American Express (AXP) announced plans for 5,400 layoffs after the stock market closed Thursday, blaming technological challenges to existing business lines.
The company also announced a range of unexpected expenses that crimped fourth-quarter earnings, including a $342 million charge to pay future rewards points to card holders and $153 million in reimbursements to customers.
The announcements put a major dent in the company’s fourth-quarter earnings, which will are scheduled to be announced in greater detail next week.
Chief Executive Officer Kenneth Chenault explained the layoffs by stating that technology is transforming the world of commerce.
"Maintaining our momentum in this environment will require us to evolve our business, embrace new technologies, become more efficient and generate resources to invest in the many growth opportunities we've identified," Chenault said in a news release.
The company said that it expects somewhere between 1,600 and 2,900 of the jobs lost to be replaced by the end of 2013. American Express currently has 63,500 employees. Its last major round of layoffs came in 2008 and 2009, when it eliminated roughly 11,000 jobs.
The largest reductions will come in American Express' travel businesses, which have been changed dramatically by changes in technology, according to the company. But the job cuts will be spread proportionally between U.S. and international markets, and will cut across seniority levels, businesses and staff groups, the company said.
"Against the backdrop of an uneven economic recovery, these restructuring initiatives are designed to make American Express more nimble, more efficient and more effective in using our resources to drive growth," Chenault said.
On a conference call with analysts, Chenault said the layoffs are a continuation of restructuring moves the company made over the previous five to six years.
"So my strong view is that we have been ahead of the curve," he said.
Largely to pay severance to laid-off employees, the credit card issuer said it is taking a $400 million restructuring charge.
That was in addition to the $342 million expense due to changes in how American Express calculates the percentage of rewards that its card holders will ultimately redeem.
The company had previously announced that it was reviewing its methodology for projecting reward redemptions, which it said would likely lead to a fourth-quarter charge. As a result of that review, the company on Thursday bumped up its estimated redemption rate from 93% to 94%.
During the conference call with analysts, American Express executives were challenged to explain why the company’s redemption rate, which was as low at 90% percent in recent years, has continued to increase.
Daniel Henry, the chief financial officer, said that the previous estimates were based on customer behavior at the time.
"So each year we had the right estimate, but customer behavior changed, and it caused us to raise our estimate," Henry said.
American Express also announced that it plans to reimburse $153 million to its customers in connection with regulatory reviews of the company.
That figure includes approximately $28 million in reimbursed late fees, which the company said should not have been charged because the customers did not receive statements; $24 million in reimbursements to card holders who disputed balances on their accounts; and $68 million in bonus rewards that should have been credited to customers.
American Express did not provide any details on the regulatory reviews it is facing. "Our ultimate goal is the fair treatment of our customers, and our intention is always to do right by them," Chenault told analysts.
In October, federal and state regulators hit the card company with more than $112 million in penalties for allegedly violating a range of consumer protection laws. Those alleged violations included charging unlawful late fees.
The October enforcement action against American Express also dealt with debt collection practices, and on Thursday the company said that it was providing $33 million in additional restitution in connection with debit collection settlement letters.
The affected card holders will be notified of the reimbursements in the coming months.
Although $153 million for customer reimbursements is a substantial sum, it relates to conduct that occurred over a multi-year period, Henry stressed. "So the impact on one year or one quarter would not be material," he said.
The company also offered a preview of its fourth-quarter results, which are scheduled to be released in on Jan. 17. Quarterly net income was $637 million, or 56 cents per share, down from $1.2 billion, or $1.01 per share in the same period a year earlier.
The company said that if the unexpected expenses are excluded, fourth-quarter adjusted net income was $1.2 billion, or $1.09 per share.
On the positive side, American Express said that credit card spending, revenue growth and credit quality all remained strong in the fourth quarter.