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FedEx (FDX -15%) is down sharply after getting FY25 got off to a slow start. The package delivery giant reported a large EPS miss with its Q1 (Aug) report last night. Revenue fell 0.5% yr/yr to $21.58 bln, which was also a miss but the EPS downside was much more pronounced. It also lowered the top end of its FY25 adjusted EPS outlook to $20.00-21.00 from $20.00-22.00. Its FY25 revenue outlook was also lowered to low single-digit growth vs its prior forecast of low-to-mid single digit growth.

• FedEx said its Q1 results reflect a challenging demand environment, which was weaker than expected, particularly in the US domestic package market. FDX was hurt by a mix shift, which reduced demand for priority services, increased demand for deferred services, and constrained yield growth. Also, weakness in the industrial economy pressured its B2B volumes, particularly in the US. FedEx also saw increasing demand for its lower-yielding services.
• Breaking it down by segment, Express revenue declined 0.7% yr/yr to $18.31 bln, driven by one fewer operating day and a mix shift towards deferred services. Slightly lower US domestic volume was offset by higher international export volume. Yield remained positive, driven by higher base rates and fuel surcharges. Freight segment revenue declined 2% to $2.33 bln, driven by reduced weight per shipment and priority shipment, lower fuel surcharges, and one fewer operating day.
• In terms of industry pricing, FDX says it's operating in a very competitive but still rational pricing environment. Against this backdrop, FDX is focusing on revenue quality and continues to grow yield, but at a lower rate than expected especially in the US. At Express, package yield increased 1% overall, driven by US priority and international domestic. As a reminder, Fedex's contract with the US Postal Service expires on September 29. FDX will be making network adjustments post-expiration.
• FedEx says it lowered FY25 revenue guidance, but it does expect the demand environment to moderately improve as it moves through the year driven by a slight recovery in the industrial economy, e-commerce growth, and low inventory levels. FDX expects some improvement in the pricing environment skewed toward the second half of the fiscal year. FDX also expects modest improvement in the US domestic ground parcel volume, particularly in the back half of the fiscal year.
• On the cost side, FDX has been continuing with its structural cost reductions via its DRIVE initiatives. This was able to partially offset revenue and expense pressure. FDX expects the cadence of DRIVE-related savings throughout the year to increase sequentially by quarter. FDX is on track to deliver $4 bln of savings through DRIVE in FY25 compared to the FY23 baseline. For example, it has recently implemented significant new pricing actions relating to both demand and fuel surcharges, which will benefit FDX in the coming quarters. It also said it's making significant progress on its network transformation, which will drive improved profitability by unlocking efficiencies, improving density and creating a more flexible network.

After shares gapped higher with its last earnings report, investors were not expecting a big EPS miss like this. However, we did caution in our preview that UPS reported a big EPS miss in Q2 in July and that made us nervous. FedEx was impacted by lower demand generally and by a mix shift. Basically, customers were willing to wait longer to get their packages in order to pay less. The silver lining is that the downside FY25 EPS guidance was by less than the Q1 miss, which tells us FDX still feels ok about Q2-Q4. Also, FedEx is making progress in terms of reducing costs and it does expect modest demand improvement as the fiscal year progresses.