FedEx says economy isn't as robust as it hoped

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By SAMANTHA BOMKAMP, Associated Press

NEW YORK (AP) — FedEx says the U.S. and global economies aren't growing as strongly as expected. It expects a mild recession in Europe this year.

That outlook on a conference call with analysts overshadowed a strong third quarter for the Memphis, Tenn., company. Online holiday sales helped FedEx more than double its profit in the three-month period ended in February.

The world's second-largest package delivery company is predicting growth of 2.1 percent in the U.S., compared with a forecast of 2.5 percent growth by leading economists surveyed by The Associated Press. It dropped its forecast for global growth to 2.3 percent from 2.9 percent.

Chief Financial Officer Alan Graf said the current economic environment and higher fuel prices are driving more customers to "trade down" or choose slower methods of shipping to save money. That means choosing FedEx's ground service, which delivers by truck, over its express business, which mostly ships packages by air.

FedEx narrowed its forecast for the fiscal year ending in May. It now expects to earn $6.43 to $6.68 per share compared with between $6.25 and $6.75 per share previously. Analysts, on average, predict $6.39.

Separately, FedEx agreed to pay $3 million to settle federal charges of hiring discrimination. The settlement covers back wages and interest to more than 21,000 job applicants who were rejected for positions at 23 facilities in 15 states.

FedEx shares, which are close to a year-high, fell about 4 percent.

As customers shifted business to FedEx's ground service, volume at its U.S. express business dropped 4 percent. FedEx said weaker shipments from the technology sector played a part in that. In response, Graf said the company will "take some planes and put them in the desert until economic conditions improve."

BB&T Capital Markets analyst Kevin Sterling said another reason that the ground service is getting more business is that it has gotten more efficient. He estimates that between 60 and 70 percent of packages shipped via ground service arrive within two days, compared with 50 percent just a couple of years ago.

FedEx's ground segment results were also boosted by its home delivery services, which include directing packages between residential customers and major retailers. The segment's revenue growth of 14 percent was the best of any of FedEx's businesses.

In its fiscal third quarter, FedEx earned $521 million or $1.65 per share, compared with $231 million, or 73 cents per share, a year earlier. FedEx realized higher prices from rate increases and surcharges that cover the rising cost of fuel. Mild weather helped, too.

The company had record holiday package shipments. FedEx gains when more people shop online for the holidays. It also benefits when recipients return those ill-fitting sweaters or unwanted presents.

Excluding one-time items, FedEx earned $1.55 per share compared with 81 cents per share a year ago. The results beat both analysts' and the company's own expectations.

Revenue rose 9 percent to $10.56 billion.

Sales at FedEx's express segment, its largest, rose 8 percent to $6.54 billion. That was due to higher prices and heavier packages in the U.S., which offset the average daily package volume falling by 1 percent.

FedEx Chairman and CEO Fred Smith declined to comment on rival UPS' planned $6.77 billion purchase of Dutch parcel TNT Express. But he inferred his company won't make a competing bid.

"We feel confident in our plans to continue the expansion through organic growth," he said.

Smith said FedEx is seeing weakness in Europe as its financial crisis continues.

"Growth rates in Europe are extremely low and my personal belief is they're going to continue to be low," he said.

The company is seeing improvement in the Asia-Pacific region following Chinese New Year. Previously red-hot growth rates for exports there had moderated in recent months. FedEx officially didn't specifically address China. Concerns about a slowdown in the Chinese economy sent stock and commodities prices lower on Thursday.

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