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Sotheby’s Shortfalls: What’s Missing from CEO Tad Smith’s Earnings Conference Call?

Notwithstanding the assertion by Sotheby’s CEO Tad Smith that he was “pleased with the progress we’ve made on our strategic objectives,” there was much cause for concern in Sotheby’s conference call with securities analysts this morning (covering fourth-quarter and full-year 2015). Professing to be “incredibly excited about our prospects,” Smith tried to put an upbeat spin on the downbeat financial results in its latest 8-K report, filed with the SEC.

Tad Smith, Sotheby’s CEO, addressing the crowd before the first of the Taubman auctions Screenshot from “Masterworks” auction webcast

Tad Smith, Sotheby’s CEO, addressing the crowd before the first of the Taubman auctions
Screenshot from “Masterworks” auction webcast

Net income (profits) for 2015 totaled only $43.7 million, a 63% decrease from the previous year’s net income of $117.8 million.

More details are in the Form 10-K annual report, just filed with the SEC:

The lower level of net income is due to a number of charges recorded in 2015, including a $65.7 million non-cash income tax charge related to the planned repatriation of foreign earnings [to help bankroll the stock-repurchase program] and an after-tax charge of $23.6 million related to a series of regional voluntary separation incentive programs [i.e., staff buyouts], both recognized in the fourth quarter of 2015.

Excluding these and other charges, Sotheby’s reported adjusted net income of $143.1 million…[compared] to 2014 adjusted net income of $142.4 million.

The 10-K revealed that the final amount of Sotheby’s guarantee on the under-performing A. Alfred Taubman Collection was not $515 million, as previously stated, but $509 million, “which takes into account items withdrawn by the Estate prior to sale.”

In its “Update on the Taubman Collection,” the 10-K also revealed:

Through February 24, 2016, total aggregate proceeds (i.e., the hammer price plus buyer’s premium) from sales of Taubman Collection property were $470 million. The results of these sales, combined with the estimated value of items which were taken into inventory after failing to sell at auction ($33 million) and the estimated aggregate proceeds of the remaining property to be offered at future auctions ($3 million), result in a projected loss on the [Taubman] auction guarantee of approximately $3 million, which was recognized in the fourth quarter of 2015. [Emphases added]

But that $3 million loss (which doesn’t include the $6 million in expenses incurred by the Taubman sales) is based on Sotheby’s being able to realize the estimated value of $33 million for the Taubman works that failed to sell at auction, and became Sotheby’s property, under the terms of the guarantee. Now that those works have been “burned,” and given the what Smith himself today called “a period of lower sales” (continuing into the current quarter, when aggregate sales to date have been 33% below last year), the prospects for recouping the full $33-million estimated value for the unsold Taubman works seem uncertain at best.

Even more telling than what the CEO said during the conference call was what he didn’t say: Conspicuously absent was any information about the highlights of upcoming sales—a regular feature in conference calls presided over by Bill Ruprecht, Smith’s predecessor. That’s because “the market is a little tighter on consignments, as people are in a wait-and-see mode,” as Smith’s explained it.

Also missing were details to back up Smith’s claim that Sotheby’s now has “better expertise and specialists” than it had a year ago, other than the principals of Art Agency, Partners (the advisory firm recently purchased by Sotheby’s)—Allan Schwartzman (who spoke briefly during the conference call), and Amy Cappellazzo (who didn’t).

In my Jan. 14 post about possible downsides of the Art Agency, Partners relationship, I mentioned that “it remains to be seen how well the seasoned specialists already on Sotheby’s staff will take to having AAP’s art experts overseeing them.”

I had posted this image to illustrate that observation:

Simon Shaw, Alexander Rotter and David Norman at Sotheby's November press preview Photo by Lee Rosenbaum

Simon Shaw, Alexander Rotter and David Norman at Sotheby’s November press preview
Photo by Lee Rosenbaum

Yesterday we learned that two of the above trio—Alex Rotter, co-head of the contemporary art, and David Norman, vice chairman of Sotheby’s Americas and co-chairman of Impressionist and modern art—are leaving the building. As reported yesterday by Katya Kazakina of Bloomberg, Rotter will depart “at the end of this month,” while Norman “will stay at least through the semi-annual auctions in May.”

Smith noted that despite the hit that client relationships may take due to exodus of respected senior staffers (also including Melanie Clore, co-chairman of Impressionist and modern art), “we have a large number of incoming résumés.”

The 10-K also gives a concise summary of how Sotheby’s and Christie’s compare on market share:

In 2015 , 2014 , and 2013 , Sotheby’s and Christie’s together totaled approximately $12.3 billion, $12.9 billion, and $11.0 billion, respectively, of Aggregate Auction Sales, of which Sotheby’s accounted for $5.9 billion (48%), $6.1 billion (47%), and $5.1 billion (47%), respectively.

Sotheby’s net losses on auction guarantees in 2015 totaled $11.57 million, compared to a net loss on guarantees of $15.46 million the previous year—a sign that the auction market has been cooling, or at least performing below Sotheby’s expectations. As of Feb. 24, 2016, according to the 10-K, “Sotheby’s had outstanding auction guarantees totaling $59.7 million. Each of the auction guarantees outstanding as of Feb. 24, 2016 had a minimum guaranteed price that was within the range of the presale auction estimates for the underlying property. The property related to these auction guarantees is being offered at auctions in the second and third quarters of 2016.”

In trying to emphasize the positive during the conference call, Smith mentioned Sotheby’s ramped-up presence on social media. It has posted nothing on Twitter about its fourth-quarter and annual results, but it did tweet this, shortly after the conference call, in reference to its upcoming (decidedly modest) sale in London next Wednesday of fine and decorative art from the collection of Deborah, Duchess of Devonshire, last of the Mitford Sisters:

To ramp up investor- and consignor-confidence, Sotheby’s will need more than “ham hock” on its 2016 menu!

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