Should You Be Worried About This Consumer Finance Company's Earnings Announcement?
American Express isn't slated to release its fourth-quarter earnings until Thursday evening. So imagine Wall Street's collective surprise last Thursday when the company released a preemptive statement about charges it would be reporting. While CEO Kenneth Chenault stated the announcement was all in the interest of transparency, should investors be nervous about what they might hear later this week?
Fear not, Fool!
While we may all still be scratching our heads about the timing of this press release, investors shouldn't be worried about what the announcement contained. By outlining three charges that have a substantial impact on the company's bottom line, American Express allowed us to get a peek at how it performed -- without giving away the farm.
The three charges, while nothing to sneeze at, were generally mild in comparison to some of the charges reported by other financial firms (read: no huge lawsuit settlements):
Restructuring: $400 million in costs associated with approximately 5,400 job cuts
Recalculating: $342 million in updated Membership Rewards redemption estimations
Reimbursing: $153 million in fees, charges and interest paid back to cardholders
In order to move the company further into the digital age, Chenault announced a plan to cut 5,400 jobs throughout 2013. The firm's business travel segment will face the majority of the cuts in order to reflect the customer trends toward do-it-yourself booking and other online transactions. The company is planning, however, to add new positions throughout the year, so the net affect will be a workforce that's 4%-6% smaller by year-end 2013.
American Express is just the most recent financial firm to announce layoffs:
Planned Job Cuts
Business Segment Most Effected
Bank of America
Fixed Income Trading
So far, JPMorgan is one of the only major Wall Street firms to resist layoffs. The company cut its bonus payout by 2% for its corporate and investment banking sectors in 2012 instead of following its rivals into the land of job cuts.
But unlike some of the other companies' plans, which are mainly cost-savings initiatives , American Express has a clear vision of how the cuts will be managed and how it will help propel new-project development in the long term. The company's plan should be welcomed by investors as it moves forward with growth initiatives that will benefit from the refocused workforce and (bonus!) cost savings.
Gimme, gimme, gimme
The membership rewards program is one of the most effective customer-loyalty drivers for American Express. The company reevaluates its forecast of rewards reimbursements from time to time. With the completion of its 2012 review, the company found that the redemption rate of rewards was 94% (up 1% from previous estimates), causing a $342 million adjustment. While the temporary hit to the company's books may not be warmly welcomed by investors, an increase in rewards reimbursement should signal positive results.
In the world of membership rewards, customers have to spend more to earn more. So, as the reimbursement rate increases, it's a sign that American Express is enjoying higher customer spending -- an 8% increase for the fourth quarter to be exact. In addition to strong revenue generation, that increase shows the power of AmEx's market share, considering the effect of Hurricane Sandy on consumers and businesses along the East Coast during the fourth quarter.
With our apologies
The final charge was one that American Express knew was coming. After several regulatory reviews of the company's business practices, they agreed to reimburse customers that had been charged fees and interest or lost rewards due to company missteps. The $153 million effect of that agreement seems much more substantial since it encompasses reimbursements for items spanning 5-6 years, according to Chenault. While the company may report other reimbursements down the road, investors shouldn't expect an impact like the one we'll see in the fourth-quarter results.
In the end...
American Express has already beaten most analyst expectations with the information it released ahead of schedule. With revenues up 5% and adjusted net income hovering around 2011 levels, the company continues to report strong results. In spite of the 46% hit AmEx will take on its unadjusted net income from the three charges outlined, investors should be expecting the stock to perform well and be pleased with the company's results.
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The article Should You Be Worried About This Consumer Finance Company's Earnings Announcement? originally appeared on Fool.com.
Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American Express. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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