What's going on?
Delivery giant FedEx is feeling the heat this winter: it reported on Wednesday that its quarterly profits would be squeezed by the cost of new investments and higher staffing costs during the holiday season.
What does this mean?
Shares in FedEx fell by about 3% after the company’s earnings report missed Wall Street’s expectations, but the company’s CEO insisted that the lower profits were due to long-term expansion that should strengthen returns in the years ahead. For example, the company has already spent around $2 billion in 2016 as it invests in automated distribution centers to handle an increasingly high volume of orders from online retailers.
Why should I care?
The bigger picture: The great battle for delivery services has begun.
It’s no secret that ecommerce has sparked a sea-change in people’s shopping habits – and the shift towards online shopping is only likely to grow. So far, ecommerce has thrived on a model where a delivery middleman (like FedEx) connects consumers to retailers’ goods – which has boosted business for delivery firms. However, Amazon’s plans to further develop its own delivery logistics pose a serious threat to FedEx and other delivery companies.
For the stock: Short-term pain for long-term gain?
FedEx’s stock dropped on Wednesday largely due to the cost of investment in new distribution centers and improved automated technology that should, over time, reduce the cost of shipping goods – and, ultimately, boost the company’s profits. Of course, investment usually demands a cost that won’t be regained until some point in the future. However, whereas a company might see opportunity in the future, investors often focus on the expense today – which helps explain FedEx’s short-term stock performance.