Sotheby's First-Quarter Loss: Commission Margins Down; Buyers Premium Up UPDATED

Sotheby's Stock Chart

There was a lot of news in Sotheby's First Quarter 2008 Earnings Conference Call this morning with investment analysts.

The lead-off revelations: The auction house's revenues ($129.3 million) declined $18.1 million (12%), compared to the first quarter of 2007. There was a first-quarter net loss of $12.4 million ($0.19 per diluted share) compared to net income of $24.3 million ($0.37, per diluted share) for the first quarter of 2007---a $36.7 million decline. First quarters are traditionally weak, with the biggest auctions coming in the second and fourth quarters.

Increased expenses played a significant part in the decline, but Sotheby's said that it was primarily due to lower auction commission margins, as compared to the same period last year. (The auction commission margin equals commission revenue divided by hammer price.) The margin was 13.6% in the first quarter of 2008, compared to 16.6% in the first quarter 2007. Commission margins are typically lower for higher-valued works.

To help boost those margins, Sotheby's will once again raise the fee charged to buyers, effective June 1---25% on the first $50,000 of the hammer price; 20% on the next $950,000 of hammer. (The current buyers premium is 25% of the first $20,000; 20% on the next $480,000.) The charge on hammer price above $1 million will remain at the current 12%.

There was a lot of interesting discussion about guarantees---the amounts that auctioneers sometimes agree to pay to sellers, whether or not the bidding actually reaches those amounts. In the Q&A with analysts, there was a suggestion---uncontradicted by the auction house's officials---that agreements to share a portion of the buyers premium with sellers are sometimes taking the place of guarantees as tools for attracting consignments.

Bill Ruprecht, Sotheby's president and CEO said:

We have been operating in an environment of uncertain economic times over the last nine months, so at the end of last year we focused even more keenly on managing our risks and limiting our exposures to guarantees by taking on fewer deals where we could have exposed our balance sheet to material losses....
 
Our traditional competitor [Christie's] had approximately $80 million more in guarantees than we did in this most recent 10-day period and by our calculations, we are, year to date, the only firm to have had meaningful profitable guarantee experience....Our competitor did not have strong results in the guarantee line.

When I asked Christie's to comment on the accuracy of these assertions, Toby Usnik, its head of public relations, would only say:

We are very pleased with our results for the week.

Sotheby's reported that its year-to-date sale totals, as of yesterday, were up 11% from last year. In his prepared conference call remarks (which you can read here), Ruprecht quietly corrected a claim made at Wednesday's postsale Impressionist/modern press conference: The average value of lots sold on Wednesday was $5.7 million, compared to $4.8 million (NOT $3.5 million) at Sotheby's weak Impressionist/modern sale last November---a less impressive increase than previously announced.

An interesting moment during the Q&A came when one analyst suggested that giving sellers a portion of the buyers premium is a consignment-getting technique now being used in lieu of offering guarantees. The analyst asked Sotheby's to provide regular reports not just on sale totals, but also on the currently undisclosed amount of the premium relinquished to sellers (which diminishes Sotheby's profit). Sotheby's officials did not refute the analyst's assumptions about the use of the rebate in lieu of guarantees, but they did not offer to change the method of reporting, observing that reports of auction commission revenues reflect the impact of the rebates.

Sotheby's stock is not reacting well to this morning's news: As of 11:38 a.m., it was trading at $24.94, down $2.53 (9.21%) from yesterday's close. One analyst asked whether, in light of the disconnect between share price and company health, management might consider a share buyback. The reply:

That's something we would look at and consider.

UPDATE: Usnik of Christie's e-mailed me with this additional observation about Sotheby's analysis of Christie's guarantees:

As a private company, we don't comment on this aspect of our financials, but we can confirm that all objects guaranteed were identified as such in our catalogue.