Earnings Report: A Retooled Sotheby’s Beats Expectations in Uncertain Climate

CEO Tad Smith lays out the house's strategy.

Sothebys New York. Photo by Michael Nagle/Getty Images.

In a call with investors and analysts this morning, Sotheby’s reported healthy results for the most recent fourth quarter—a key period in the company’s business since it includes the major New York November auctions. The key point stressed by the company was that profitability was up despite overall lower revenues.

Sotheby’s CEO Tad Smith emphasized that the results beat analysts’ estimates by more than 10 percent, saying: “On our last analyst and investor call, we anticipated fourth quarter adjusted EPS [Earnings Per Share] to be in line with 2015’s figure and, in the end, we came in 14 percent higher,” with adjusted earnings per share of $1.35. The year ago adjusted earnings per share was $1.19.

However fourth quarter revenue was down, to $308.7 million from $335.8 million in the 2015 fourth quarter, an eight percent drop. And revenue for the entire year was also down, to $805 million from $961.5 million, a drop of 16 percent.

The results, said Smith, were “driven largely by a number of outstanding fourth quarter sales.”

The auction house boss focused on three takeaways, including that Sotheby’s had been “cautiously optimistic in November. But, as it turns out, the weight in that statement should have been on optimism as collectors responded enthusiastically.”

Overall, they admitted, revenue was down. Yet Smith added that “greater pricing discipline and intelligent deal making” helped boost auction commission margins, and further pointed to a stabilizing art market.

In the past, due to fierce competition for consignments and clients, both big auction houses have had to spend enormously to attract business, leading to the paradox that even as the high-end art market has boomed, the auction business has faced narrowing margins.

Looking forward to the year ahead, Smith touched on the Trump presidency and said Sotheby’s is keeping an eye on how tax reform and economic and regulatory policies could affect Sotheby’s as well as the broader art market. He also mentioned Brexit as a factor to keep an eye on as far as the auction house’s UK business is concerned.

“In the short term,” said Smith, “exchange rates present a favorable opportunity in our London salesroom for non-British buyers. But what will happen in the longer terms depends on the UK’s exit agreement and the nature of legislation that is put in place.”

Shares were trading higher on the New York Stock Exchange this morning, up more than 11 percent at $44.71.

Oliver Chen, an analyst with Cowen and Company reiterated his “outperform” rating on Sotheby’s stock, writing in a report: “We see solid results as evidence of the operating and financial leverage of the [Sotheby’s] business model, indicative of earlier innings of market stabilization, and also evidence that when great collections are available – buyers and sellers will transact.”


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