FedEx reported a notable drop in its first-quarter earnings and revised its annual profit forecast downward, attributing the financial setbacks to a combination of diminished demand in the package delivery industry, specifically for high-margin priority services, and elevated operating costs. The company's shares plummeted by approximately 9% to $272.83 in after-hours trading following the announcement, signaling investor disappointment.

The earnings decline marks a challenging period for FedEx, which has been grappling with reduced demand for its premium delivery options in the United States. In addition, the company faced an operational hurdle with one fewer operating day during the quarter compared to last year. These factors contributed to FedEx's inability to meet Wall Street's profit expectations, with the firm posting adjusted earnings of $3.60 per share, falling short of analysts' projections of $4.76 per share, according to data from LSEG.

The company has also been trying to mitigate the impact of these demand issues through cost-cutting measures. Despite completing a significant restructuring in June that merged its Ground and Express delivery units to streamline operations and reduce expenses, these efforts were insufficient to counterbalance the declining demand. Consequently, FedEx now forecasts its revenue for fiscal 2025 to grow by only a low single-digit percentage, a reduction from its previous expectation of low- to mid-single-digit growth.

Additionally, FedEx has scaled back the upper range of its full-year adjusted operating income projection to between $20 and $21 per share, from an earlier estimate of $20 to $22 per share. The company's first-quarter results underscore the ongoing operational and market challenges, with CEO Raj Subramaniam describing the period as a "challenging quarter" due to higher operating expenses and weakened demand for priority shipping services as e-commerce growth moderates post-pandemic.

FedEx’s impending loss of a significant contract with the United States Postal Service (USPS) further complicates its outlook. The contract, valued at $1.75 billion during the USPS's latest fiscal year, will cease on September 29, 2024, presenting a projected $500 million headwind for FedEx in the current fiscal year. This loss comes as the USPS has opted to shift this business to FedEx's rival, United Parcel Service (UPS).

FedEx's revised earnings per share (EPS) forecast for the fiscal year is now set between $17.90 to $18.90, down from the prior range of $18.25 to $20.25, and below the analyst consensus of $19.80.

In light of these challenges, FedEx is also evaluating strategic options regarding its FedEx Freight business, considering potential spin-offs or sales as part of its efforts to optimize its portfolio and focus on core strengths amidst the evolving market conditions.