If you saw the news Thursday that American Express and Costco Wholesale are ending their credit card partnership and were wondering which company was the loser in the deal, take a look at the stock price.
American Express shares fell nearly 7 percent to $80.48 a share. That’s a loss of more than $6 billion in market value. In contrast, Costco’s stock barely budged.
The partnership agreement won’t officially expire until March 2016. After that, American Express will no longer be accepted at the 474 Costco stores in the U.S. and AmEx will likely replace its co-branded Costco cards.
The way AmEx CEO Ken Chenault tells it, ending the 16-year partnership was AmEx’s choice because the credit card deal didn’t “make economic sense” for the company. No doubt that Costco was trying to negotiate better terms from AmEx. Competitors like MasterCard and Discover are no doubt ready to work with Costco for less than AmEx, a premium brand.
The split was widely rumored before Thursday’s announcement. AmEx and Costco ended a similar agreement last year in Canada. Possibly hinting at what may happen in the U.S., the AmEx co-branded cards were replaced by Capital One MasterCards. And all MasterCards are now accepted at Costcos in Canada.
So why was AmEx stock hammered?
For Wall Street analysts, the math is pretty easy. The co-branded cards accounted for about one out of every 10 AmEx cards and about 8 percent of AmEx billings globally. Only 2.4 percent of that spending was in Costco stores, however. Add the 1 percent of spending at Costco that was billed to other AmEx cards and you get a 3.4 percent decline in AmEx billings as this deal winds down.
“The loss of this business is likely to result in a lack of earnings per share growth in 2015, setting back management's plan to continue double-digit EPS growth over an extended period,” wrote Morningstar analyst Jim Sinegal in a research note Thursday.
Fact is, Costco is one of the country’s most popular retailers and, despite its discount mission, its customers are wealthy. For the 22 weeks ended Feb. 1, Costco reported $49 billion in sales, 6 percent growth over the same period a year ago.
There are probably quite a few Costco fans who own American Express cards mainly due to their loyalty to Costco.
But, as is often the case with Wall Street, its reaction to the news may have been hasty. As a prestige brand, American Express needs to defend its pricing. Chenault may ultimately prove correct to take a hit to sales to hang onto stronger profit margins.
“Instead, we will focus on opportunities in other parts of our business where we see significant potential for growth and attractive returns over the moderate to long term,” Chenault said in a statement.
The question for Chenault and AmEx is where it will find those opportunities for growth. Looking over the retail landscape, there are few opportunities as promising as the Costco deal it’s walking away from.
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