One day after announcing plans to slash 10 percent of its global work force, American Express Co. painted a bleak outlook on Friday, saying it does not expect to meet its financial targets until economic conditions improve.
In its quarterly filing with the Securities and Exchange Commission, American Express said it expects write-offs in its credit card portfolio to continue to increase in the fourth quarter and into next year.
The New York-based credit card issuer has reported four straight quarters of profit declines as an increasing number of consumers struggle to pay off debt and reduce spending in the face of a worsening economic downturn.
If the performance of its credit card portfolios weakens further, the company's ratings could be downgraded, American Express said. Maintaining high and stable debt ratings ensures that a company can continue to access the capital markets at reasonable rates.
American Express historically has relied on the debt capital markets for its funding needs, as it does not generate retail customer deposits. While American Express has been able to finance its operations amid the tightening credit markets so far, the efforts have been tougher and more costly — and the company does not expect conditions to improve any time soon. If its ratings were downgraded, its ability to access capital to sustain operations could be significantly hampered.
In the event that access to the capital markets was completely frozen, American Express believes it would have access to enough liquidity to meet its obligations and fund operations for at least 12 months, according to the filing.
On Thursday, American Express said it would cut 7,000 jobs in an effort to slash costs by $1.8 billion in 2009 as it prepares for an increasingly difficult economic environment.
The company is also suspending management-level salary increases next year and instituting a hiring freeze. Additionally, American Express plans to scale back investments in technology and marketing, and streamline costs associated with some rewards programs.
As a result, it will take a restructuring charge of between $240 million and $290 million in the fourth quarter.
Sandler O'Neill & Partners analyst Michael Taiano said the cost reductions are necessary given the significant challenges the business faces over the next several quarters, but could hurt American Express over the long term.
"The actions announced by American Express seem to suggest that at least for the time being, the company is retreating toward more of a survival mode rather than seeking to drive further market share gains and revenue growth, which is understandable given current market conditions, but could result in slower longer-term growth," Taiano wrote in a note to investors on Thursday.
American Express also said Friday it is being investigated by the U.S. Department of Justice regarding its surcharge practices. The company said it intends to cooperate with the department's request for certain documents and other information.
American Express shares rose 29 cents to $26.35 in morning trading. Shares are down about 50 percent for the year.