Last week, FedEx Corp. (NYSE: FDX) reported its financial results for the quarter running December through February. In the current macroeconomic environment, FedEx, and its logistics-oriented cohorts (like UPS), serve as meaningful proxies for the push-and-pull of supply and demand in the domestic and global economies. From labor and transportation costs to parcel volume and rates, FedEx offers remarkably clear visibility into how macroeconomic forces are manifesting themselves in the current day-to-day. But, beyond the ‘great view’ into macro effects, and FedEx’s solid financial performance – it beat analyst estimates on revenue and came in $.05 short on adjusted earnings per share – there was another nugget of information, a key insight in fact, that FedEx management addressed in their earnings call that spoke directly to understanding consumer demand right now – FedEx expectations of 2022 e-commerce growth.
In attempting to assess consumer demand in the wake of the pandemic and at the forefront of inflation, FedEx’s 2022 growth expectation for e-commerce provides a key piece of information. Parcel shipping and delivery resulting from e-commerce activity speaks directly to consumer demand, and fortunately for market observers, FedEx tracks this data closely. As such, FedEx’s e-commerce expectations constitute a valuable insight for predicting economic activity as the U.S. economy enters the second quarter of the year.
The crux of the news on e-commerce was that FedEx revised its 2022 growth forecast downward. Not by much, but enough to confidently indicate ‘softening’ consumer demand for the rest of the year. The specifics of management’s forecast revision were exposited by Brie Carere, FedEx’s Executive Vice President and Chief Marketing and Communications Officer:
“From a B2C perspective, we have modified our long-term outlook…We’re now projecting about 8.3% CAGR in [our] e-commerce market, that’s to the calendar year 2026. So historically, over the last couple of years, we had actually projected 10%. So yes, we think consumer demand will be down. It is already, quite frankly, in our outlook for Q4”
As to the reasons for the decline, FedEx management kept its analysis at the macro level. In keying off what appears to be the Federal Reserve’s latest GDP revisions downward – announced in Powell’s presser last week) – Career said FedEx tweaked its own forecasts down to 3.5% for the calendar year 2022, and 2.3% for the calendar year 2023, because, she argued, consumer demand is “tilting towards services.”
From FedEx’s vantage point the “tilting toward services” supposition is likely true, even if not yet proven, as the Federal Reserve picked up supporting data for this in its March ‘22 Statement of Economic Performance. With the elimination of mask mandates and the removal of prohibitions on commercial business access, it’s hard not to get the sense that there’s been a massive shift in consumer behavior toward getting out of the house and doing things, and away from staying home and buying things. This normalization of consumer behavior, or what I referred to last year as the ‘E-commerce Equilibrium’, toward a more balanced demand between goods and services enjoys validation, I believe, from TSA travel data, which shows that checkpoint volume is well on its way back to 2019 levels before the first wave of COVID hit. Consumers are out-and-about again. They’re traveling, going to the movies, seeing shows, and eating at restaurants.
Investment banks take…
Quarterly financial reporting from large logistics players like FedEx and UPS is an excellent resource for taking the temperature of consumer demand. And, because FedEx tracks e-commerce parcel volume as a B2C performance indicator, it represents a fairly accurate, and current reflection of consumer spending. Therefore, when attempting to get a quality read on the economy, especially on-demand in the face of inflation headwinds, FedEx’s direct exposure to, and ability to measure e-commerce activity serves as a reliable proxy.
That FedEx’s reasoning for the guide-down on e-commerce growth is due to consumers shifting demand away from goods, and toward services, at a time when many of the government’s most restrictive COVID protocols are being removed, sounds and feels right to me. But I wouldn’t go so far as to conclude that it’s the only factor affecting declining e-commerce growth.
What can’t be teased-out, out yet, as a factor in declining e-commerce growth is inflation. Though many of us believe it’s in there, and it’s going to be a drag on e-commerce growth, it’s hard to quantify at this time – it still being too early. Regardless, inflationary effects will be additive to the “tilt to services” effects, cementing the overall trend in consumer demand downward.
How this all feeds into investment banking activity – fundings and exits – is unclear, but it portends an overall downward pressure on investment volume and valuations.
One other theme that FedEx management spoke to on the call, unrelated to e-commerce growth, but relevant to fintech and software, was its commentary on its continuing effort to modernize its processes. President and Chief Operating Officer Raj Subramaniam emphasized that FedEx has been heavily investing in digital innovation going back three years, having anticipated e-commerce as a high growth segment – even before the pandemic. And FedEx is still building on that investment in digital through automation and enhanced data analytics. Referenced on the call were optimization programs addressing package sorting, staffing, and route optimization for the last mile. Reading between the lines, these optimization reforms are leveraging the most advanced technologies being deployed today, including robotics, machine learning, and IoT, and this makes FedEx a great proxy for digital transformation as well.