By Robin Sidel
American Express Co. said second-quarter earnings fell 3.7% as
the company said it is seeing lower spending growth on Costco
Wholesale Corp. co-branded cards in the U.S. ahead of the end next
year of its exclusive relationship with the warehouse club.
AmEx said its international operations were also hit by the
strong U.S. dollar even as credit quality remained strong.
New York-based AmEx reported a profit of $1.47 billion, or $1.42
a share, down from $1.53 billion, or $1.43 a share, a year earlier.
The year-earlier period included a gain related to the partial sale
of business-travel operations that previously were fully owned by
the company.
Unlike most other card companies, AmEx both issues cards and
operates a processing network. That means it competes with big card
businesses from the likes of J.P. Morgan Chase & Co. and Bank
of America Corp., as well as networks Visa Inc. and MasterCard
Inc.
Revenue, net of interest expense, decreased 4% to $8.28 billion.
Excluding the impact of currency conversions and the
business-travel operations, revenue was up 5%.
Analysts polled by Thomson Reuters expected per-share profit of
$1.32 and revenue of $8.46 billion.
Chief Financial Officer Jeffrey Campbell said in a conference
call that spending growth on Costco cards in the U.S. has slowed as
AmEx and Costco reduce their marketing programs and as fewer Costco
customers sign up for the cards.
AmEx, which has been the only credit card accepted at Costco in
the U.S. for 16 years, announced earlier this year that the
relationship would end in 2016. The move is expected to have a big
impact on AmEx because Costco cards represent roughly one in every
10 AmEx cards in circulation.
In Canada, AmEx has retained spending from more than half of its
Costco customers even though its co-brand relationship with the
warehouse club ended some months ago. AmEx last year started
offering those Costco-Amex cardholders a new cash-back card.
But Mr. Campbell warned analysts not to assume that the Canada
situation will be repeated in the U.S. when AmEx's relationship
with Costco ends.
For one thing, he noted that AmEx kept the Costco loan portfolio
in Canada, meaning that the company is still getting some benefit
from that relationship. AmEx is widely expected to sell the U.S.
portfolio and could face restrictions in soliciting those
customers.
In addition to the end of its Costco partnership in the U.S. and
Canada, AmEx has also been hit by the loss of a big antitrust case
that removes restrictions on merchants that accept its cards. As a
result, those merchants are now permitted to steer customers to
other, cheaper cards from Visa and MasterCard.
As a result of some of that uncertainty, AmEx executives have
said that quarterly results will likely be uneven.
The company's U.S. card-service business reported that its
earnings grew 15% to $886 million. Revenue increased 6% to $4.7
billion, reflecting an increase in card-member spending and higher
net interest income from growth in the company's loan
portfolio.
Separately, Discover Financial Services said its profit fell 7%
in the second quarter as higher expenses ate into results and
revenue was essentially flat from last year.
The Riverwoods, Ill.-based company reported second-quarter
earnings of $599 million, down 7% from the year-earlier period. On
a per-share basis, earnings were $1.33 a share, down from $1.35 a
share a year ago.
Revenue net of interest expenses was relatively flat at $2.18
billion compared with $2.17 billion a year earlier.
Analysts polled by Thomson Reuters had projected earnings of
$1.31 a share on revenue of $2.22 billion.
Cassandra Jaramillo contributed to this article.
Write to Robin Sidel at robin.sidel@wsj.com
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