Sotheby’s third-quarter results are a mixed bag

Auction house chief Tad Smith points to positive progress, but firm is still operating at a loss

There is good and bad news in Sotheby’s third-quarter results, released this morning. On the plus side, total revenues are up, its loan portfolio is growing and $1.7bn sales of Impressionist and Modern art have led to the highest annual total for the category in the company’s history, with more auctions yet to come. On the other side, auction and private sales commissions drive the core business and those continue to shrink, resulting in a decrease in Sotheby’s gross profit. While the company’s adjusted net loss of $17.9m was an improvement on the $27.7m net loss in the same quarter last year, it is still a loss.

Seven months into the job, Sotheby’s chief executive Tad Smith gave more insight into the company’s priorities during this morning’s call to shareholders. He says the auction house is making “good progress” on its four main goals: the creation of a “compelling growth strategy”; a more effective embrace of technology; a focus on attracting, developing and retaining talent; and the need to allocate capital well.

Taubman will pay off … if you don’t include marketing and staging costs The Taubman sales last week made a combined $420m. Smith says the company expects to cover the entire $500m guarantee through a combination of last week’s sales, anticipated sales and inventory sales (works that fail to sell at auction but which Sotheby’s hopes to sell afterwards). However, the costs of marketing and staging the Taubman sales are not factored into Smith’s calculations.

“Some have asked me whether the Taubman guarantee, which thus far has not involved any third party hedges, is a sign of things to come under my leadership,” Smith says. “The answer is no. There was only one Alfred Taubman. We will certainly make future guarantees, but we continue to have a firm and prudent policy.”

Strategic plan and future growth

Smith says the company now has an approved strategic plan with the board, the first element of which “is to recognise that our performance at the high end of the fine art market helps define our brand’s luster across many different categories and that there was some work to do in this area”.

Changes include the way the auction house secures consignments, how it hedges guarantee exposure and how it better identifies client opportunities cross-departmentally. There is also a plan for improving private sales, which Smith declined to divulge for “competitive reasons” but said will be implemented next year.

Perhaps unsurprisingly, given the overall economic distribution of wealth, the middle market has “been a little more sluggish in the auction room than we would have liked”, Smith says. Interestingly, though, while the number of “managed clients”—those assigned a manager—who actually consigned or bought work was slightly down this year, the overall number of clients grew 8% compared with the same nine-month period last year. “In other words, the number of clients who are very big buyers or consignors is down very slightly, but it was more than made up for with growth in new self-service or future managed clients,” Smith says. “Incidentally, managed clients were less than a quarter of our total transacting clients.”

Sotheby’s has more followers on social media than its rivals, Smith says. Its audience is growing faster than those of its competitors, and “is the most engaged”. This has led to a 41% increase in online buyers since the same time last year (though specific numbers were not provided). The company is also looking towards the wealth of Silicon Valley, which Smith calls a “critical growth area”.

Financial facts and figures—the good, the bad, the undecided Total revenues increased $38.8m (or 7% compared with the previous year) over the nine-month period (1 January to 30 September), reaching $625.7m. Also during this time, finance segment revenues—basically loans made by the company—increased 50% (from $32m to $49m), and Sotheby’s sold 89% more of its inventory than last year ($67m compared with $36m).

Meanwhile, margins continue to shrink as competition between the auction houses eats away at their profits. Auction commissions were down 12% for the nine-month period (from $64m to $56m). Private sales commissions were up 2% for the quarter (from $42m to $44m) but down 12% overall for the nine-months (from $12m to $10m).

A $6m “indirect expense” logged in the general and administrative expenses for the nine month period “is almost entirely due to higher costs in the second quarter associated with a client authenticity claim”, according to the accounting notes.

Adjusted net income decreased $1.7m, or 3%, from $64.3m a year ago. While gross profit was up by 1% for the quarter (from $66m to $67m), it is down 3% in the year (from $459m to $443m).