One of the key themes that I've been following and investing in has been the accelerating shift to digital commerce from brick and mortar, and while most tend to think that is "just" Amazon (
AMZN) , the reality is other retail companies, ranging from Walmart (
WMT) to Target (
TGT) and even TJX Companies (
TJX) are embracing it. We've seen this confirmed each month in the Commerce Department's Retail Sales reports as well as comments made by retailers over the last several quarters. More often than not, the thing is these purchased goods need to be delivered and the more consumers shift to digital commerce, the better it should be for the likes of United Parcel Service (
UPS) and to a lesser extent FedEx Corp. (
FDX) .
Despite that tailwind, FedEx reported weaker than expected quarterly bottom line results despite reporting stronger than expected revenue and boosting its 2019 outlook. Specifically, FedEx now sees FY2019 EPS of $17.20-$17.80 vs. its prior guidance of $17.00-$17.60 and the consensus of $17.40. What this means is the midpoint of its new guidance is $17.60, a nice increase vs. the consensus forecast. While FedEx cited some modest impact was had on its business due to tariffs with China (China-U.S. bidirectional packages are 2% of FedEx revenue), it forecasted continued revenue growth ahead which reflects the shift toward digital commerce mentioned above. On the earnings call, FedEx reaffirmed that it expects "record amounts of volumes this year like we had last year. The four Mondays in December will all be record volumes for FedEx."
Despite that positive outlook and raised guidance, FDX shares are trading off some 4% as investors wrestle with the culprit behind the company's sharp quarterly earnings miss last night - higher variable wage cost and accelerated wage increases for certain hourly employees." Add to that the affirmation the company will not only "55,000 additional team members for this holiday season" but "the majority of these team members, however, will stay on with FedEx after the holiday peak or become permanent employees of FedEx."
That fired the "cost" alarm in investors, but here's the thing - the company knows this and has factored that into its FY2019 EPS forecast, which is up 15% year over year. Yes, the hole in its August quarter means it will have to make up EPS ground, but provided it has an accurate read on its cost structure, which can be especially tricky during the holiday shopping season, the average Wall Street price target of $285 looks achievable. Helping drive that price target home in the coming weeks will be the annual litany of holiday shopping forecasts, which increasingly contains a digital commerce component that as one might expect continues to take consumer wallet share. Come the September quarter earnings season, which is only several weeks away, retailers will be weighing in on holiday shopping season prospects as well. With the economy continuing to hum, consumer sentiment high and shoppers flush with higher after tax paychecks, odds are those retailers will offer a rosy outlook for the holiday shopping season. All of this tends to gel in late October to mid-November.
As one might suspect, FDX shares as well as UPS ones have tended to enjoy a nice year-end run as those data point coalesce. It's hard to see it not happening once again, which means investors should be using the pullback in FDX shares to get ready for what's to be had in the coming months. And that goes for UPS shares as well.