Credit card company American Express Co said it would cut about 5,400 jobs, or 8.5 percent of its workforce, as it restructures its business and pay legal bills.
The steps will cost the company about $600 million in charges in the fourth quarter after taxes, which will halve its net income.
Nearly $300 million of the charges are to cover restructuring, primarily in its travel division, to save money and adapt to the fact that customers increasingly book travel online and on their mobile phones instead of with travel agents.
The other half of the charges are for higher costs from customers redeeming more rewards for spending with cards, as well as $153 million of payments to reimburse customers that were overcharged or short-changed benefits.
American Express tends to cut staff at the beginning of recessions. But CEO Kenneth Chenault, speaking to stock analysts after the announcement Thursday, said spending with its cards continues to grow.
"This is not driven by our view of the macro environment," he said.
The company said the job cuts will happen over the year and come even as it hires some new employees and invests in more online customer service. The current workforce of 63,500 people will be about 4 to 6 percent smaller by the end of 2013.
The job reductions would be spread proportionately between the U.S. and international markets, New York-based AmEx said.
Even with the restructuring, Chenault said operating costs could increase by as much as 3 percent annually as the company spends more money for cardholder services, international expansion, and new products, such as prepaid debit cards.
At the same time, the company said that it is going to pay out $153 million to customers because of errors it made in charging fees and crediting people with rewards for spending with their cards.
Many of the reimbursements stem from previously-disclosed consent orders that the company reached with the Consumer Financial Protection Bureau in October. Others are for problems the company found as its went back into its records as far as seven years, Chief Financial Officer Dan Henry told analysts.
Some of the errors happened as the company got caught up in applying complex award formulas. For example, a cardmember who bought vegetables in a market that the company had not classified as a supermarket wrongly received half the reward points due, Henry said.
Cardholders due money will be notified directly in coming months, the company said.
"We are going to continue to work closely with regulators and strengthen our controls," Chenault said in a statement from the company.
The company also said that a previously-announced review of its model for forecasting how many of its member rewards will be redeemed showed that it was underestimating redemptions. The company now expects customers to redeem 94 percent of their rewards, instead of 93 percent, a difference that forced it to set aside an extra $342 million to cover the expense.
The change means the company will show about $40 million each year of additional expense, Henry said.
The cost is worthwhile, Chenault said, because customers who use the rewards programs more tend to use their cards for more of their spending and are less likely to switch to a different credit or charge card. Higher spending translates to higher revenue for the company from merchants who take the cards for payment.
Without the charges, the company said it would have reported fourth-quarter adjusted net income at $1.2 billion, or $1.09 per share. Instead, it said made $637 million, or 56 cents per share.
Analysts, on average, had expected the company to earn $1.06 per share, excluding items, on revenue of $8.12 billion, according to Thomson Reuters I/B/E/S.
The charges, after tax, included $287 million for the restructuring, $212 million to account for the higher redemptions of rewards and $95 million for the customer errors.
The company said cardmember spending grew 8 percent in the fourth quarter, the third straight quarter of single-digit growth after nine quarters of double-digit growth. About two points that growth was due to changes in foreign exchange rates.
Consolidated total revenue net of interest expense rose 5 percent to $8.1 billion in the quarter.
AmEx will report more details about the quarter on January 17, when it originally planned to issue results.
Shares of the company fell slightly in trading after the announcement and the market-closing bell to $60.50. They closed at $60.79 on the New York Stock Exchange on Thursday.
(Reporting by David Henry in New York and Jochelle Mendonca in Bangalore; Editing by Sriraj Kalluvila, Bernard Orr)