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Why Shares of FedEx Were Up Today

What happened

Shares of FedEx (NYSE: FDX) gained nearly 5% on Friday after the shipping giant announced a plan to streamline its operations by having its FedEx Ground division deliver FedEx Express packages. It's a small move, but an important step for a company that has been spending a lot of money in recent years with the promise of that spending eventually translating into greater efficiency and lower operating costs.

So what

FedEx said Friday that beginning in March, Express packages will be delivered by Ground if they are residential deliveries in which Ground can meet the service requirements. The coordination, which will begin in Greensboro, N.C., and will roll out at other markets throughout the year, should mean fewer trucks on the road and better utilization of assets.

Image source: FedEx.

"This move makes residential deliveries more efficient by putting the right package in the right network at the right cost to serve our customers," COO Raj Subramaniam said in a statement. "We continue to flex our network to stay ahead of e-commerce growth, and that includes adjustments to better handle the demand for residential deliveries while lowering our cost to serve."

Shares of FedEx underperformed the S&P 500 by more than 30 percentage points in 2019 as the company sparred with one-time customer Amazon.com and struggled to deliver for investors. The company was forced to manage weaker-than-expected global volumes during a period when it was also spending more domestically to build out its capacity and manage growing e-commerce shipments.

Now what

The move by FedEx to have two of its divisions coordinate better might seem minor, but it speaks to the complexity of the logistics supply chain and how difficult it can be to shift operations. The stock's reaction is probably an indication of how frustrated investors have been with the slow transition.

FedEx reported $5.5 billion in capex in 2019 and expects to spend another $5.9 billion in 2020, but it also expects 2020 to be the year when some of that spending begins to pay off in the form of new services, including seven-day-a-week residential delivery and improved freight delivery. Investors have taken a wait-and-see approach to the stock. Friday's announcement was viewed by markets as one small step in the right direction.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lou Whiteman owns shares of FedEx. The Motley Fool owns shares of and recommends Amazon and FedEx. The Motley Fool has a disclosure policy.


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