Charge card pioneer American Express (NYSE:AXP) has been a giant in the card industry for decades, navigating the changing tides of global economic growth to produce impressive long-term growth for shareholders. Coming into Wednesday afternoon's second-quarter financial report, though, AmEx investors were bracing for declines in revenue and earnings, tied largely to the strength of the U.S. dollar. Although the company didn't entirely overcome foreign exchange obstacles, American Express nevertheless produced a much-needed earnings beat, and it remains optimistic about its long-term strategy. Let's take a closer look at how American Express fared this quarter and what's ahead for the card giant's future.
The greenback hurts the green card
The figures for American Express' second quarter continued trends that the company has seen for a while. Revenue fell 4% to $8.28 billion, faring worse than the 2% decline that most investors had expected from the company. Net income of $1.47 billion was also down 4% from the year-ago quarter, but a substantial drop in outstanding share counts held the damage to earnings down to a single penny, with earnings of $1.42 per share topping the consensus estimate by a dime.
Yet as it has done in past quarters, American Express put most of the blame on the strong U.S. dollar. After adjusting for the impact of foreign exchange rates, as well as business travel results from last year that weren't duplicated this year, adjusted revenue climbed 5%. AmEx said that higher spending among its cardmembers and its growing loan portfolio helped bolster its results.
AmEx's segment results show the disparities across the company's business. U.S. Card Services saw sales climb 6%, helping to push net income higher by 15%. Reductions in loss provisions reflected better credit conditions in the U.S. economy, and net write-offs declined compared to last year's second quarter. Internationally, though, revenue fell 10%, again due to a roughly 15 percentage point impact from the dollar. Global Network and Merchant Services got a nice 20% boost in net income stemming from its efforts to cut expenses, while the Global Commercial Services division suffered big declines in revenue and net income because of the spinoff of its business-travel operations into a separate joint venture.
Overall, American Express executives seemed pleased with the results, as CEO Kenneth Chenault pointed to "disciplined expense control and a substantial return of capital to shareholders" as highlights of the quarter. Chenault also noted how important higher cardmember spending was, especially in international markets where global macroeconomic conditions are far from ideal.
Where does American Express go from here?
AmEx expects to keep growing in the current favorable environment, and it has signaled that it won't hesitate to spend in order to invest in its internal growth. In particular, Chenault pointed to attracting new cardmembers and customers, expanding internationally, growing its merchant network, and working on its loyalty coalition business as key elements of its future success. New digital capabilities should also help improve results in the future.
Nevertheless, most investors aren't so sure about how successful American Express can become in the near future. Few expect much if any earnings growth either for 2015 or 2016, and revenue gains will likely remain muted, especially if dollar strength continues. Moreover, AmEx shareholders still worry about the anticipated financial hit from the impending loss of its Costco business, and it could be difficult for the company to find ways to replace lost revenue from the deal.
Perhaps because of that uncertainty, traders sent shares of American Express falling in after-hours trading, with the stock dropping almost 1.5% in the first hour following the announcement. AmEx has a long history of overcoming adversity in the past, and fundamental conditions are still strong for the company. To succeed, though, AmEx will have to keep fighting in an increasingly competitive environment, and that will require constant vigilance to ensure it doesn't lose ground to its rivals.