American Express Strikes Deal With Sam’s Club; But Won’t Be Enough To Offset Costco Loss

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AXP: American Express Company logo
AXP
American Express Company

American Express‘ (NYSE:AXP) stock price is down 20% year-to-date, far below the 6% decline in S&P 500 during the same period. The primary trigger behind the sell-off in the stock were reports (back in January) that one of American Express’s key customers, Costco (NYSE:COST), was considering ending its partnership with the company. In the following months, the company officially announced the end of the partnership [1] as the two companies failed to agree on new terms. This was considered to be a significant blow to American Express, as 11 million of the 112 million American Express cards in circulation were co-branded with Costco.

In an attempt to make up for some of this loss, American Express recently partnered with Wal-Mart’s (NYSE:WMT) chain of warehouse-clubs, Sam’s Club. [2] Sam’s Club has 650 stores across the U.S. compared to Costco’s 470. While this was a much welcomed move from American Express, the extent to which the deal will offset the loss of business from Costco remains a question. In this article, we try to answer this question and take a closer look at both partnerships.

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Benefit From The Sam’s Club Deal

In the most recent fiscal year, Sam’s Club generated a total of $58 billion in merchandise sales. While some of these sales would have been paid for in cash, the market opportunity for American Express is the volume of payments made through credit and debit cards. As Sam’s Club doesn’t break down its volumes by mode of payment, we will assume the country averages to apply for Sam’s Club. According to a study conducted by MasterCard in 2013 [3], an estimated 80% of the value of consumer spend was cashless in the United States. Assuming that another 5% of the payments are made through gift cards or checks, the share of credit cards or debit cards amounts to about 75%. This puts the size of American Express’ opportunity at Sam’s Club at around $44 billion annually.

Sams

Unlike its partnership with Costco where it was the exclusive credit card partner, American Express will have to compete with Visa (NYSE:V), MasterCard (NYSE:MA) and Discover (NYSE:DFS) at Sam’s Club. While American Express’ share in the U.S. payments market stands at about 25% [4], it is unrealistic to expect the company to capture a similar share at Sam’s Club right away (though it is possible in the long term). For every 10% share of card payments at Sam’s Club that AXP processes, it will gain $4.5 billion in payment volumes. Assuming a 1% transaction fee, this would amount to around $45 million in revenues.

Does This Offset The Loss Of Business From Costco?

For 16 years, American Express has been Costco’s exclusive credit card partner. In the 12 months ending August, Costco generated merchandise sales of $67 billion, which converts to $50 billion in card payment volumes, per the assumptions made earlier. Considering that Costco paid roughly 0.6 percent of each transaction in processing fees to American Express, according to Bloomberg [5], the estimated revenues loss stands at $300 million.

cost

Significant Opportunity, But Unlikely To Fully Offset Costco Loss

Despite American Express striking a deal with Sam’s Club, it is unlikely to come close to recovering the volumes it lost by ending the partnership with Costco. It would need to significantly exceed its average share of 25% at Sam’s Club in order to make up to the estimated $300 million in transaction fee revenues it will lose.

American Express also issued a co-branded “TrueEarnings” credit card with Costco, which in 2014 generated an additional $36 billion in payment volumes at merchants other than Costco. By re-issuing the cards, like it did in Canada, [6] the company could retain a portion of its TrueEarnings customers and their non-Costco payments. These opportunities lead us to believe that American Express could still make a comeback by recovering more of its lost volumes.  Our price estimate of $94 for American Express’ stock is more than 20% above the current market price.

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Notes:
  1. AmEx Tumbles as Lender Ends Partnership With Costco in U.S. []
  2. Sam’s Clubs to Accept AmEx Cards []
  3. MasterCard Press Release []
  4. CardHub Report []
  5. Costco to Pay Almost Zero to Accept Credit Cards []
  6. The Motley Fool []