Earnings Review: American Express’ Cost Cutting Boosts Bottom Line But Expenses Expected To Rise Going Forward
American Express (NYSE: AXP) announced its earnings for the second quarter of fiscal year 2016 on Wednesday, July 20th. The company reported earnings per share of $ 2.11, a 48.6% increase over last year’s $ 1.42. The rise was attributable mostly to various one time items. These include a $1.1 billion pre-tax gain for the sale of the co-brand portfolio with Costco, the losses resulting from the slowdown in Costco-related payment volumes, restructuring charges related to cost reduction efforts and increased spending on investments related to future growth opportunities.
American Express is working on compensating for the loss of partnerships with Costco, Jet Blue Airways, Fidelity and Starwood Hotels. To this end, the company is working on trying to expand the network of merchants who are willing to accept American Express credit cards, partners such as Sam’s Club who offer American Express cards to their members and cost reduction efforts. Net Operating expenses for the quarter declined by almost 15% year over year as a result of these efforts. Since this is the largest expense item for the company, this reduction led to a 35% increase in net income. Compared to last year, American Express’ share count has declined by 7%. This also contributed to the increase in reported EPS.
Going forward, the company’s focus is on trying to sign new partners to the American Express network and trying to expand the acceptance levels of AmEx issued credit cards to those of Visa and Master Card credit cards. The company hopes to achieve this by 2019, but it is likely to put pressure on the transaction fees that it can command and the Annualized Percentage Rates it can offer on credit card loans. These efforts should drive the top line in the long term, but in the short term expenses are expected to continue to rise.
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Have more questions about American Express? See the links below:
- How Much Did American Express’ Revenue & Net Profit Grow In The Last Five Years?
- How Much Can American Express’ Revenue Grow In The Next Five Years?
- What Is American Express’ Fundamental Value Based On Expected 2016 Results?
- How Has American Express’ Revenue Composition Changed In The Last Five Years?
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