, or $4.37 per share, for the fiscal first quarter ended Aug. 31, from $1.28 billion, or $4.87 per share, a year earlier.

Revenue increased 14% to $22.0 billion.

On the heels of the report, FedEx lowered its full-year forecast for earnings, excluding items, to $19.75 to $21.00 per share. FedEx previously forecast 2022 earnings per share, excluding items, of $20.50 to $21.50.

FedEx and competitor United Parcel Service Inc (NYSE:UPS) are sprinting to hire holiday help as the resurgence of Delta variant-driven COVID-19 infections threatens to increase e-commerce delivery demand during the holiday season, when package volume can easily double.

FedEx aims to bring on 90,000 holiday workers. It hired 70,000 last year and 55,000 in 2019.

Up-and-coming rival Amazon.com Inc (NASDAQ:AMZN) is touting average pay of $18 per hour as it races to expand its own delivery network. Amazon's nonunion delivery contractors compete with FedEx and its Ground delivery partners for workers.

UPS workers are unionized and among the highest paid in the industry. Shares in UPS shed 2.6% after the FedEx report.

At the market close on Tuesday, shares in FedEx were down 10% over the past six months, while UPS shares gained 19%.