American Express, Costco to end US exclusivity deal

AP News
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Posted: Feb 12, 2015 1:13 PM
American Express, Costco to end US exclusivity deal

Costco shoppers who have been limited for years to American Express credit cards may be able to pluck a new option from their wallets or purses next year after an exclusivity deal between the companies expires.

American Express said Thursday that it hasn't been able to come to an agreement with Costco on renewal terms. The current agreement covers U.S. stores and dates back 16 years. It will end March 31, 2016.

The end of the partnership with Costco will hurt American Express earnings and revenue growth in 2015 and 2016, but company leaders said they remained confident they can reach longer-term goals. Even so, American Express shares tumbled about 6 percent after the announcement.

Costco is the world's second-largest retailer by revenue, according to the National Retail Federation.

The company posted revenue of about $8 billion last month alone.

The relationship accounted for 8 percent of American Express billed business last year, 20 percent of its worldwide loans, and 10 percent of its cards in force.

That adds up to a large loss, according to Jefferies and Co. analysts.

American Express said that Costco pays a significantly lower rate than the overall average it imposes on other retailers as part of the agreement. That arrangement gave the credit card company exclusivity for almost two decades, though Costco also accepts debit cards and cash.

American Express ended a similar agreement with Costco in Canada last year, a spokeswoman said.

Costco Wholesale Corp. representatives did not return calls seeking comment from The Associated Press. The Issaquah, Washington, company has 474 locations in the United States and 88 in Canada.

The expiration of the American Express deal could clear the way for rivals Visa Inc. or MasterCard Inc. Shares of both companies rose Thursday.

New York-based American Express said it will attempt to increase business elsewhere to counter the loss of Costco and expects to achieve its goal of earnings-per-share growth between 12 percent and 15 percent "over the moderate to long-term."

Because of the exclusivity that American Express was granted at Costco, it gave up the fatter revenue and profits it commands elsewhere. As a result, there will likely be a smaller-than-normal decline in the overall reported discount rate in coming periods, according to Jefferies.

But the analysts believe the end of the partnership will hurt for a while.

"We are encouraged by recent investments and strategic initiatives from the company, yet we note that these are likely to take some time to make a considerable impact on earnings growth," they wrote in a research note.

Thursday's announcement came nearly a month after American Express said it planned to cut more than 4,000 jobs this year, or about 6 percent of its workforce after seeing its fourth-quarter profit advance 11 percent.

Shares of American Express fell $5.20 to $80.81 in Thursday afternoon trading while broader indexes advanced slightly. Costco stock also slipped 30 cents to $147.16.