‘Lost year’ for growth in 2020, but rebound in 2021: XPO

‘Lost year’ for growth in 2020, but rebound in 2021: XPO

XPO Logistics CEO Bradley S. Jacobs expects a recovery in "fits and starts" in the second half of 2020. Photo credit: Ari Ashe, JOC.com/IHS Markit.

The CEO of XPO Logistics expects a global economic recovery to come “in fits and starts” as social distancing requirements eventually relax and businesses reopen, although 2020 may be a “lost year” for earnings growth due to the coronavirus disease 2019 (COVID-19) pandemic.

“I’m a pragmatic bear in the short-term, because that’s the reality of COVID-19,” Bradley S. Jacobs said Thursday in a letter to shareholders. Long-term, however, Jacobs is a “mega-bull” who thinks some consumer and business behaviors reshaped by the pandemic “may become economic tailwinds in our industry.” He expects consumer confidence and economic growth to rebound globally in 2021.

Greater consumer confidence, however, will depend on how quickly the 22 million people who lost jobs over the past month return to work, with the Labor Department reporting Thursday that an additional 5.25 million workers filing first-time unemployment claims in the past week. A rebound may not truly come until a vaccine for COVID-19 is available, most likely in 2021. 

In the meantime, “the service we provide as a company and industry will continue to be the bedrock of all economies,” Jacobs said. “I believe that supply chains will become more ironclad against disruption,” as the coronavirus pandemic accelerates development of supply chain technology that better helps companies manage the risks ahead, he said.

“Artificial intelligence will lead to greater sharing of information, and threats like pandemics and natural disasters will be detected much earlier,” Jacobs said in the letter, filed with the US Securities and Exchange Commission (SEC). That’s no guarantee human behavior will change when faced with potential catastrophe, but it may help guide or compel preventive actions.

The pace of e-commerce expansion, already measured in double-digit percentages, will step up again, he predicts. “Millions of consumers have become more accustomed to online shopping for food, household goods, pet supplies, health and beauty products, furniture and appliances without leaving their homes,” Jacobs said. “If this becomes secular, it will drive even more demand.”

The beneficiaries: e-fulfillment, omnichannel retail, reverse logistics, and last-mile logistics, all areas covered by XPO Logistics’ brands and divisions. As for the pandemic, “Our major markets appear to be in the worst of it now, in mid-April,” he said. “One thing is clear: there’s a beginning, a middle, and an end to this,” although “this” will not end as quickly as it began.

The world is likely to return to work “in fits and starts in the back half of the year, as extreme social distancing winds down,” Jacobs said in his letter. “Life is complicated at the moment, but we think 2021 will be a much better year, and it will get better from there.”

Sale plans canceled, stock climbs

The impact of the pandemic won’t be too evident in the logistics operator’s first-quarter earnings, which XPO will release May 5. “From a demand standpoint, January was very good and February and early March were reasonably good,” Jacobs said. “The last half of March declined sharply as large sectors of the [US] economy came to a near halt.”

That’s also when XPO, which had $16.7 billion in annual revenue last year, decided to drop plans announced in January to sell or spin off as many as four of its transportation and logistics businesses, excluding its less-than-truckload (LTL) operations. “In light of current market conditions, XPO has terminated the strategic review process,” the company said in a March 20 SEC filing.

The sale or spin-off was meant to improve XPO’s shareholder value. Now those businesses, including last-mile logistics and supply chain management, are well-positioned to grow post-pandemic. As of April 15, the share value of XPO’s stock on the New York Stock Exchange is up 32 percent from March 20, although down from an April 8 high of $64.01 per share.

After announcing its plans in January, XPO’s stock price rose from about $78 per share Jan. 10 to $99.11 per share Feb. 20. A long slide in share value followed through mid-March as the rapid spread of COVID-19 in the United States rattled Wall Street and investors.

XPO has felt the impact of COVID-19 around the world, starting in China. The company has about 5 million square feet of logistics space in Asia, including a “footprint” in Wuhan, China, the origin point of the disease. “Our Chinese logistics sites are all back up and running at about 90 percent of prior levels,” Jacobs said.

The company has extensive supply chain and distribution operations in Europe, especially in France, Spain, and the United Kingdom. “North America was the most recent, and the most rapid, escalation,” he said. “Our first priority is to keep our employees out of harm’s way. Second is our duty as an essential provider of transportation and logistics services.

“I’m immensely grateful to our employees, particularly those on the front lines, for stepping up to the challenge of providing essential services,” Jacobs said. “We acted quickly to instill comprehensive safety protocols specific to the pandemic and help our team cope with the disruption. We’re helping communities get through this, so the economy can get back on its feet.” 

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.