3 Reasons Shareholders Should be Excited to Own GXO Logistics
GXO (NYSE: GXO) is off to a great start as a public company.
Last month, company executives from GXO rang the bell at the New York Stock Exchange to celebrate their one-year anniversary since spinning off from XPO (NYSE: XPO). Despite its success, many investors still don't know the company exists.
They were recently referred to as "one of the biggest companies you've never heard of" on an episode of the 7 Investing podcast. For those who don't know, GXO is the largest pure-play logistics business in the world and services billion-dollar brands like Apple, Nike, and Disney, to name a few.
On the 2022 2nd quarter earnings call, management highlighted several reasons to be excited about GXO moving forward, and it explains why they continue to win business at a record rate (signed new customers in Q2 representing $475 million in future revenue).
Before we discuss the future, it's important to acknowledge the elephant in the room. It's been a rough year for GXO shareholders, with the stock currently down 50% year-to-date. Some investors may be understandably cautious about investing when considering inflation and recession fears. While no one knows how the stock price will behave over the next 6-12 months, shareholders should be encouraged to see GXO positioning itself as an industry leader in logistics for the next decade and beyond.
Here are three reasons the business is set up for success.
Innovation in reverse logistics
Improved efficiencies through automation
A business model that thrives in any environment
Let's take a look at each.
Reverse Logistics
It's no secret that the pandemic accelerated eCommerce adoption, and consumers have become comfortable ordering products online. As the volume of orders increases, so does the number of returns. According to Bill Fraine (Chief Commercial Officer at GXO), 25% of returned products never make it back into circulation. These returns add up quickly and negatively impact profit margins.
Fortunately, this area is where GXO excels and can get products back into the market faster, reselling up to 96%. They know customers are excited about this value proposition because 40% of new customer contracts signed in the 2nd quarter feature reverse logistics. This should serve as a tremendous growth lever moving forward.
Despite the success, GXO is not resting on its laurels. They are combining their suite of software tools with the expertise of the newly acquired Clipper Logistics (the deal was closed in May 2022). Clipper is one of the European leaders in reverse logistics and will add its tools and knowledge to the GXO flywheel, allowing them to expand on its already impressive lead.
Automation
Automation will transform the logistics industry over the next decade, and GXO plays a significant role in speeding up the adoption curve for automated warehousing. In the 2nd quarter, 60% of their new business wins featured highly automated sites. In July, they announced an expansion of their current relationship with 6 River Systems to increase the supply of collaborative robots.
One highlight of the automated sites is the benefit to employees. The robots are quick and efficient and can accomplish labor-intensive jobs. This frees up employees for more meaningful work, and they have reported higher satisfaction at automated warehouses. This creates what Chief Commercial Officer Bill Fraine calls "sticky" labor. Employees who enjoy their work have longer tenure and are more productive, allowing GXO to improve efficiency and save on training costs.
Inflation
CEO Malcolm Wilson indicates inflation is a key driver in some of the new business wins from recent quarters.
"Across global markets and industries, continuing supply chain complexities, elevated inventory levels, and high inflation are making seamless logistics management mission critical for more and more companies." -GXO CEO Malcolm Wilson
With costs increasing across the board, the value that GXO provides its customers is plain to see. Businesses can increase efficiency and lower costs by moving products closer to customers. When you add the efficiencies created by automation and its expertise in reverse logistics, you begin to see why so many customers are outsourcing to GXO.
Another strength in the GXO business model is its ability to pass costs on to customers. Almost half (45%) of GXO revenue comes from cost-plus contracts. This means the customer pays for cost increases without affecting GXO's margin. Other contracts contain annual inflation escalators that help offset any increases, and GXO aims for 30% ROIC (Return on Invested Capital) on all of its contracts.
Conclusion
Put it all together, and GXO looks like a business that has the potential to reward patient shareholders. They have a seasoned management team and continue to win customers at a record rate. Shareholders will be wise to pay attention to the next four quarters. If GXO can continue to execute and win new business, it will emerge from the current macro challenges stronger than before.
*I’ve included my notes from the Q2 call below.
Disclaimer: I own shares of GXO. This article is for informational purposes only and should not be considered investment advice. Please consult a professional before making any financial decisions.