Tales from the 10Q: Details on Sotheby's Guarantees

Sotheby's stock chart, as of 12:57 p.m. today

Investors seem not to have loved what they heard in Sotheby's Tuesday announcement of its first-half results and its much more detailed elucidation of its finances in the Form 10-Q, filed yesterday. The auction house's publicly traded stock yesterday slid nearly 8% on a day when the Dow rose 40 points.

Yesterday's filings provided more details on Sotheby's experience in offering guarantees (amounts that the auction house agrees to pay consignors, regardless of whether bidding reaches that level) and its attempts to reduce risk in these economically dicey times.

Here are some nuggets mined from the 10-Q:

As of June 30, 2008, the Company had outstanding auction guarantees totaling $106.6 million, the property relating to which had a mid-estimate sales price of $118.4 million. The Company's financial exposure under these auction guarantees is reduced by $16 million as a result of risk sharing arrangements with unaffiliated partners [third-party guarantees offered by dealers, collectors or others]...

As of July 29, 2008, the Company had outstanding auction guarantees totaling $62 million, the property relating to which had a mid-estimate sales price of $69.6 million. The property related to such auction guarantees is being offered at auctions in the second half of 2008. As of July 29, 2008, $36.9 million of the guaranteed amount had been advanced by the Company.

The report did acknowledge that Sotheby's had a "less favorable auction guarantee experience" than it did last year, and that there has been "an increase in risk reduction arrangements and strategies in an effort to reduce the Company's exposure to auction guarantees in response to an uncertain economic environment over the last year." Although the overall guarantee portfolio was said to be profitable, there was one big loss:

For the three and six months ended June 30, 2008, principal activities decreased $10.5 million and $12.9 million, respectively, when compared to the same periods in the prior year, primarily due to losses recognized in the second quarter of 2008 related to property offered and sold under one auction guarantee, for which there was no comparable shortfall in the prior period.

The 10Q also acknowledges that "competitive pressures...in certain cases have caused the Company to accept lower auction commission margins in order to win consignments."

I also got a little more financial information from privately held Christie's, which doesn't have the rigorous disclosure requirements imposed on Sotheby's as a publicly traded company. Christie's press release doesn't break out its auction total from total sales figures (which include private sales). But in response to my query, Christie's said that first-half auction sales amounted to $3.23 billion (compared to $3 billion at Sotheby's).