American Express Co. (AXP) will eliminate 8.5% of its staff in the credit-card lender’s biggest cost cuts in recent years as it works to shore up its business in light of a tough global economy and rejigger its travel business to better compete in an increasingly digital environment.
The unexpected cuts, announced late Thursday, will cost the company $400 million, mainly tied to severance payments. The lender also will pay $342 million tied to its cardholder rewards program and pay $153 million in refunds to customers related to ongoing regulatory reviews of its business.
The costs come just months after the world’s largest credit-card issuer by spending agreed to pay $127.5 million, including $85 million in customer refunds, to settle allegations by the Consumer Financial Protection Bureau, Federal Reserve and other banking regulators that it engaged in unlawful debt-collection practices and mismarketed certain products.
American Express, like other credit-card companies, has benefited from a turnaround in borrower behavior that has led to loan losses. The lender, traditionally known for its well-heeled customer base, bounced back from the financial crisis more quickly than its peers thanks in large part to its focus on affluent borrowers who use their cards frequently but typically pay their bills on time.
Under Chief Executive Ken Chenault, who has led American Express since 2001, the company had strayed from its roots by rolling out new card products aimed at new types of customers, including younger consumers. AmEx revved up its push into the credit-card business, rolling out new cards that allowed customers to carry a balance from month to month. That thrust the company into frenzied competition against scores of card issuers and bank-owned debit cards, which were catching on with young consumers.
But a surge in unemployment made it difficult for borrowers to pay their bills on time, leading to higher losses during the financial crisis.
While losses have improved substantially, the company, along with its competitors, has been hit by deleveraging by consumers, who have grown more conservative about racking up debt since the recession as they work to get their personal finances in order. That has crimped the revenue lenders earn from finance charges and other fees.
Much of the cuts are related to the company’s global travel business, shifting more services to digital channels to improve efficiency. The company said it would eliminate 5,400 jobs, or about 8.5% of its head count.
However, the company said the cuts will be offset by hiring for some new positions, and it expects its head count to be down by 4% to 6% by the end of this year from the current base of 63,500 when including those hires.
The cuts, which will be made over the coming year, prompted the company to record a $400 million charge in the fourth quarter.
“We must keep evolving our business to become more efficient, adapt to changing customer preferences and to increase our capacity to invest in growth,” Mr. Chenault said during a conference call to discuss the cuts.
The actions will help the company limit operating expense increases to below 3% for the next two years, Mr. Chenault said.
“The expense reduction…is helpful, but at the same time I don’t think that it’s too much of a difference versus what we had modeled for expense growth over the next year or two,” said Donald Fandetti, an analyst with Citigroup Inc.
The company said cardholder spending held up during the fourth quarter, despite the negative impact of Hurricane Sandy. Its so-called billed business increased 8% in the fourth quarter, up from 6% in the third quarter on a reported basis.
It also said it would record $342 million in expenses related to its cardholder rewards program after determining the rate at which its customers redeem points earned on purchases is higher than previously calculated.
Separately, it also is refunding $153 million to cardholders related to late fees, finance charges and bonus rewards for certain customers. Part of the refunds–$33 million–relates to debt-collection issues previously disclosed as part of the regulatory action filed by the CFPB and other agencies in October.
American Express strives to serve customers “accurately and to always fulfill our promises,” Mr. Chenault said. “Our aspiration is to meet these objectives 100% of the time, but problems can and do arise, and when they do, we address them.”
The moves resulted in a profit of $637 million, or 56 cents a share, in the fourth quarter. Excluding the charges, the company would have posted a profit of $1.2 billion, or $1.09 a share. Analysts polled by Thomson Reuters were expecting earnings of $1.06 a share.
The company’s shares were down 0.5% at $60.50 in after-hours trading Thursday. The shares have risen about 5% in the past three months.
Source: Dow Jones