FedEx's Q1 2026: Contradictions Emerge on Network 2.0 Savings, Trade Environment Impact, De Minimis Exposures, and Service Improvements

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 18, 2025

Financials Results

• Revenue: Up 3% YOY (consolidated); absolute amount not disclosed
• EPS: $3.83 adjusted EPS, up 6% YOY
• Operating Margin: Adjusted operating margin expanded 20 bps YOY (consolidated); FEC adjusted operating margin expanded 70 bps YOY

Guidance:

• FY26 adjusted EPS expected at $17.20–$19; effective tax rate ~25%.
• FY26 revenue growth expected at 4%–6% (midpoint ~5%).
• $1B transformation-related savings (DRIVE/Network 2.0); ~$1B operating income headwind from global trade; ~$160M OI headwind from USPS contract expiration.
• Capex target ~$4.5B; continue share repurchases; up to $400M voluntary U.S. pension contributions.
• Q2: sequential improvement in adjusted EPS; FEC margins maintained or improved sequentially; Freight margin decline moderates.
• Midpoint: FEC revenue +6% with slightly lower margin; Freight low-single-digit revenue growth with margin down.
• 5.9% GRI effective January; peak surcharges in place; modest peak ADV increase; total peak volume up mid- to high single digits.

Business Commentary:

• Revenue Growth and Cost Management:
• FedEx reported $3.83 in adjusted earnings per share for Q1, up 6% year-over-year, with revenue growth of 3%.

• This growth was driven by strength in U.S. domestic package services, cost reduction efforts, and effective yield management.

• International Priority Freight Performance:

• International priority and economy freight revenue experienced 14% year-over-year growth in Q1.

• Growth was facilitated by the Tricolor strategy, which enhances capacity flexibility and reduces unit costs.

• Impact of Trade Environment:

• FedEx experienced a $150 million headwind from reduced international export demand in Q1, mostly due to the U.S. Postal Service contract expiration.

• The full removal of the de minimis exemption in the United States also contributed to the global trade headwinds expected for the fiscal year.

• Network Enhancements and Efficiency:

• FedEx advanced the Network 2.0 rollout, optimizing approximately 70 additional U.S. stations in Q1, with nearly 3 million average daily volume flowing through Network 2.0 operations.
• Improvements in labor and on-road productivity in Europe, driven by strategy and cost management, also contributed to profitability.

Sentiment Analysis:

• Management reported a “solid quarter” with revenue up 3% and adjusted EPS up 6%, plus 20 bps margin expansion and $200M transformation savings. However, they guided to FY26 EPS of $17.20–$19 amid an estimated ~$1B operating income headwind from global trade and a $160M USPS contract headwind, and noted Freight margin pressure. They expect only slight FEC margin improvement and Q2 EPS to improve sequentially but gave no YOY Q2 guide.

Q&A:

• Question from Jordan Alliger (Goldman Sachs): Is the EPS range mostly about revenue outcomes or other drivers?
  Response: Management said the range depends on multiple variables—global trade, industrial economy, U.S. demand, inflation and B2B traction—not just revenue.

• Question from Ken Hoexter (BofA Securities): Explain why incremental operating gains lag revenue growth and detail the $1B and $300M headwinds.
  Response: They face a ~$1B trade-related OI headwind (including de minimis changes) and ~$300M of customs/administrative costs, which pressure leverage despite cost actions.

• Question from Bascome Majors (Susquehanna): Strategy and potential of data monetization with the new CDIO?
  Response: FedEx will scale AI on its unique logistics data to enhance operations/customer tools and pursue new revenue models via Dataworks/FDX.

• Question from Scott Group (Wolfe Research): Q2 sequential earnings and why operating leverage isn’t stronger?
  Response: Expect Q2 adjusted EPS to improve sequentially, but a ~$1B trade headwind reduces flow-through despite revenue growth and savings.

• Question from Thomas Wadewitz (UBS): Clarify the $150M Q1 trade hit and why it becomes ~$1B for the year.
  Response: Most Q1 impact was top-line loss from China–U.S. de minimis changes; full-year adds global de minimis pressure plus ~$300M customs/admin costs and ~$100M extra OI impact.

• Question from Jonathan Chappell (Evercore ISI): How does revenue accelerate to the midpoint amid intensifying trade headwinds?
  Response: USPS headwind laps in Q2; onboarding wins (e.g., Amazon) ramp; pricing/yield actions and improving Freight yields in H2 support ~5% revenue growth.

• Question from Brandon Oglenski (Barclays): Domestic package volume outlook, market share, and pricing dynamics?
  Response: Expect continued share gains in SMB/healthcare with rational pricing; fuel and mid-quarter price changes support yields; execution-driven, not major trend shifts.

• Question from Christian Wetherbee (Wells Fargo): Should 4% revenue map to $17.20 EPS and 6% to $19? Clarify the $300M trade expense.
  Response: No direct revenue-to-EPS mapping given many variables; the $300M reflects customs clearance, staffing, and admin costs to adapt to trade changes.

• Question from Ravi Shanker (Morgan Stanley): Customer reaction to de minimis expiry and any pull-forward in volumes?
  Response: Small exporters are stressed; FedEx is digitizing clearance and partnering closely. No evidence of pull-forward; peak/back-half outlook remains intact.

• Question from Brian Ossenbeck (JPMorgan): How much of peak strength is FedEx-specific vs market? Freight outlook?
  Response: Peak gains skew to FedEx wins and large B2C customers; Freight remains disciplined on revenue quality with yield improvement expected in H2.

• Question from J. Bruce Chan (Stifel): Airfreight supply constraints and Tricolor flexibility?
  Response: They’re selectively growing premium freight, shifting capacity (e.g., Asia–Europe) and leveraging Tricolor to decongest hubs and flex between own/third-party lift.

• Question from Unknown Analyst (TD Cowen): Any Network 2.0 changes during peak; impact on $1B savings cadence?
  Response: Network 2.0 is on plan (18% U.S. ADV in model); no new optimizations during peak; savings and customer-experience benefits remain on track.

• Question from David Vernon (Bernstein): Why isn’t there more operating leverage with savings and 5% revenue growth?
  Response: Trade-driven opportunity cost and mix shift to lower-yielding (still profitable) traffic dampen flow-through despite cost reductions.

• Question from Ariel Rosa (Citi): How much of revenue growth is new wins vs organic; details on $600M Freight spin costs?
  Response: Growth reflects onboarding wins and yield actions; spin costs are primarily IT/systems to enhance Freight’s customer experience, with limited staffing costs.