FedEx's Q1 2026: Contradictions on Trade Headwinds, Operating Leverage, and De Minimis Shipments

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

Date of Call: None provided

Financials Results

• Revenue: Up 3% YOY
• EPS: $3.83 adjusted EPS, up 6% YOY
• Operating Margin: Adjusted operating margin expanded 20 bps YOY (exact margin not disclosed)

Guidance:

• FY26 adjusted EPS outlook: $17.20–$19.00 (midpoint $18.10).
• FY26 revenue growth expected 4%–6% (midpoint 5%).
• $1.0B transformation savings (Drive + Network 2.0); ~$1.0B OI headwind from global trade; $160M OI headwind from USPS contract expiration; ~$300M direct trade-related costs; tax rate ~25%.
• Capex ~$4.5B; up to $400M pension contributions (reduced from $600M).
• Q2: sequential EPS improvement; FEC margin maintain/improve; Freight margin decline to moderate.
• Peak: modest ADV increase vs FY25; mid–high single-digit total peak volume growth.
• Amazon onboarding complete by Q3; continued U.S. domestic revenue growth.
• Freight revenue flat to up modestly for FY26.

Business Commentary:

* Revenue Growth and Network Adaptation: - FedEx reported 3% year-over-year revenue growth for the first quarter. - This growth was driven by strong performance in U.S. Domestic package services, despite significant international export demand pressures.

• Operating Leverage and Efficiency:
• FedEx Express (FEC) demonstrated 17% year-over-year adjusted operating income growth, expanding adjusted operating margin by 70 basis points.

• This was achieved by reducing structural costs and enhancing operational efficiency through Network two point zero and Tricolor strategies.

• Impact of Global Trade Environment:

• The company faced a $150 million headwind due to reduced international export demand in Q1, primarily from the de minimis exemption elimination on U.S. imports.

• This led to a $1 billion full-year headwind, impacting both top-line revenue and operational costs.

• Digital Transformation and Data Insights:

• FedEx emphasized the strategic value of its data and AI capabilities, with 17 million packages and 2 petabytes of data generated daily.
• The utilization of data insights and AI tools is enhancing supply chain visibility and enabling premium monitoring and intervention for customers.

Sentiment Analysis:

• Management delivered $3.83 adjusted EPS (up 6% YOY) on 3% revenue growth and modest margin expansion, but highlighted a ~$1B global trade headwind (de minimis changes, China-U.S. export softness) and a $160M USPS contract expiration impact. FY26 EPS guided to $17.2–$19 with 4%–6% revenue growth and $1B cost savings. Q2 EPS expected to improve sequentially; peak season modestly better. Balanced by ongoing international export pressure and Freight softness.

Q&A:

• Question from Jordan Alliger (Goldman Sachs): Is the low-to-high EPS range mainly a function of revenue outcomes, or are there other variables driving where results land?
  Response: Outcome depends on multiple variables—global trade trends, industrial economy health, and U.S. domestic demand—not just revenue.

• Question from Ken Hoexter (Bank of America): How should we interpret incremental margins given the $1B headwind and $300M trade-related expenses?
  Response: A ~$1B trade headwind, including global de minimis removal, pressures margins; FedEx is mitigating via cost actions and customer support, with stronger outlook beyond FY26.

• Question from Bascome Majors (Susquehanna): How will FedEx monetize its data and AI capabilities under the new digital leader?
  Response: FedEx is scaling AI on a unique logistics data platform to improve operations, differentiate customer tools, and develop new revenue models; more detail coming in February.

• Question from Scott Group (Wolfe Research): What Q2 sequential earnings lift should we expect, and why is operating leverage muted despite revenue growth and cost cuts?
  Response: Expect Q2 EPS to improve sequentially; leverage is dampened by a ~$1B trade headwind reducing flow-through despite savings.

• Question from Tom Wadewitz (UBS): Clarify the $150M Q1 trade headwind and why it scales to ~$1B for the year.
  Response: Most of Q1’s $150M was top-line pressure from de minimis-driven China-U.S. export declines; full-year grows with global de minimis changes plus ~$300M customs/staffing costs.

• Question from Jonathan Chappell (Evercore ISI): How do you bridge to 5% revenue growth if trade headwinds intensify?
  Response: USPS headwind laps after Q1, ongoing onboarding (e.g., Amazon) ramps, and Freight yields improve in H2; current trends continue.

• Question from Brandon Oglenski (Barclays): What’s the outlook for U.S. domestic volumes and pricing amid competitor contraction?
  Response: Expect similar trends with growth from onboarding and SMB momentum; pricing remains rational, with fuel and price actions aiding yields.

• Question from Chris Wetherbee (Wells Fargo): Should 4% revenue align with the EPS low end, and what are the $300M trade expenses?
  Response: No direct tie between revenue and EPS range placement; the $300M is customs clearance, staffing, and administrative costs due to trade changes.

• Question from Risha Harnain (Deutsche Bank): What drives sustainable share gains and the profitability of onboarded business?
  Response: Targeted execution in SMB, healthcare, and seven-day/rural coverage; healthcare is sticky and profitable; strong pricing capture supports revenue quality.

• Question from Ravi Shanker (Morgan Stanley): Customer reactions to de minimis changes and any pull-forward in volumes?
  Response: Small exporters faced stress; FedEx aided with digital clearance tools. No evidence of pull-forward; July was strong but aligned with retail events.

• Question from Brian Ossenbeck (JPMorgan): How much of peak strength is FedEx-specific versus market, and Freight outlook details?
  Response: Peak strength is largely FedEx-specific from prior wins onboarding; expect outperformance with surcharges applied. Freight yields should improve in H2 with discipline.

• Question from Bruce Chan (Stifel): Are airfreight supply constraints emerging, and how does Tricolor help?
  Response: FedEx is selectively growing premium lanes (e.g., Asia–Europe), shifting capacity; healthcare drove ~50% of U.S. export weight growth; Tricolor densifies and decongests the network.

• Question from Jason Seidl (TD Cowen): Any Network 2.0 adjustments for peak and impact on $1B savings cadence?
  Response: Network 2.0 remains on plan (18% U.S. ADV optimized; ~140 facilities closed; ~360 stations integrated); no new optimizations during peak to protect service.

• Question from David Vernon (Bernstein): Why isn’t more falling to the bottom line with $1B savings and 5% revenue growth—mix impact?
  Response: Leverage is constrained by opportunity cost from trade headwinds and a shift to lower-yielding (but profitable) mix alongside other pressures.

• Question from Ari Rosa (Citi): How much of revenue growth is from new wins vs. organic, and what comprises the ~$600M Freight spin costs?
  Response: Growth reflects share gains, onboarding, and yield; H2 driven by onboarding and pricing. Spin costs are mostly IT/systems to enhance Freight’s standalone customer experience.