Ken Chenault has some explaining to do. When American Express Co.’s chief executive officer speaks Wednesday at an annual investor day, shareholders will be eager to hear how the firm plans to recover from a string of setbacks.
Last month AmEx announced it’s parting ways with Costco Wholesale Corp., which accounts for one in every 10 AmEx cards and 20 percent of its loans. Adding to that challenge, the lender posted a disappointing year-end profit, announced thousands of job cuts, lost a critical antitrust ruling and ended a partnership with JetBlue Airways Corp.
Wednesday’s event starts at 1:30 p.m. in New York. With the stock down 12 percent in 2015, the second-worst performance in the Dow Jones Industrial Average, here are four topics investors and analysts say they want Chenault to address:
AmEx has struggled to reach a revenue target, and profit is stagnating. Last year, net revenue rose 4 percent, short of an 8 percent goal. The firm has said earnings per share will be flat or modestly down this year before returning to a 12 percent to 15 percent growth rate in 2017. Should AmEx sell the existing Costco loan portfolio to the retailer’s new card partner, Citigroup Inc., that probably will affect profit, though the impact isn’t certain, AmEx has said.
Some investors are calling for the company to spell out why it’s confident in its targets, how it will reach them, and what business risks may yet block the path.
“My faith in management has been shaken,” said Walter Todd, chief investment officer of Greenwood Capital Associates, which holds shares of AmEx. “They need to have more-realistic goals about what their revenue-growth potential is because they now have a myriad of factors that are posing challenges.”
Competition is getting stiffer, with rival U.S. card issuers sweetening rewards and wresting partnerships to erode AmEx’s dominance among big spenders. That’s pressuring AmEx to burnish offerings to keep current cardholders happy and lure new ones. The question is: What’s next?
AmEx already improved benefits for its gold cards, adding a personalized travel service and more points for dining out. Last week, it announced a venture with Charles Schwab Corp. to create two co-brand cards, and it recently renewed deals with Starwood Hotels & Resorts Worldwide Inc. and Delta Air Lines Inc. AmEx also said it’s starting a loyalty program called Plenti that will let customers earn and spend points at a variety of retailers. Are additional perks for platinum or co-brand cards in the works?
“The company will have to offer more aggressive rewards” after losing the co-brand deals, said Moshe Orenbuch, an analyst at Credit Suisse Group AG. Some analysts have yet to adjust predictions to “reflect the costs of maintaining these relationships and more aggressive marketing and rewards that will be needed to win back a significant piece of the lost volume.”
New products and marketing can take a toll before they pay off. Some of AmEx’s efforts to tap less-affluent consumers, such as prepaid debit cards for people who lack access to traditional banks, have yet to make their full contribution to revenue growth, the company has said. After fourth-quarter costs climbed 3.5 percent to $6.3 billion, AmEx said it will eliminate more than 4,000 jobs this year.
“The big question is how can they cut costs right now?” said Scott Valentin, an analyst at FBR Capital Markets. “All of these new things and programs are going to require a lot of spending. Their ability to control costs is a huge point of interest.”
AmEx is trying to persuade more merchants to accept its cards, which typically carry higher processing fees than those from Visa Inc. and MasterCard Inc. At last year’s investor day, AmEx announced a program called OptBlue to win over small businesses by lowering some of those costs. The company forecast then that small-merchant acquisitions will increase at least 50 percent annually starting this year.
“OptBlue is starting to pay off,” Cheryl Pate, a Morgan Stanley analyst, wrote in a note predicting the lender will discuss the program’s progress. “We think AmEx can win over small merchants, boosting U.S. acceptance.”
Now, AmEx’s relationship with merchants is facing even more investor scrutiny after a federal judge ruled last month that AmEx’s practice of barring them from steering shoppers to cheaper cards violated U.S. antitrust law. If the ruling isn’t reversed on appeal, as much as 12 percent of AmEx’s revenue could be at risk, according to one analyst’s estimate.
The firm knows adding merchants is important to stockholders.
“We hear you, we’re on it,” Chief Financial Officer Jeff Campbell said at a November investor conference. “We’re very focused on continuing and greatly accelerating the pace on merchant acceptance.”