Rising costs underscore the challenges awaiting the company as it tries to boost margins on soaring online shopping—and demand for home deliveries—fueled by the pandemic.

(Bloomberg)—FedEx Corp. tumbled as cost pressures tied to surging package deliveries emerged as a threat to the gusher of profits Wall Street expects from the courier.

Capital expenditures will jump more than 20% during fiscal year 2022 as FedEx ramps up outlays to boost efficiency, including on 16 automated facilities to be built before the end of the year. Labor constraints also have boosted costs and crimped on-time deliveries.

“The inability to hire team members, particularly package handlers, has driven wage rates higher and creates inefficiency in our networks,” chief operating officer Raj Subramaniam said Thursday on a call with analysts after FedEx reported earnings. That’s forcing the company to offer overtime and adjust package routes.

Rising costs underscore the challenges awaiting the company as it tries to boost margins on soaring online shoppingand demand for home deliveriesfueled by the pandemic. While the shift spurred record package volumes and enabled FedEx to raise prices, the boom has also placed greater strain on the courier’s web of sorting centers and delivery routes.

“They need to spend more because their networks are stressed with the surge of freight that we’re seeing,” said Lee Klaskow, an analyst at Bloomberg Intelligence.

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The shares fell 4.6% to $289.82 at 9:36 a.m. in New York, the biggest drop on the S&P 500 Index. FedEx had climbed 17% this year through Thursday, while an S&P index of U.S. industrial companies advanced 15%. United Parcel Service Inc. gained 22% during the same period.

Amid the blitz of packages and aggressive price increases, both FedEx and UPS have struggled to live up to investors’ high expectations for profit growth. UPS shares fell the most in seven months on June 9 when Chief Executive Officer Carol Tome’s financial forecast disappointed shareholders.

FedEx has also been struggling with on-time performance as less than 88% of its deliveries hit that bar last month, according to ShipMatrix, which provides data and consulting to shippers. UPS achieved a level of 96%, while the U.S. Postal Service had about 95%.

No ‘big beat’

Adjusted earnings will be $20.50 to $21.50 a share for fiscal year 2022, which ends May 31, FedEx said in its earnings statement. Analysts had expected $20.48, according to the average of estimates compiled by Bloomberga number that had risen a dollar a share since mid-April on optimism that hefty demand would continue even as the pandemic eases.

The results were “not the big beat that we have recently grown accustomed to,” Ravi Shanker, an analyst at Morgan Stanley with an equal weight rating on the stock, wrote in a research note.

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Shanker said the company’s normalized earnings per share is likely closer to $15 than $25, given the structural pressures on the ecommerce parcel delivery business.

FedEx expects operating margins to improve in fiscal year 2022, CEO Fred Smith said on the conference call. Sales are expected to exceed $90 billion.

In FedEx’s fourth quarter, adjusted earnings climbed to $5.01 a share, a penny above analyst estimates. Sales jumped 30% to $22.6 billion, compared with analysts’ estimate of $21.5 billion. The company called out “constrained labor availability” as one of the reasons that earnings were only slightly above expectations while sales handily surpassed estimates.

For its fiscal 2021 as a whole, adjusted earnings almost doubled to $18.17 a share. Profit in fiscal 2020 was the lowest in six years as FedEx invested heavily to revamp its ground network in an effort to handle residential deliveries more efficiently.

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