How do you restore investor confidence in a company whose first-quarter results show a net loss of $25.9 million (compared to net income of $5.2 million for the same period the previous year), with a 35% decrease in net auction sales and 33% decrease in auction revenues in this year’s first quarter compared to last years?
You try to show that this was an anomaly (because the first quarter last year included “unusually strong sales”) and you profess “cautious optimism” that better days are coming.
That’s what Sotheby’s CEO Tad Smith gamely tried to do in his is 9 a.m. quarterly conference call with securities analysts. The firm’s stock had a roller-coaster ride today, opening at 26.08, tanking to 24.96, then rebounding to 28.91 (up 6%) at the close.
The firm’s Form 10-Q quarterly report, just filed with the SEC, acknowledged that “auction sale results in the fourth quarter of 2015 and the first quarter of 2016 indicate that the global art market is experiencing a period of lower sales in comparison to the first half of 2015. Accordingly, it is unlikely that net auction sales and revenues in 2016 will equal the levels achieved in 2015 and 2014” [emphasis added].
But Smith saw positive signs in the respectable, if not robust, results of yesterday’s Bound to Fail sale at Christie’s and 20th Century and Contemporary sale at Phillips. He manifested a stronger grasp of Sotheby’s complexities than I’ve heard on previous conference calls. But he offered no compelling map for getting beyond the current financial roadblock, other than mentioning the recent expansion and sprucing up of the firm’s exhibition space, and a 60% increase in the number of lots sold online (with no details provided on the income from those lots).
Smith assured jittery analysts that he was going to be “very conservative” in offering consignors guarantees (wherein the auction house promises sellers an undisclosed sum, whether or not the bidding actually reaches that level). In a “softer market” (as he described it) guarantees become increasingly risky.
The 10-Q provided details on the current level of guarantees:
As of May 5, 2016, Sotheby’s had outstanding auction guarantees totaling $86.2 million and, as of that date, Sotheby’s financial exposure was reduced by risk- and reward-sharing arrangements [i.e., third-part guarantees, irrevocable bids, etc.] totaling $14.2 million….The property related to these auction guarantees is being offered at auctions in the second quarter of 2016.
Analysts found a glimmer of hope in this quarter’s modest increase in the auction commission margin (from 15% in last year’s first quarter to 15.4% this year), but that could more properly be regarded as another negative indicator: As noted in the 10-Q filing, the increased commission margin was “primarily due to changes in sales mix”: Fewer objects were sold at the highest price levels.
Auction commission margins (calculated by dividing commission revenue by hammer price) are, by definition, higher in the middle-to-low price range, because the percentage charged on the hammer price is higher for lower-priced goods. But at the lower end of the market, the profits per lot are counted in thousands, not millions.
Sotheby’s failure to realize any auction commission at all from the disastrous Taubman Collection sales significantly depressed the auction commission margins: Without the Taubman sales, the margin for the first quarter of 2016 would have been 16.2%.
Buried in the 10-Q is a candid admission that the program of staff buyouts initiated by Sotheby’s last year might not be entirely “healthy for the company,” as Smith had originally asserted:
On Nov. 13, 2015, Sotheby’s announced a series of regional voluntary separation incentive programs aimed at reducing headcount and associated compensation costs. Employee transitions under these programs commenced on December 31, 2015 and will occur throughout 2016. The programs will result in a net reduction of approximately 5% of Sotheby’s global headcount of approximately 1,600 employees prior to their implementation. The loss of employees as a result of these programs could adversely impact Sotheby’s ability to compete.
This week’s intense schedule of major auctions, beginning with tonight’s Impressionist/Modern sale at Sotheby’s, should provide a clearer picture of where the market in general and Sotheby’s in particular are headed.