American Express’ Q2 Earnings Hold Still Despite Currency Headwinds. Spending On Growth Initiatives To Increase

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AXP: American Express Company logo
AXP
American Express Company

American Express (NYSE:AXP) announced its Q2 2015 earnings on Wednesday, July 22. [1] The company’s revenues, net of interest expense, decreased 4% compared to the same quarter a year ago. It is important to note that revenue in the prior-year period included that from the company’s business travel operations, which were later deconsolidated. Adjusted for this change, revenues actually increased 1% year-over-year. The bottom line was also down 4% at $1.47 billion.

This quarter saw the launch of the Plenti loyalty coalition program in the U.S., Amex Express Checkout and other growth initiatives. Looking ahead, the company expects to ramp up spending on these initiatives in the next two quarters which might drag down earnings a bit. Another notable trend seen during this quarter is related to Amex’s Costco relationship in Canada, which we elaborate on below.

See our complete analysis of AmEx’s stock here

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Brief Overview of Some Key Metrics

Total cards-in-force increased by 4% this quarter to 114 million, while total card billed business grew at a slightly slower rate of 2%. Though the billed business declined 5% compared to last year, on an FX adjusted basis, it increased 9%. The company’s total expenses were 4% lower compared to last year, with the most significant cost cuts coming from marketing and promotion (21% lesser) and salaries/ employee benefits (25%). Finally, write-off rates remained near historical lows. In the second quarter, the worldwide net lending write-off rate was 1.4%, as compared to 1.5% in Q1’15 and 1.6% in Q2’14.

Relationship with CostCo in Canada vs. the U.S.

Costco cards represent roughly 10% of AmEx cards in circulation, and for 16 years AmEx has been the only credit card accepted at Costco in the U.S. However, earlier this year, the company announced that the relationship would end in 2016 (still under negotiation), which could have a big impact on AmEx.

In Canada, the company made a similar move by ending its relationship with Costco a few months ago, but also launched a new cash back card (in 2014) that was offered to former Costco Canada card members. This seems to have worked well, and the company managed to retain over half of their other stores spend (stores other than Costco). However, there is a key difference between the moves in Canada vs. the U.S., which is that there was no portfolio sale in Canada. As the two situations are very different (assuming there is a portfolio sale in the U.S), it will have an impact on the company’s ability to capture the Costco cardmembers’ spend in the U.S., which in turn affects its cardmember relationships. However, the extent to which this move will impact the company’s U.S. business remains uncertain.

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Other Source: The Wall Street Journal

Notes:
  1. Q2 2015 Earnings Press Release []