Sotheby’s Reports Loss of $11 Million in Fourth Quarter of 2015
The auction house takes a loss amid strategic cost-cutting initiatives.
Sotheby’s was smart to manage investor and analyst expectations by pre-announcing fourth-quarter and 2015 results on January 22. That report allowed the auction house to get out in front of some less-than-stellar aspects of the current financial situation—including significant charges for voluntary employee buyouts and tax charges related to “repatriating foreign earnings” that resulted in a fourth-quarter net loss of $11.2 million.
Typically, the fourth quarter of the year, which includes the major November New York auction season, is a robust period for Sotheby’s and its rivals, Christie’s and Phillips. However, the latter two houses, which are privately held, are not required to disclose detailed financial results.
As a result of the pre-announcemnt, parts of today’s official fourth-quarter earnings report actually exceeded some analysts’ expectations, even as Sotheby’s and other art sellers continue to grapple with pressure on the art market, most recently seen in the lackluster London auctions.
Sotheby’s loss of $11.2 million, or 17 cents a share, can be compared with an income of $74 million, or $1.07 a share, in the same period in 2014. According to its complicated earnings report, Sotheby’s, “the lower level of net income is due to a number of charges recorded in 2015.” Excluding the aforementioned tax and buyout charges that reflect strategic longtime management initiatives, net income was up in the fourth quarter, to $80.6 million.
However, for the entire year, adjusted net income was only $143.1 million, “which is comparable to 2014,” according to Sotheby’s. Another challenge for the auction house in the fourth quarter was managing the impact of the $500 million guarantee it extended to secure the estate of former chairman A. Alfred Taubman. In its January 22 pre-release, Sotheby’s said its loss on that guarantee was $12 million.
In a slide presentation accompanying today’s earnings report, Sotheby’s said the Taubman collection, which spanned several auctions including Impressionist, contemporary, and Old Masters, “brought net auction sales of $383 million in 2015 with no related auction commission revenues.” More Taubmanworks are set to be offered in the months ahead. On a better note, Sotheby’s said auction commission margin on all other sales was 15.5 percent, an increase of 80 basis points from the previous year.
In a conference call with investors this morning, CEO Tad Smith said: “After a year of transition, we have a strong team with a clear mandate to build a more valuable business for shareholders and a more responsive one for new and existing clients. We will likely have one or more difficult quarters as we ride through the current cycle, but we are being careful on guarantees and capital commitments, [and] watching our liquidity carefully.”
Shares of Sotheby’s stock have been rebounding to about $24 a share after hitting a low of $19 a share earlier this month.
Analyst David Schick of Stifel noted in a pre-conference call report this morning that Sotheby’s is “navigating pressures” and that there are still “difficulties” that remain to be seen in the months to come. However, Schick said Sotheby’s reported adjusted fourth quarter earnings per share of $1.19 is “above our $1.14 consensus-matching model.”
Schick called the strategy “prudent,” saying, “management indicated it is being careful on guarantees and capital commitments.”
Meanwhile analyst Kristine Koerber, of Barrington Research, cut her rating on the stock to “market perform” from “outperform.” According to Koerber’s report: “A slowing art market, senior talent departures and lack of visibility on financial strategy cause us to move to the sidelines for now. Based on recent auction results, it is evident that there is less of an appetite for high-end art and bidders have become more price-sensitive. We believe the company will be faced with supply/demand challenges over the near term especially as it is more prudent with guarantees, and we expect revenues and profitability to be suppressed.”
Today’s earnings news also coincided with the announced departure of two high-level and longtime Sotheby’s executives: David Norman, vice chairman of Sotheby’s Americas and co-chairman of Impressionist and modern art worldwide, and Alex Rotter, global co-head of the contemporary art department, are veterans of the auction house, having served there for 31 years and 15 years, respectively.
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