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Sotheby’s Earnings Conference Call: The Cost of Activist Shareholders

Daniel Loeb

Daniel Loeb

Sotheby’s press release today on recent earning results included two different figures for the key metric of profitability—“net income”—in the second quarter (ending June 30), which included the big May sales of Impressionist/modern and contemporary art.

“Adjusted net income” for that quarter decreased 4% from the same quarter last year, to $87.83 million. But “net income” for that quarter decreased even more—by 15%, to $77.63 million.

So what exactly was that “adjustment”?

The more favorable figures are the result of adding back into Sotheby’s income the “special charges” that were unique to this year. As explained by the firm’s chief financial officer, Patrick McClymont, during Sotheby’s first-half conference call for stock analysts today, the special charges were the cost of “shareholder activism” and the associated litigation.

Special charges amounted to $18.55 million in the second quarter and a whopping $24.26 million for the first six months of 2014. (Some of that may eventually be reimbursed, according to Sotheby’s.) That’s a lot more than the $15.7 million than Sotheby’s had estimated as the likely cost of its losing battle against activist investor Daniel Loeb‘s Third Point.

On the plus side, net auction sales were up 24% in the first half (but private sales commissions decreased). Some 26% of buyers in the first half were first-time clients at Sotheby’s, but when a stock analyst asked Bill Ruprecht, the auction house’s chairman, president and chief executive officer, how that compared to previous years, he replied, “I can’t give you year-over-year trends.”

In this connection Kelly Crow‘s detailed Wall Street Journal investigation of The Race to Find New Art Collectors is not to be missed.

Another stock analyst expressed “trepidation” over Sotheby’s increased willingness to offer guarantees to consignors. The auction house had sharply scaled back guarantees after it got burned in the 2008 art-market crash.

Ruprecht replied that he had “never been more rigorous” in analyzing the possible risks of individual guarantees and that they give Sotheby’s the “flexibility to do business that we believe will be profitable to the institution….We syndicate away risks through irrevocable bids and the like.”

Responding to another analyst, McClymont said “we did well” on guarantees overall, although “a couple of guaranteed works” failed to sell.

To increase efficiencies, Sotheby’s is planning to make “headcount reductions” in staff during the third quarter.

More financial details are available on Sotheby’s latest Form 10-Q quarterly report, filed with the SEC.

an ArtsJournal blog