On Monday, Sotheby's announced their 2016 3rd quarter financial results, and it was not pretty. The international auction house reported a loss of $54.5 million, compared to a $17.9 loss for the 3rd quarter in 2015. The NY Times reported that market watchers believed the losses were beyond the control of Sotheby's, and the stock price actual climbed by 11.2%.
The first block quote is an article from the NY Times, the second block quote is the press release from Sotheby's.
The NY Times reports
Source: The NY TimesCiting a general slowdown in the art market and other factors, Sotheby’s on Monday reported a loss of $54.5 million in the third quarter, compared with a $17.9 million loss for the same period a year ago.
The auction house had expected the decline, which it attributed in part to the change in the timing of the summer contemporary art sales in London. They took place in the second quarter this year, having been scheduled in the third quarter in 2015.
Sotheby’s also recorded a $17.2 million pretax charge related to the acquisition in January of Art Agency, Partners, the art advisory business led by Amy Cappellazzo.
“The third-quarter results were not expected to be good,” Tad Smith, Sotheby’s president and chief executive, said in a statement. “Underneath our seasonally low level of sales, there were encouraging but tentative indicators that the market could be looking for a rallying point.”
Sotheby’s shares closed at $38.43, up 11.2 percent, on Monday on the results.
Analysts said Sotheby’s performance was largely a result of market forces outside its control.
“We’ve had a long period of art price inflation, and now we’ve started a period of a softer art market, which creates uncertainty,” said David Schick, the lead luxury analyst at Consumer Edge Research. He added that Sotheby’s “should be given credit for trying to think differently about evolving their business model,” by acquiring Art Agency Partners and trying to build private sales.
As part of its effort to think in new ways, Mr. Smith said in a conference call with investors Monday morning that he would like to see Sotheby’s develop customer research so that a bidder who lost out on an item could buy something similar privately from the auction house “within 24 hours.”
Sotheby’s private sales almost doubled to $167.9 million, from $84.9 million in 2015.
Sotheby’s said its quarterly losses were partly offset by an increase in its commission margin, to 16.5 percent from 15.3 percent.
The timing of the Art Agency charge will not affect the timing of Sotheby’s payments to the advisory’s principals, which are limited to no more than $8.75 million a year over a four-year period.
In general, the acquisition of the advisory business — for as much as $85 million — has resulted in “marked improvements ranging from competitive successes and enhanced auction commission margins to improved focus on private sales,” said Mike Goss, Sotheby’s chief financial officer.
At the end of 2015, Sotheby’s took a loss on the sale of the collection of A. Alfred Taubman, its disgraced former chairman.
On the conference call, Sotheby’s said that — excluding last year’s $383 million Taubman sale — it was likely to see lower sales in the fourth quarter, a decline consistent with a 26 percent drop in the overall art market over the last nine months.
“There are a lot of factors that look positive,” Mr. Smith said on the call. “But prudence dictates that we should wait and see.”
On Monday, Sotheby’s also announced the appointment of its first board member from Asia, Linus Cheung, a Hong Kong telecom executive. “He hails from a crucial part of our world — Greater China — that will be the foundation of a bright future for Sotheby’s,” Mr. Smith said in his prepared remarks. “His appointment is an important symbol of the relationships that Sotheby’s is building in China, especially with the help of our largest shareholder, Taikang.”
Sotheby’s loss per share increased to 99 cents, from 26 cents a year ago.
Sotheby’s, a publicly traded company, releases audited results quarterly. Its main competitors are privately held. Christie’s is owned by François Pinault, the French luxury-goods magnate; Phillips is owned by the Russian company Mercury Group.
The Sotheby's press release on Third Quarter 2016 Financial Results
Source: Sotheby'sNEW YORK, Nov. 07, 2016 (GLOBE NEWSWIRE) -- Sotheby's (NYSE:BID) today reported its financial results for the third quarter and nine months ended 30 September 2016.
For the three months ended 30 September 2016, Sotheby's reported a net loss of ($54.5) million and diluted loss per share of ($0.99) which compares to ($17.9) million and ($0.26), respectively, a year ago. Excluding certain acquisition related and other charges, Adjusted Net Loss* for the third quarter of 2016 is ($43.1) million and Adjusted Diluted Loss Per Share* is ($0.78), as compared to ($17.9) million and ($0.26) per share in the third quarter of 2015.
"As we communicated previously, the third quarter results were not expected to be good," said Tad Smith, President and Chief Executive Officer of Sotheby's. "Underneath our seasonally low level of sales, there were encouraging but tentative indicators that the market could be looking for a rallying point. At the same time, we are thrilled with the continued results of our internal initiatives."
The comparison to the 2015 third quarter net loss is significantly influenced by three factors.
First, Net Auction Sales and Auction Commission Revenue were adversely impacted by a change in the timing of the summer Contemporary Art sales in London which were held in the second quarter of 2016 after occurring in the third quarter in 2015. This shift in timing accounted for $197 million, or 93%, of the $211 million decline in Net Auction Sales from quarter to quarter.
Secondly, the Company reported a $15 million swing in Inventory activities, driven by $9 million in net gains, largely from the sale of a single painting in the year ago period, and $6 million in net losses from sales in inventory and other inventory write downs in the current period.
Partially offsetting these factors in the quarter was an improvement in the Company's Auction Commission Margin and a lower level of share-based compensation expense, continuing trends seen throughout the year. The Company also reported a lower effective tax rate and a significantly lower number of shares outstanding, both of which will benefit the year, but are negative factors for a quarter in which a loss is reported.
Finally, the Company recorded a $17.2 million pre-tax charge in the quarter related to the previously announced earn-out arrangements associated with the acquisition of Art Agency, Partners. These charges are required to be reflected in the financial statements as Salaries and Related Costs, but because they are part of the consideration paid for the acquisition, the Company is excluding them when reporting Adjusted Net Loss* and Adjusted Diluted Loss Per Share*. The timing of this non-cash expense recognition has no bearing on the timing of cash payments due under the earn-out which are limited to no more than $8.75 million per year over a four year period.
"Since integrating AAP into our existing business, we have seen marked improvements ranging from competitive successes and enhanced auction commission margins to improved focus on private sales and the creation of a formidable advisory business which has brought in incremental revenues each quarter. Based on the trajectory of the principals' progress against certain targets, we need to take the accounting charge now, although the payouts will still be made over the next four years as planned," said Mike Goss, Sotheby's Chief Financial Officer.
For the nine months ended 30 September 2016, Sotheby's reported net income of $8.6 million and diluted earnings per share of $0.14, which compares to $54.9 million and $0.79, respectively, in the prior year period. The lower level of net income is principally due to a decrease of $764.5 million, or 26%, in Net Auction Sales associated with the recent decline in the global art market. Also unfavorably influencing the comparison of year-to-date results to the prior year is $21.6 million in compensation expense related to the aforementioned AAP earn-out expense as well as unfavorable experience with inventory activities. These factors are somewhat mitigated by an increase in Auction Commission Margin from 15.3% to 16.5%, a reduced level of incentive and share-based compensation expense, a lower effective income tax rate, and diluted earnings per share benefited from a lower number of shares outstanding due to share repurchases made over the last twelve months.
Adjusted Net Income* for the nine months ended 30 September 2016 is $25.9 million and Adjusted Diluted Earnings Per Share* is $0.43 which compares to $62.5 million and $0.90, respectively, in the prior period. Adjustments between GAAP and non-GAAP measures are largely the result of $13.2 million of after- tax acquisition earn-out compensation expense and $4.5 million of after-tax contractual severance agreement charges in the current period, as well as $5.8 million of after-tax leadership transition severance costs in the prior period.
"Given the seasonality of our business, we encourage investors to look at our results on a rolling six month basis," added Mr. Goss. "To make this analysis easier for our investors, we will be posting our six month data to our investor relations website."
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