Activist investors who have roiled Sotheby’s management and negatively impacted its bottom line may be gratified by the auction firm’s announcement today that it will increase a previously authorized $125-million stock repurchase program by another $125 million, with the funds coming from the company’s current cash balances.
But investors can’t be happy with the plummeting of today’s stock price (down 9% and falling, at this writing) in reaction to today’s release of disappointing quarterly financial results.
At the beginning of his most expansive public comments since becoming Sotheby’s CEO in March, Tad Smith acknowledged a “rather bumpy quarter.”
Total revenues for the quarter—$332 million—marked a 1% decline from the same quarter in 2014, while net income (profits) fell a hefty 13%, to $67.57 million. Smith attributed most of the second-quarter decline to “sale timing issues” and “a cancelled sale provision and the cost of a client authenticity claim, both related to property sold in prior years.”
Let’s unpack that:
—“Sale timing issues” refer to the scheduling of the London’s summer contemporary auction from the second quarter last year to this year’s third quarter.
—“A cancelled sale provision” refers to a buyer’s default on an unspecified purchase.
—I have not yet been able to identify which “authenticity claim” Smith referred to, but it may be this one (Sotheby’s won that case, but there may have been costs in defending it) or perhaps this one.
Also hurting the results, according to Patrick McClymont, CFO, were unfavorable foreign currency exchange rate changes and a loss taken on a painting acquired by Sotheby’s earlier this year that was sold at auction during the second quarter. (Another painting acquired with it was sold at an offsetting profit that will be realized next quarter.)
What’s more, in conjunction with Sotheby’s leadership transition, the firm incurred a whopping $9.5 million in severance costs associated with “the termination of the employment of certain Executive Officers,” including Bruno Vinciguerra, Sotheby’s chief operating officer, whose departure is effective Aug. 31. Smith will assume the COO’s responsibilities.
The voluminous 10-Q quarterly report also discloses first-quarter costs associated with Smith’s hiring:
In the first quarter of 2015, Sotheby’s recognized $4.2 million in costs associated with the hiring of Thomas S. Smith, Jr. as its President and Chief Executive Officer, which are classified within CEO Separation and Transition Costs.
These costs principally relate to compensation of $3.1 million owed to Mr. Smith to replace incentive compensation that he expected to receive from his previous employer, consisting of a fully vested restricted stock unit award with a fair value of $2 million granted on March 31, 2015 and a $1.1 million cash payment due in September 2015. There is no required service period associated with this compensation.
CEO Separation and Transition Costs also include approximately $1.1 million in recruitment and other professional fees associated with the CEO hiring process.
On a positive note, Smith today enumerated the elements of his strategic plan to improve Sotheby’s performance, most notably: “recruiting talent as well as exploring bolder ideas designed to substantially improve our performance in Contemporary,” widely seen as lagging behind Christie’s.
Christie’s, which is not publicly traded and doesn’t disclose profit figures, last month reported record half-year sales of £2.9 billion, up 8% in British pounds but flat ($4.5 billion) in dollars.