The fallout continues from Tuesday’s abrupt firing of C.H. Robinson Worldwide Inc. President and CEO Bob Biesterfeld. Most of it has been negative, with some rays of hope thrown in.
Analyst reaction to the move was fairly harsh. Tom Wadewitz of UBS slapped a sell recommendation on Robinson (NASDAQ: CHRW) shares with an $81-per-share 12-month price target. That is well below the $90.80 per share level where shares closed on Wednesday. Ken Hoexter of Bank of America/Merrill Lynch downgraded the shares to neutral from buy and cut his 12-month price target to $95 a share from $104.
Amit Mehrotra of Deutsche Bank was probably the most sanguine. Mehrotra acknowledged that Robinson’s earnings power may be impaired by decelerating volumes, lower contract rates and a “fast normalizing” global freight forwarding business off of very high levels. However, he said there’s not a lot of downside in the shares from the current price range.
The macroeconomic weakness affecting the brokerage giant was beyond Biesterfeld’s control. Nor could he stop the compression of contract rates — which generally account for more than 60% of Robinson’s brokerage business — in the wake of the 2022 collapse of spot market rates.
Contract rate moves, which typically lag spot rates by about six months (though the timing may vary a few months), are about to see what Wadewitz called a “competing down.” As contract rates decline to meet spot rate levels, Robinson’s North American Surface Transportation (NAST) net revenue, or revenue after transportation costs are factored in, may drop as much as 20% in 2023, he said. NAST is by far Robinson’s largest unit, with nearly $5.8 billion in gross revenue through the first nine months of 2022.
More than macro issues
However, Biesterfeld’s departure — announced on the first business day of the year with no transition period — sends a signal that Robinson’s board and stakeholders were unhappy with his performance and the pace of change in his 3 ½ years at the helm. Robinson’s total return of 18% during his tenure lagged the S&P 500’s return of 42%.
The last straw for the board may have been Robinson’s third-quarter results, which were released on Nov. 2. The company reported year-on-year declines in gross revenue, as well as operating and net income. Operating expenses rose 12.4% to $599.6 million, led by a 21.3% jump in selling, general and administrative costs.
It didn’t help matters when Biesterfeld told analysts that demand and freight rates, which the company had expected to weaken, declined faster and further than he had projected.
At the time it released its quarterly results, Robinson announced a cost-reduction program aimed at reducing operating expenses by $175 million in 2023. At the heart of the cost-cut plans was the layoff of 650 employees, or about 6% of its workforce. That was announced on Nov. 9.
However, to achieve the $175 million in gross cost savings, Robinson would have to reduce head count at NAST and its “other and corporate” unit by much more than 10%, Wadewitz said. In 2021, personnel expenses accounted for 75% of Robinson’s total operating expenses.
The third-quarter results and Biesterfeld’s subsequent comments may have been the catalyst for the board to do what it had already begun to plan. The sense among executives, shareholders, analysts and board members was that the company wasn’t moving fast or effectively enough to transform into a digital platform away from traditional brokerage, especially in an increasingly competitive segment. There was also a sense, said one executive intimately involved in the matter, that Biesterfeld was not the best long-term fit to run a nearly $25 billion business.
Biesterfeld was “over his skis,” said the executive.
Board Chairman Scott Anderson will serve as interim CEO (no president was named), and Jodie Kozlak, who runs a consulting firm, will be independent board chair. The focus now turns to a permanent successor, and whether Biesterfeld’s departure triggers significant changes in the company’s operations. One internal candidate for the top job is Arun Rajan, the current chief operating officer and an advocate of the rapid uptake of digital brokerage processes.
In his Wednesday note, Mehrotra said a new CEO needs to focus efforts on a “harder pivot in strategy away from traditional brokerage and toward a more digital platform to improve productivity, with perhaps some bold M&A to accelerate that shift.” Given Robinson’s size and scale, a new CEO would “likely need to come from an existing brokerage house with a proven track record in order for investors to get behind the potential transformation,” he said.
Whoever takes over will have to deal with ramped up competition — the latest being the RXO Inc. (NYSE: RXO) pure-play brokerage spinoff from XPO Inc. (NYSE: XPO) — as well as what is believed to be discord among Robinson’s employees, analysts said. Hoexter said that RXO should be the prime beneficiary of any defections of high-level IT talent from Robinson.
Perhaps the most intriguing scenario comes from Brittain Ladd, a longtime logistics and e-commerce consultant and one not shy about airing his opinions. In a LinkedIn post Tuesday, Ladd said Robinson needs to “think big” and consider acquiring or merging with international freight forwarder Flexport. Then Robinson should name newly minted Flexport Co-CEO Dave Clark, who made his name running Amazon.com Inc.’s (NASDAQ: AMZN) transportation and logistics operations, as CEO of the combined company.
In an email Wednesday, Ladd said he had floated the idea among several Robinson executives at the vice president level. The executives were receptive, according to Ladd. One executive, who Ladd said has worked with Robinson for 20 years, said Biesterfeld was not an innovator in Clark’s mold.
Ladd said the Robinson executive told him that “we have to do things differently.”
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