Reeling from the loss of the Costco account and other setbacks in 2015, American Express is looking to the future the same way any investor might — banking on the diversification of its portfolio to slowly climb back.
In addition, American Express executives said they would sharpen the cost-cutting scalpel, establishing an aggressive $1 billion expense reduction through 2017, while hoping to gain that same amount or more through the sale of its Costco portfolio.
"The performance we are discussing today is not what we or you are accustomed to seeing from American Express, and we are taking significant actions to change the trajectory of our business going forward," CEO Ken Chenault said Jan. 21 in opening a fourth-quarter conference call with analysts to discuss Amex's 38% profit loss in the quarter.
The industry has been aware of Amex's organizational restructuring in the past year, partly to address the need for cost savings and accelerating growth in international markets, and partly a continuation of a process since the death of president Ed Gilligan in May of 2015.
The company has also had time to contemplate losing its Costco relationship to Citigroup, which will now issue co-branded Visa cards for Costco members, but this is the first time executives have put a number on cost reductions.
"Overall, we continue to be very disciplined about controlling expenses, but recognize that we will need to be even more aggressive going forward, as evidenced by the $1 billion target to reduce our overall cost base," said Jeff Campbell, executive vice president and chief financial officer for American Express. The reductions will occur in operating expenses as well as marketing and promotion costs, Campbell said during the conference call.
Though not banking on an improving global economy or gross domestic product growth to bounce back from a rugged 2015, Amex is still investing in consumer growth and promoting the OptBlue program for small businesses and the Plenti multi-merchant loyalty program.
"We have expanded our merchant network, adding more than 1.2 million new merchants globally in the past year," Chenault said. "With our OptBlue program, we're continuing our efforts to move toward parity coverage with the other card networks in the U.S."
OptBlue allows acquirers to adjust rates for certain small merchants, with the goal of eliminating the perception that small businesses cannot afford to accept Amex cards.
Plenti added Chili's restaurants this week, and Chenault said the program's value is in building more merchant relationships in the future.
"We'll invest to grow our cardmember base and merchant network, deepen our customer relationships through lending and rewards," Chenault said. American Express also will "develop newer adjacent opportunities like our loyalty coalition business," he added.
The overall tone of the call reflected what American Express executives have made clear in the past — that Amex wants to continue its mission to become more inclusive as a card brand.
Amex's fourth-quarter struggles included a $419 million charge ($335 million after tax) for technology assets and restructuring within the Enterprise Growth Group.
Revenue in the quarter fell 7.6%, to $8.39 billion, while expenses rose 1.5%, to $6.37 billion. In addition, a partnership renewal with Delta Airlines increased rewards costs by $109 million.
The card brand will see an impact on billings growth rates during the second half of 2016 due to the end of the Costco relationship in the U.S., Campbell said.
Amex expects to close the sale of its Costco portfolio to Citigroup around mid-2016, and expects its merchant acceptance agreement to extend through the transaction close, allowing co-brand cardholders to use the cards at any merchant location accepting Amex, Campbell added.
American Express estimates a gain of $1 billion if the portfolio sale unfolds as expected, though Campbell said that estimate could change based on cardmember borrowing and paydown trends during the transition period.
However, some analysts predict Amex could gain even more from the sale.
Amex's Costco portfolio represents "one of the best ever put up for sale" because of the average spend of each cardmember, hovering around 30% higher than an average Citi card, Deutsche Bank analyst David Ho reported.
The card brand will get a sizable premium for the Costco portfolio, mainly because "Citi is on the clock" to announce a deal with Amex to honor its deal with Costco, Ho stated in an e-mail alert.
Ho estimates that the Costco USA portfolio sale could result in as much as a $2.2 billion gain for American Express, figuring in a 15% premium on a portfolio valued at roughly $15 billion.