American Express is getting whacked, down about 6% after the company announced its deal with Costco is expiring next year.
In a statement, American Express said its co-branding agreement with Costco will expire in March 2016.
In a press release, American Express CEO Kenneth Chenault said: “Taking a very disciplined approach, we began discussions on a possible renewal with Costco well in advance of the contract expiration. However, we were unable to reach terms that would have made economic sense for our Company and shareholders.”
Costco operates 671 warehouse stores worldwide, including 474 in the US and Puerto Rico. During the quarter ending Feb.1, Costco generated a whopping $US49 billion in sales, growing 3%.
In a call with investors Thursday, American Express executives explained why the co-branding agreement was not renewed.
Chenault said American Express had started early discussions on contract renewals with several of the companies that put their branding on the credit cards. The contracts typically include rewards programs and some publicity for both companies. Airliners Delta and Cathay Pacific were two of the companies that renewed the contracts.
But with Costco, it just didn’t make economic sense, Chenault said. That’s partly because even the deal with Delta for example was less lucrative than they had anticipated. The company also lost its agreement with Costco in Canada last year.
American Express, like many other companies that earn revenues abroad, is getting hammered by the foreign currency implications of a strong dollar. And the company announced that it was laying off 4,000 people during its earnings release last month as part of a restructuring process.
“We could begin to see a modest slowdown in billings, loans and revenue growth associated with the Costco U.S. co-brand over the course of 2015, and we would expect this slowdown to increase as we near the end of the contract,” chief financial officer Jeffrey Campbell said on the call.
American Express is forecasting earning per share growth in 2016, CEO Chenault said. Its fourth-quarter profits rose 11% to $US1.45 billion, or $US1.39 a share, versus an expected $US1.38 per share.
Following the news, shares of American Express fell as much as 6% to $US80.71 a share. Costco shares were little changed.
Here’s a chart showing the drop in AmEx.