By Todd Horwitz 

FedEx Profit Falls 40%

FedEx said Tuesday that its profit fell 40% in its most recent quarter, hurt by higher costs, a shorter holiday shipping season and its move to cut ties with online shopping giant Amazon. The package delivery company also cut its earnings expectations for the year. Its stock tumbled almost 7% in after-hours trading Tuesday. Fred Smith, the company’s CEO, called the current fiscal year one “of continued significant challenges and changes for FedEx.”

Smith said the fiscal second quarter was an “anomaly” because of the shorter holiday season. Thanksgiving this year was six days later than last year, making it the shortest stretch between Thanksgiving and Christmas since 2013. FedEx said it needed more drivers and package handlers to deliver packages faster, increasing costs. It also pushed Cyber Monday, the busy online shopping day, into the company’s fiscal third quarter.

FedEx also took a hit from its recently soured relationship with Amazon, which is building its own delivery fleet that could threaten traditional delivery companies. Amazon has leased jets, built package-sorting hubs at airports and launched a program to let its contractor drivers start their own businesses delivering packages in vans. A recent report by Morgan Stanley estimated that Amazon is delivering half of its packages itself.

Both FedEx and UPS are absorbing higher costs in the U.S. as they modernize sorting centers and shift to seven-day residential delivery, not just during the holidays but year round. FedEx is also beginning to keep in its network more of the packages it had sent to the U.S. Postal Service for last-mile delivery.

The goal is to shift FedEx’s delivery network, designed primarily for shipments between businesses, to one that can deliver more individual packages to residences to capitalize on the relentless growth of online shopping. The latest quarter shows that the changes FedEx is making to its Ground network “are costing them more than they had realized,” said Satish Jindel, president of the parcel research firm SJ Consulting Group Inc.

FedEx executives admitted that they underestimated how much it would cost to expand to seven-day delivery, which started in early November. “Clearly, we didn’t do the greatest job of forecasting our cost,” Mr. Smith said. Finance chief Alan Graf added that FedEx has had to pay higher-than-expected wages in some areas given the tight labor market.

Todd “Bubba” Horwitz