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Despite Strong 2011, Sotheby’s Stock Slides on Fourth-Quarter Decline

Today’s fluctuations, so far, in Sotheby’s stock

Despite boasting the second-best annual financial results in its history (only outstripped in pre-crash 2007), Sotheby’s has been watching its stock price slip today (down more than 9% from yesterday’s close, at this writing), after reporting late yesterday afternoon a 25.7% decline in its net income for the fourth quarter of 2011, as compared with the previous year’s fourth quarter.

Explaining this decline, Bill Ruprecht, Sotheby’s president and CEO, said this to security analysts during a conference call yesterday about the 2011 results:

There is little doubt that unease in the broader economic environment, including concerns about instability in Europe, contributed to the sometimes choppy auction results we saw in the fourth quarter and created a challenging climate for gathering consignments for our first quarter 2012 auctions.

Ruprecht warned that “first-quarter sales are trending well short of the prior year.”

On the plus side, net income for 2011 was up 6.5% from the prior year, to $171.42 million. Total sales (including auctions, private transactions and dealer revenues) increased 21% to $5.82 billion, virtually a dead heat with the $5.7 billion that rival auction house Christie’s reported on Feb. 1. (Unlike Sotheby’s, Christie’s is not publicly traded and does not disclose net income.)

Ruprecht took a swipe at the rival house, noting that “while in one sense this [the sales total] represents leadership parity with our principal competitor, we are really pleased with how we got there—through a focused commitment to the high-end of the market, having sold just half the lot volume of our competitor, but at double the average price point.”

At both houses, private sales soared: They totaled $814.6 million (a 65% increase) at Sotheby’s; $808.6 million (a 44% increase) at Christie’s. The Big Two have been increasingly behaving less like auction houses and more like dealers.

In its press release, Sotheby’s attributed its weak fourth-quarter results, in part, to a 46% decline in single-owner sales. Christie’s fourth quarter, by contrast, was boosted by a successful series of sales from Elizabeth Taylor’s collection, where “every one of the 1,778 lots found a buyer, contributing to total sales [for the Taylor lots] of $157 million.”

Sotheby’s is making a big bet in China, including $8 million in capital expenses for a greatly expanded Hong Kong facility. This will include salesrooms, exhibition space and administrative offices and, at 34,000 square feet, it will double the size of Sotheby’s existing premises there. It is scheduled to open this May, at a time when the Chinese economic engine is notably slowing down.

The labor strife with art handlers (scroll down), now entering its ninth month, continues to be a cloud hanging over Sotheby’s. Here’s what the auction house says about that situation in its Form 10-K Annual Report (p. 10), filed yesterday with the SEC:

On June 30, 2011, the collective bargaining agreement applicable to 42 property handlers employed at Sotheby’s New York City office expired. During the process of negotiations with the union representing the property handlers, the union made statements to the media threatening a strike. In order to avoid the impact of the union’s threatened strike during the autumn 2011 sales season and in support of Sotheby’s bargaining proposals, Sotheby’s locked out members of the bargaining unit on July 29, 2011. Although management cannot predict the ultimate outcome of the negotiations and any associated work disruption, Sotheby’s is committed to a good faith bargaining process and resolution of this matter.

In the interim, Sotheby’s ability to conduct business at its New York City office could be disrupted by the lockout, though management has implemented contingency plans to minimize any potential disruption that could be caused by the lockout. The union has also initiated a broader campaign seeking to pressure Sotheby’s management and its Board of Directors and to influence Sotheby’s clients and suppliers to support the union and cease doing business with Sotheby’s. It is impossible to predict the impact of this union campaign, but to-date, the campaign has not had a material impact on Sotheby’s business.

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