COURTESY SOTHEBY’S
Sotheby’s CEO Tad Smith announced in this morning’s quarterly earnings call that the auction house will post a net loss of $54.5 million for the third quarter of this year, a deficit significantly larger than the adjusted net loss of $17.9 million last year in the same quarter.
During the call, Smith and Sotheby’s CFO Mike Goss assured shareholders that such losses had been anticipated, as the company has never before posted a profit in its third quarter, a period when only 7 percent of its annual sales occur. And, a direct comparison to last year may be misleading, as the timing of the summer sales in London in 2015 allowed those auctions to be included in last year’s third quarter, injecting the earnings period with a $197 million bundle that this year’s third quarter did not have.
But, even when adjusting the numbers to account for last year’s anomalous uptick in revenue, what appeared to be a 57 percent decline is still an 8 percent decline. Last year, the $17.9 million loss was an improvement on the year before.
“Underneath the seasonally weak results that we expected during the quarter, we are pleased both with some small signs that the market might stabilize and also more significant internal progress on our initiatives such that, when the market does stabilize, Sotheby’s will be poised to do very well for shareholders,” Smith said during the call.
Smith and Goss emphasized throughout the call that this period’s general lack of importance—the year’s major auctions occur in the second and fourth quarters, when Sotheby’s holds its auctions in New York—makes any anecdotal bad news relatively insignificant in the context of the sales calendar.
“The quarter itself is so small and the number of sales so few, that one needs to be cautious when using this data,” Smith said.
Still, even if just a fraction of the year’s business is done during the third quarter, the earnings statement is still a benchmark of how Sotheby’s is doing compared to the year prior. As Smith noted, hammer sales are down 8 percent in the third quarter compared to the third quarter of 2015, and the year-to-date total is down 26 percent. This, despite a moderately successful sale in London last month, where Jean-Michel Basquiat’s Hannibal (1982) was the most expensive lot of the Frieze London sales across three auction houses.
Part of the reason for the increased losses as compared to last year’s modest losses stemmed from underperforming inventory sales—last year, the sale of a single painting provided nearly all of the $9 million gain in inventory sales, whereas this year, write-downs that came from the decision to convert older inventory to cash, in order to redeploy that cash elsewhere at Sotheby’s, caused $6 million in losses.
“With this decision has come some pain, but we think this is the right way to think about capital allocation,” Goss said.
There was also a loss of $17.2 million due to payments related to the $35 million in performance payouts included in the purchase of Art Agency, Partners in January of this year. The deal to purchase the advisory firm indicated that the extra package would be delivered once certain benchmarks were reached; once they were, the payments went into effect. However, this loss was not included in the adjusted net loss due to the fact that it is “not an ongoing compensation expense.”
Goss also hastened to say that, despite optimism regarding the fall sales—which include a work by Edvard Munch as the marquee Imp-Mod lot, a duo of primo Richters from the Ann and Steven Ames collection, and works from the collection of David Bowie—the fourth quarter would probably also be down compared to last year. Factors impacting that include the contraction in the market and the lack of a gigantic extra sale like last year’s auction devoted solely to the collection of former Sotheby’s chairman Alfred Taubman.
During the question-and-answer session, Smith addressed concerns from those who hopped on the call, explaining the value of Art Agency, Partners, discussing the problem with getting consignments despite the emergence of a new collector class that’s ready to spend big on works, and looking at the problems facing a business that is technically in retail but cannot be, as he put it, “Amazon’d.”
He also announced that joining the board of directors would be Linus Cheung, the former CEO of HongKong Telecom.
“One, Linus has years of history with our company as a client,” Smith said. “And, two, he hails from a crucial part of our world—Greater China—that will be the foundation of a bright future for Sotheby’s.”
Smith reminded shareholders that, in the coming months, Sotheby’s will see Marc Porter and Saara Pritchard joining the team, and hinted at the fact that other new staffers will be joining in early 2017, though they have yet to be announced.