Few things react more sharply to changing economic conditions than the market for high-end art and other collectible items, and Sotheby's (NYSE: BID) relies on healthy markets for those items in order to bolster its own results. Lately, however, the luxury market has been weak, and coming into Monday's third-quarter financial report, Sotheby's investors were prepared for huge declines from year-ago levels because of a number of factors, some anticipated and some not. Sotheby's results showed some significant differences compared to what most had expected to see, but the company said that it's working hard to improve its business going forward. Let's look more closely at Sotheby's numbers to see whether investors should be worried.
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Image source: Sotheby's.
Sotheby's watches sales plunge
Sotheby's third-quarter results weren't pretty. Revenue sank by a third to $91.5 million, with the only good news being that the decline was actually far less than the anticipated 40% plunge that most investors were looking to see. The company's bottom line worsened substantially, with adjusted net losses more than doubling to $43.1 million and working out to $0.78 per share, which was even worse than the $0.63 per share consensus forecast for Sotheby's quarterly loss.
Looking more closely at Sotheby's results, a number of factors conspired to hold down the auction house's results. A change in the timing of the company's summer sales of contemporary art in London took revenue that had been in the third quarter in 2015 and instead put it in this year's second quarter, creating disruptions to year-over-year comparisons in both last quarter's results and this quarter's. In addition, the company said that inventory-related moves resulted in a negative $15 million swing for the company, with positive results last year giving way to negative writedowns this year. Moreover, the third quarter is traditionally Sotheby's slow season, with many high-end collectors taking summer off and deferring activity into the fourth quarter.
Sotheby's financial results were poor across the board. Auction agency commissions and fees were down by a quarter, and inventory sales figures dropped by more than half. Meanwhile, total expenses barely moved at all, with rising salaries and related expenses offsetting some costs that followed revenue figures lower.
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CEO Tad Smith was quick to defend Sotheby's performance. "As we communicated previously," Smith explained, "the third quarter results were not expected to be good. Underneath our seasonally low level of sales, there were encouraging but tentative indicators that the market could be looking for a rallying point." The CEO also said he was pleased with the efforts that Sotheby's is taking internally to try to keep costs under control and bolster its business.
Can Sotheby's bounce back?
One area in which Sotheby's was optimistic is in its recent acquisition of Art Agency Partners. As CFO Mike Goss said, "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." Because of the way in which Sotheby's structured its acquisition, the company took a pre-tax charge during the quarter of $17.2 million to reflect the impact of earn-out arrangements.
Still, Sotheby's isn't out of the woods yet. Given the rising level of uncertainty on the global macroeconomic and geopolitical fronts, some high-end auction customers might well choose to sit out high-profile events in the near future. Poor performance during a slow season is one thing, but Sotheby's has a lot riding on seeing improved conditions as activity levels pick up.
Sotheby's investors didn't respond immediately to the news, with no appreciable trading activity in the pre-market session following the announcement. Nevertheless, Sotheby's needs to demonstrate that things can improve from their current malaise, or else future disappointments could have a more devastating impact on the business going forward.
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