FedEx Q3 2026: revenue up 12%, but a $1.2B markdown of its FedEx Freight stake cut EPS 56%

FedEx's quarter ended September 30, 2026 brought revenue of $22.86bn, up 11.9% from $20.43bn, and operating income of $1,067m, up 9.8%. Diluted earnings per share from continuing operations (EPS, profit per share, excluding the FedEx Freight business FedEx spun off on June 1) fell 56% to $1.21 from $2.73. That drop is not about deliveries. It comes almost entirely from a $1,238m non-cash markdown of the 19.9% FedEx Freight stake FedEx kept. On FedEx's own adjusted basis, EPS rose 28% to $3.74. Revenue grew because FedEx charged more per package, more than because it carried more of them. U.S. revenue per package rose 7% while U.S. daily volume rose 2%. Costs kept pace, though: purchased transportation rose 19% and fuel 64%, so the operating margin slipped to 4.7% from 4.8%.

Why this is labelled "Q3 2026". FedEx moved its fiscal year end from May 31 to December 31, effective June 1, 2026. This quarter is the calendar third quarter (July to September 2026), and FedEx itself calls it its "third quarter." The year-ago comparison is the recast July–September 2025 quarter, with FedEx Freight removed from both years. This report is written from the earnings release furnished on Form 8-K (Exhibit 99.1) on October 28, 2026. The full 10-Q for the quarter had not been filed when we wrote this, so the detailed management commentary (MD&A) is not yet available. The cash flow figures cover nine months and were not recast for the spin-off.

The numbers

Net income including discontinued operations was $290m, against $920m a year ago, which included $275m from FedEx Freight. The table uses continuing operations so both years cover the same businesses.

Where the growth came from: price, freight weight and fuel

Express U.S. Domestic revenue rose 10% to $14,710m and operating income rose 7% to $946m. Revenue per package rose in every service: priority +7% to $28.18, deferred +10% to $20.81, ground +7% to $12.89. Daily volume grew only 2%. Ground commercial (business-to-business) grew 3% and home delivery 1%, so the mix leaned toward the business parcels FedEx says it wants. FedEx credits "higher package yields, increased package volume, improved service mix, and continued cost savings from transformation initiatives." But the segment margin narrowed to 6.4% from 6.6%. Purchased transportation (paying outside contractors to move and deliver packages) rose 18% to $4,473m, against 3% for FedEx's own salaries and benefits. That fits the Network 2.0 model of handing more pickup and delivery to contractors, so FedEx is partly swapping its own payroll for contractor bills. Either way, costs absorbed most of the price gain.

Express International revenue rose 17% to $7,465m and operating income rose 15% to $220m, a 2.9% margin (3.0% a year ago). The growth came from heavier shipments, not more parcels. Total international packages per day fell 4%, mainly because the intra-country (domestic delivery inside other countries) business fell 11%. Meanwhile freight pounds rose 15%, international economy packages 17%, and priority revenue per package 16% to $74.27. Freight revenue jumped 28% to $1,442m. On an adjusted basis the margin rose to 3.9% from 3.1%, after $77m of restructuring costs from the international transformation program.

Fuel is a large moving part the release doesn't break out. Fuel expense rose $496m (+64%) to $1,270m. FedEx bills fuel surcharges on top of base rates, and the release says base yields rose, but it doesn't say how much of the $2.4bn revenue increase was surcharge pass-through. The 10-Q should answer that. Until then, part of the 12% revenue growth should be treated as fuel cost being passed on to customers, not as extra demand. A surcharge that rises as fast as fuel costs adds revenue without adding margin, which helps explain why the margin slipped.

What the headline numbers hide

The GAAP loss is a paper markdown. After the spin-off, FedEx holds 19.9% of FedEx Freight as a stock investment and must mark it to market value every quarter. The stake fell in value by $1,238m this quarter ($5.18 per share), with no tax offset shown. Net of this markdown, the stake still shows a $3,254m gain for the nine months to September, and it is carried at $3.3bn. As long as FedEx holds the stake, its GAAP earnings will swing with FedEx Freight's share price, and that swing has nothing to do with parcel operations.

A one-off gain runs the other way. In July FedEx used the roughly $4.1bn dividend it received from FedEx Freight, plus cash on hand, to buy back about $4.9bn of its own bonds through tender offers. Because the bonds were bought below face value, FedEx booked a $627m pre-tax gain ($1.97 per share). That gain won't recur, and FedEx excludes it from adjusted EPS.

Adjusted EPS got real help from below the operating line. Adjusted pre-tax income rose about $190m (19.5%) to about $1,165m (our calculation from the release's reconciliation). Of that, adjusted operating income added $164m and lower net interest added $59m: interest, net fell to $66m from $125m now that the bonds are retired. Other non-operating income excluding the bond gain fell by about $33m. The bigger lever is tax. The adjusted tax rate fell to about 23.1% from about 28.9% a year ago. At last year's rate, adjusted EPS would have been about $3.47, not $3.74. So roughly $0.27 of the $0.81 increase, about a third, came from tax.

Not all the exclusions are flattering. FedEx's "restructuring, exit and other costs" adjustment adds back $130m of operating costs. It also removes a $263m deferred tax benefit tied to the sale of FedEx Supply Chain, which makes adjusted EPS lower, not higher. That is conservative. But restructuring costs show up every quarter ($61m a year ago, $82m in January–March), so treating them as one-offs flatters the adjusted operating figure a little.

Buybacks did little for EPS this quarter. FedEx repurchased $2.0bn of stock (about 6.3m shares) from June through September, and the cash flow statement shows the same $2,000m for the nine months to September. Yet the diluted weighted share count was 239m, up from 237m (+0.8%), as stock issued to employees (cash proceeds from stock issuance were $1,010m for the nine months) offset the repurchases. FedEx says the lower share count added only $0.02 to quarterly EPS. Dividends paid were $979m over the nine months. The release does not give the July–September amounts.

Cash: $8.0bn, but $2.7bn belongs to customers. FedEx says its September 30 cash "included approximately $2.7 billion in IEEPA tariff refunds held for refund to customers." These are refunds of tariffs struck down by the Supreme Court in February 2026. FedEx collected that cash but has to pass it on. The release does not say which balance-sheet line holds the amount owed (accounts and notes payable rose to $6,959m from $4,355m at December 31). Nine-month operating cash flow of $7,448m includes FedEx Freight through May, because the cash flow statement wasn't recast, so it isn't a clean read of the remaining company.

On balance the quarter is understated. GAAP EPS fell 56% because of a $5.18-per-share non-cash markdown of the Freight stake. Operating income grew 10% (16% adjusted). The adjusted EPS figure overstates the other way, since about a third of its 28% gain came from a lower tax rate.

Takeaway: Read FedEx's quarter through operating income (+10%, or +16% adjusted), not either EPS figure. The GAAP drop is a paper loss on its FedEx Freight shares, and the adjusted jump leans on a 6-point lower tax rate and interest saved on bonds repaid with Freight's dividend. Underneath, prices rose about 7% per U.S. package, but contractor and fuel costs grew faster than revenue, so margins didn't widen.

Did last time's read hold up?

Our fiscal 2026 annual report said to watch "whether Express U.S. Domestic holds a margin above 7% with the pilot contract fully loaded" (the new pilot contract took effect June 29, 2026). In the first full quarter under it, the answer is no. The segment's margin was 6.4% (6.6% adjusted), below 7% and 20bp under the same quarter a year earlier. July–September is usually a lower-margin quarter than April–June (the recast April–June 2026 quarter showed 9.2%), and the nine-month margin is still 7.4%. The year-on-year slip matters more than the seasonal one. The release doesn't break out the pilot contract's cost. The U.S. segment's salaries and benefits rose just 3%, and the pressure that shows came from purchased transportation (+18%). We also flagged the $3.3bn of tariff claims. The release now shows $2.7bn of refund cash held for customers. That backs our earlier view that most of the money isn't FedEx's to keep.

Outlook

FedEx raised its calendar-2026 forecast. Note that calendar 2026 includes January–May, which were in the old fiscal 2026.

• Revenue growth: about 12% (was about 11%).
• Adjusted EPS (continuing operations): $18.00–$18.60 (was $16.90–$18.10). The midpoint moved up $0.80, about the size of this quarter's adjusted EPS beat over last year ($0.81).
• GAAP EPS: $35.30–$35.90, inflated by the $3,254m nine-month gain on the Freight stake and the $627m bond gain. Any further mark-to-market moves are excluded.
• Tax rate: about 22.5% (was about 23%). Capital spending is unchanged at $3.9bn, and pension contributions at $475m.

Two structural changes affect the next quarter. FedEx sold FedEx Supply Chain to CMA CGM for about $1.4bn on October 1, so that business leaves the "corporate, other" revenue line ($680m this quarter, which also includes FedEx Office and Dataworks). And U.S. parcel rates rise an average of 5.9% on January 4, 2027.

Our read: The pricing is real: U.S. yields rose 7% while volume grew 2%, and international freight weight rose 15%. But this quarter shows the limit of the cost story. U.S. contractor costs grew 18% against 10% revenue growth in July–September, whatever the mix of Network 2.0 outsourcing and higher contractor rates (FedEx names "increased purchased transportation rates"). For the October–December quarter, watch whether the U.S. segment's margin gets back above the year-ago level. After the stock investment and the bond gain, that is the figure that shows whether cost cuts are reaching profit. Also watch whether the 10-Q shows how much of the revenue growth was fuel surcharge.