Wednesday, December 20, 2006

Fedex Should Sell Kinkos and Buy an Energy Company

Fedex Corporation (NYSE:FDX) reported diluted Q2 EPS of $1.64 vs. $1.53 for the comparable quarter last year. Ground package volume increased 14% which should make the teamsters stronger as they work to organize and negotiate better wages.

The Kinkos operation reported disappointing results as revenues actually declined and operating margins shrunk in half to a miniscule 1.5%. The only clear reason for Fedex to want Kinkos is to capture package volume at the ground level and maintain market share. Most of Kinkos has nothing to do with Fedex’s core competencies so it is not surprising that they are not getting it right. The press release has some corporate speak about retraining, refocusing on core resources and sales work force reorganization. Management has stepped on the gas and opened 86 new units in the first half and promises to open 200 new units during Fiscal 07. No mention of closures. As Kinkos becomes larger Fedex may have to reconsider their co-dependency problem and spin this one out while retaining a strategic relationship.

Fuel charges also dropped dramatically in Q2 contributing to very positive results. But as any airline knows this is a fleeting benefit, which frequently disappears with the next geo-political problem. Overall YTD fuel costs are still up 11%. Fuel charges are problematic. Fedex is still small enough and has the financial clout to buy into an energy company and control their fuel costs. Fuel is vastly more important than photocopies.