Last week, American Express Company (NYSE:AXP) announced that its 16-year partnership with retail giant Costco Wholesale Corporation (NASDAQ:COST) would be coming to an end. This change likely won’t have a material effect on Costco, but it has dealt a world of hurt to AXP stock, and could weigh on shares even more down the road.
American Express told investors that the two companies could not mutually agree on terms for a new contract, which is set to expire on March 31, 2016. CEO Ken Chenault said the credit card company decided it “didn’t want to do the Costco deal on their terms, this was not going to be financially smart for us to essentially make the accommodations that Costco was asking for.”
American Express Loses Costco
While we as investors don’t know the terms of the deal Costco was offering, on the surface, it would seem regardless of what they were, AXP should’ve accepted. Consider these numbers:
- Roughly one out of every 10 American Express cards were Costco-branded.
- Costco-originated cards account for 8% of AXP’s billed business.
- Costco cards also account for 20% of AXP’s loans.
Those are some crazy figures, but in short, they show that Costco was a massive growth driver for American Express. The relationship was an easy, cheap way of finding new American Express customers, since AmEx was the only card Costco would allow its members to use.
AXP said the termination of the contract will likely cause a slowdown in billing, loans, and revenue growth in 2015. Earnings also are expected to be flat or even decline this year when compared with 2014, though management believes things will begin to improve in 2016.
After news of the American Express-Costco contract termination was announced, AXP stock fell about 6%, extending a slump that saw AmEx shares fall 12% over the past year vs. an S&P 500 that’s up just more than the same amount.
The Costco debacle, coupled with the end of American Express’s partnership with JetBlue Airways Corporation (NASDAQ:JBLU), certainly will prove to be a weight around the neck of AXP stock.
Still, not all is lost.
For one, American Express isn’t going to lose all of the 8% of billed business Costco members accounted for. Certainly some of it will be lost, but that figure doesn’t include just what was spent at Costco. That figure represents what Costco members spent on their AXP cards while eating at restaurants, making purchases at other stores, etc. So yes, American Express certainly will lose a large chunk of that Costco revenue, but not the whole nugget.
And also, remember that Chenault said the proposed deal wouldn’t be financially smart for AXP. As I mentioned, on the surface, re-upping with Costco seemed like a no-brainer. But when we consider that American Express is on the hook for credit card bills which are not paid, if default rates from Costco members are higher than the average AXP card holder, and Costco is not willing to pay a high enough transaction fee to AXP to cover those defaults … well, AXP shareholders will be better off this way.
Bottom Line
The short-term pain isn’t over for AXP stock. That’s two significant, negative headlines in a very short amount of time, and American Express will be simply trying to maintain its current level of earnings for the next year.
But American Express is far from doomed. This may well be a longer-term buying opportunity before it’s all said and done. Just don’t expect much out of AXP for a few years.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on twitter at @mthalman5513.
