Sotheby's Third-Quarter Loss Narrows, Beating Expectations

  • Auction house's third-quarter loss narrows to 26 cents a share
  • CEO Tad Smith cites 'sluggish' sales in the middle market

Sotheby’s shares fell the most in three months after the firm said third-quarter revenue from its main auction business dropped amid lackluster sales of Asian art, jewelry and Old Master paintings.

Commissions from auctions -- Sotheby’s largest source of revenue -- fell by 9 percent to $69.2 million, the company reported on Monday. Profit margins on those auctions also dropped by more than analyst expectations.

"The middle market has been a little more sluggish in the auction room than we would have liked," Sotheby’s Chief Executive Officer Tad Smith said on a conference call with analysts on Monday.

Smith, who took over in March, is striving to improve performance by focusing more on contemporary art and online sales. Total revenue in the quarter rose 46 percent from a year earlier to $138 million mostly because of the sale of an artwork in Sotheby’s inventory, as well as an increase in its lending. Sales of the inventory owned by the auction house soared to $53 million from $6.3 million.

For the quarter, the company posted a net loss of $17.9 million, or 26 cents a share, compared with $27.7 million, or 40 cents, a year ago. Analysts had expected a loss of 28 cents a share, according to the average of five estimates compiled by Bloomberg.

Sotheby’s shares dropped 6.1 percent to $32.01 in New York trading, and are down 26 percent this year. In 2014, Dan Loeb, whose hedge fund Third Point is the largest shareholder in the auction house, won three board seats in a bid to improve profitability.

Margins Decline

Profit margins on auctions fell more than 400 basis points, according to a note by Goldman Sachs Group Inc. analyst Taposh Bari. A basis point is the equivalent of 0.01 percentage point. The margin decline stems from the shift of Sotheby’s London contemporary auction into the third quarter from the prior period in 2014, and weakness in lower-value auctions, the analyst said.

"Pockets of the art market aren’t as robust, including middle markets," Kristine Koerber, an analyst at Chicago-based Barrington Research, said in an e-mail after the results were reported. 

Last week, Sotheby’s began sales of works culled from the collection of A. Alfred Taubman, the former chairman who died in April. The auction house won the consignment from rival Christie’s by using its own money to provide the Taubman estate a record $515 million guarantee for more than 500 artworks. Sotheby’s revealed the exact amount of the Taubman guarantee in its regulatory filing on Monday.

Taubman Sales

Sotheby’s sold $420 million of art from the Taubman collection during two auctions last week. It needs to generate an additional $95 million in sales and commission to cover the guarantee. Smith said last week that Sotheby’s is on track to recoup the guarantee.

On Thursday, Barrington’s Koerber called the auction results "decent but not great."

Sotheby’s has two remaining standalone Taubman auctions, including an American art sale next week and Old Master sale in January. The unsold Taubman property is valued at about $60 million, based on the low estimate of the works and the buyer’s premium it would generate, according to Sotheby’s Chief Financial Officer Patrick McClymont.

While the company sold privately “a handful of items” that had found no takers at the auctions, it is premature to discuss the collection’s profitability, McClymont said during the call.

“We won’t be in a position to earn revenues until the aggregate proceeds delivered are equal to the guarantee,” McClymont said.

Guarantee Strategy

Competition to win trophy artworks is eating into profit at the major auction houses. Prices for paintings and sculptures by Pablo Picasso, Andy Warhol and Alberto Giacometti have surged to their highest levels, fueled by growing private wealth. To snag top consignments, Sotheby’s and its competitors are offering incentives to sellers such as guaranteeing minimum prices or buying works outright in advance of an auction.

"We will not roll dice in the auction room with shareholders’ money," Smith said on the call. "At the same time, guarantees on high-profile trophy lots can be important marketing investments."

The auction house sold a total of $726.7 million of art last week. At the Impressionist and modern art evening sale on Nov. 5, the tally was $306.7 million, a 27 percent decline from the similar event a year ago.

The sales kicked off 10 days of semiannual bellwether auctions in New York.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE