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FedEx (FDX -9%) delivered a worrying Q3 (Feb) report last night. While headline results were decent, with earnings barely missing estimates on a slim top-line beat, the delivery giant sliced its FY25 (May) guidance for the third consecutive quarter. FDX anticipates ending the year with adjusted EPS between $18.00-18.60 versus its previously lowered forecast of $19.00-20.00, and revs either flat or slightly lower yr/yr compared to its prior prediction of just flat growth.

What happened? Echoing his remarks from last quarter, CEO Raj Subramaniam stated that the weak industrial economy continues to place outsized pressure on the company's higher-margin B2B volumes. The frail economic conditions are not expected to improve over the immediate term, particularly given the increased uncertainty injected into the demand environment due to tariffs, which are also partly underpinning a more stubborn inflationary backdrop.

• Economic headwinds were in full force during Q3, particularly hindering FedEx Freight, which posted a 5.3% decline in revenue yr/yr to $2.09 bln. FDX noted that the challenges associated with this segment were not as severe as last quarter, but it still endured fewer shipments and lower weight per shipment. While the Federal Express segment also felt the effects of a soft industrial economy, it was less pronounced, supporting a minor 2.7% lift in revenue to $19.18 bln and helping total revs climb by 2.1% to $22.2 bln in Q3.
  • Federal Express volumes improved during the quarter to reach FDX's highest yr/yr average daily growth since Q4FY21. Federal Express package volume growth of 5% was the underlying reason. LTL (less-than-truckload) volumes were pressured, but the rate of decline improved sequentially. In U.S. domestic express services, volume ticked slightly higher, while international volumes expanded by 8%.
• Encouragingly, FDX was still able to drive adjusted operating margin expansion of 60 bps yr/yr in the quarter, underscoring the positive effects of its DRIVE and Network 2.0 initiatives. Adjusted EPS of $4.51 still missed estimates, albeit by a narrow margin. FDX's DRIVE savings mounted qtr/qtr, achieving $600 mln of savings in Q3. Management reiterated its goal of reaching its incremental target of $2.2 bln for FY25.
  • Network 2.0, FDX's plan to streamline package networks to enhance efficiency, is also rolling out smoothly. The company optimized five U.S. stations thus far in 2025 and expects 45 more in Q4. Meanwhile, FDX is on track to finish the rollout in Canada by the end of next month.
• Regarding the Freight separation, since FDX outlined its plans to fully separate the segment last quarter, the company has established a Separation Management Office. Management mentioned that it is making progress on all fronts, completing a $16 bln debt exchange offer in anticipation of the separation, possibly by mid-2026. Freight is a minor component of FDX's overall business but does boast attractive margins compared to Express. Following the separation, Freight would be the largest carrier by revenue.

Ahead of Q3 results, expectations were low, but investors were looking for signs that FDX was uncovering modest success despite a formidable economy. The company underdelivered in that regard, struggling mightily in the face of powerful macroeconomic headwinds, casting a dark cloud on the transportation sector, with many of its peers heading lower today, including UPS -2.6%, KNX -2.5% (52-week lows), XPO -1.5%, ARCB -1.3% (52-week lows),  WERN -0.3% (52-week lows), SAIA -0.3%, and ODFL -0.1% (52-week lows).