Sotheby's Finishes 2016 With Bottom-Line Strength

By Dan Caplinger Markets Fool.com

The high-end luxury market has gone through tumultuous times lately, and Sotheby's (NYSE: BID) has been on the front lines in feeling the impact that volatile activity levels in the art and collectibles markets have had on its business. Coming into Monday's fourth-quarter financial report, Sotheby's investors were once again ready to see huge sales decreases compared to the fourth quarter of 2015, but they had hoped that damage to the bottom line would be minimal. Sotheby's actually managed to do investors one better, posting considerable growth in its earnings per share even as it experienced revenue disruptions.

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Let's take a closer look at Sotheby's to see what its numbers say about its performance and what lies ahead for the auction house.

Image source: Sotheby's.

Sotheby's deals with mixed results

Sotheby's fourth-quarter numbers showed the tough conditions the auction house faces as well as its efforts to make the most of the opportunities it has. Revenue for the company fell 8% to $308.7 million, but that was only about half of the decline most investors were looking to see from Sotheby's. GAAP net income swung to a profit compared to a year-ago loss, and although adjusted net income was down 8% from the year-ago quarter, a large drop in outstanding share count boosted adjusted earnings per share to $1.35. That was up 13% from 2015's fourth quarter, and it topped the consensus forecast by $0.18 per share.

Looking more closely at Sotheby's results, the company attributed its earnings success to a few key factors. First, the company said collectors responded enthusiastically to the collections and other works Sotheby's had on sale. Also, Sotheby's did a better job of using pricing discipline and being smart about the deals it made with potential sellers to boost its auction commission margin figures, leading to greater profit. Finally, from a more macroeconomic perspective, Sotheby's sees itself as having done a good job of capitalizing on a perceived stabilization in the art and collectibles market. Going forward, it thinks it can tap into the next upturn even more effectively to bring in profit for its investors.

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Still, Sotheby's numbers showed challenges. Revenue was down in all of the company's biggest sources of income, including a 7% drop in agency commissions and fees and a 25% plunge in inventory sales. Finance-related revenue was down slightly as well. Moreover, although many expenses fell in line with the drop in sales, higher salaries and a boost in general overhead costs remain potential longer-term issues for Sotheby's to address.

CEO Tad Smith was still happy with how things went. "Our fourth quarter 2016 results came in better than expected," Smith explained, "largely due to a number of strong fourth quarter sales." The CEO believes Sotheby's efforts have been extremely successful in helping it participate in a potential rebound in the market.

What's ahead for Sotheby's in 2017?

Looking ahead, Sotheby's had a number of positives it wanted to emphasize. Although the Masters Week sales in January didn't produce as strong of results as they did in 2016, Sotheby's noted that the absence of key masterpiece and single-owner sales held back the event's results. The auction house is more optimistic about its London sales of impressionist, modern, and contemporary art later this week, and it believes that pieces by Klimt, Picasso, Basquiat, and Richter could produce monumental results that will drive interest in the art market and kick off what could be a strong 2017.

The spring sales in Asia will also be keys to Sotheby's success, and the auction house is in its final stages of assembling offerings. The Hong Kong team has identified the need to go beyond its salesroom, with nearly half of Asian purchases happening elsewhere. With Chinese insurance company Taikang having taken a more than 13% stake in the auction house, Sotheby's said its relationship with Taikang is opening doors in China and could lead to further success in the long run.

Sotheby's investors didn't have an immediate response to the news, and the stock didn't trade in the pre-market session immediately following the announcement. Given the long downward period Sotheby's has struggled through lately, signs of an uptick are exactly what investors will want to see to start 2017.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sotheby's. The Motley Fool has a disclosure policy.