Will Soft Retail Sales Growth Weigh On American Express’ Q2 Results?

American Express (NYSE: AXP) is scheduled to release its second quarter results on July 19 and Trefis expects soft retail sales growth of April and May to weigh on its Q2 earnings.

The company has broadly two revenue streams: Net-Interest Income, where Amex charges interest on credit card loans, and Non-Interest Income, where Amex charges transaction processing fees on billed volumes. Net-Interest Income and Non-Interest Income had a contribution of 20% and 80% of the total revenues in 2018, respectively.

Billed Business and Credit Card loans are the key operational metrics that drive Amex’s top line. In the Trefis interactive dashboard, How Do American Express’ Billing Volumes Compare With Retail Sales?, you can observe quarterly trends in Amex’s billed business and compare it with trends in U.S. Retail Sales. Additionally, you can find more of our Financial Services data here.

A brief look at the previous quarter results

• Billed volumes grew by just 4% during the first quarter as compared to strong 12% growth in the first quarter last year (y-o-y basis), primarily due to a decline in consumer spending during the early part of the year.
• The FOMC maintained the target rate for the federal funds rate at 2.25-2.5% in its January and March meetings. However, a slowdown of economic activity was reported for the first quarter in the Fed’s March release.
• Amex’s Q1’19 revenues came in at $10.3 billion, increasing by 6.65% over the prior year period.
• Amex’s three business segments, Global Consumer Services, Global Commercial Services, and Global Network Services reported revenue increases of 9%, 6%, and 2% in Q1’19, respectively.

What to expect from the second quarter results?

• After observing a significant drop in January and February, the U.S. Retail Sales recovered in March. However, a further decline was reported for April in the Bureau’s June release. (Note: Data considered is not adjusted for seasonality).
• Per the Bureau’s advance estimates for June, the seasonally unadjusted retail sales figures are expected to shrink by 5% sequentially.
• Per Trefis estimates, the U.S. retail sales, ex-auto and gas, and American Express’ U.S. billing volumes have a high positive correlation of +0.7.
• Considering the macro-economic uncertainty associated with tariffs against China and Europe, the Fed’s June report indicating moderate growth in economic activity, we expect retail sales growth to be softer during the second quarter.
• Consequently, we expect American Express to face revenue headwinds from lower U.S billing volumes (which constitutes nearly 66% of its billed business).

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