Sotheby’s reports ‘bumpy’ second quarter results with net income of $67.6m

New chief executive blames late sale schedule, exchange rates losses and painting that failed to sell above pre-sale estimate

Sotheby’s new chief executive Tad Smith announced details of the auction house’s “rather bumpy” second quarter this morning, Friday 7 August, in a call to shareholders.

The results were weaker than expected. Sotheby’s net income was $67.6m; its gross profits fell 7% to $262m; and total revenues dipped to $332m, a 1.1% decrease compared with the same period last year.

Smith put the shortfall down to several factors including the date change of the London contemporary auctions, which took place during the third quarter this year (as opposed to the second quarter last year). Other factors included “a cancelled sale provision and the cost of a client authenticity claim, both related to property sold in prior years”, Smith said.

The company also took a hit on currency exchange rates, which contributed “$11.3m in the quarter and $18.2m in the half to the overall decreases in auction commission revenues,” said Patrick McClymont, Sotheby’s chief financial officer.

“Significantly contributing to the decline” in gross profit was a loss incurred on a painting acquired by Sotheby’s earlier in the year and sold at “the low cost” during an auction in the second quarter, McClymont said. This was reflected in the $15m loss in the company’s cost of inventory sales.

The painting was bought as part of a pair, with the other work going on to sell for an “offsetting profit” in the same auction, McClymont said. But, since the buyer of the second work has yet to pay, the company cannot report a gain.

Sotheby’s declined to comment on which the loss-making painting was, although its high value suggests that it was one of the major lots on offer during the New York contemporary sales, the company’s most expensive category. Sotheby’s had made financial arrangements on a handful of banner works that failed to match presale expectations in the May sales. These included Gerhard Richter’s 1992 abstract canvas, which Sotheby’s declared an ownership interest in. Estimated at around $40m, the work sold for $28.3m (estimates don’t include fees; final prices do).

The good news

There was swift growth in the company’s loan portfolio to $774m by the end of June: a 30% increase compared with the same period last year. Sotheby’s extended its credit facility in June by $485m to just over $1bn, and sees the business as “well placed for further growth,” Smith said.

Private sales were up 32% from $17m to $22m, though the figures are still far lower than Sotheby’s would like. “We are very focused on improving our position in private sales in lots over $1m in value as we know that our share of what we estimate as a $20bn-$25bn addressable private sale market is currently quite low,” Smith said.

Other areas the company intends to develop include “jewellery, automobiles, collectibles, wine, and, in subsequent years, potentially more lines of business,” Smith said. While the company will maintain its focus on high-end contemporary art, it intends to do more business in the middle market (which it terms as objects priced between $25,000 to $1m). Smith sees this sector as a portal for attracting “people who can afford stuff above the middle market but are looking for an entry point,” he said.

Smith hinted at more change to come in 2016, including “bolder ideas” to grow business at the high-end of contemporary art and a new fee structure for client services. Sotheby’s also wants to continue the work begun by former chief executive Alfred Taubman in the 1980s to fully transition the company from a “business-to-business company, to a high-end client-service company”. It will be looking at whether its facilities, especially in New York, are aligned with this goal, suggesting that there will be real estate news from the company within the next year.

Despite the announcement today that Sotheby’s board has voted to increase the company’s ability to buy back shares from $125m to $250m, with plans to repurchase $125m of common stock in the near term, the stock market reacted with dismay. Shares in Sotheby’s fell almost 3% today to $37.69, as we went to press.