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FedEx (FDX -2%) did not quite deliver like investors wanted as it closed out FY25. The package delivery giant reported a huge EPS beat for Q4 (May), its largest upside in the past five quarters. Revenue edged higher by 0.5% yr/yr to $22.22 bln, a bit better than expected. The main problem was the Q1 (Aug) EPS guidance, which was well below analyst expectations.

• Management sounded pretty pleased with its Q4 results given the weak demand environment, with growth largely driven by its deferred services, which refers to longer delivery times at lower rates. This is designed for customers who prioritize cost savings over speed. That tells us customers are watching what they spend.
• Despite the headwinds, FDX posted a 1% revenue increase at Federal Express, but there was continued weakness, as expected, at FedEx Freight. For both segments, a better-than-expected May more than offset a softer-than-expected April. US domestic volumes held up well throughout the quarter, with growth accelerating in late April and May.
• From an international perspective, volume trends closely tracked global trade headlines. March was solid, but following the April 2 tariff announcement, customer concerns increased and volume softened. In early May when tariffs were implemented, China to US volumes deteriorated sharply and remained weak throughout the rest of the quarter.
• Consistent with the trends over the last several quarters, its higher margin B2B volumes remained pressured in Q4, which affected both Express and Freight results. However, FDX was encouraged by the sequential improvement at FedEx Freight and its ability to protect segment profitability with an operating margin of 20.8% in Q4. Recall that FDX previously announced it will spin off its Freight segment as a new publicly traded company by mid-2026.
• In terms of the weak guidance, FDX cited the prolonged weakness in the industrial economy. In addition, the US Postal Service contract expiration will be a near-term headwind for growth. For FY26, FDX expects around $1 bln in incremental yr/yr benefit from its transformation-related efforts, which includes structural cost reduction benefits from DRIVE and Network 2.0.

Overall, the Q4 results were actually pretty good for FedEx, especially given the macro headwinds and with the tariffs being announced mid-quarter. However, the Q1 guidance was quite weak and management seemed pretty cautious on the call, which is likely weighing on shares also. It sounds like results will remain pressured until the industrial economy improves, which will take time. On a final note, UPS will report Q2 results in late July. This report makes us more cautious on UPS.