Sotheby’s posted its second-quarter financial results this morning, which showed a decline in profit despite higher overall auction sales. The house attributes this in part to high auction guarantees for top works and a calendar shift of the Hong Kong spring sales from the second quarter to the first quarter of 2018.

Overall these results were lower than expected,” said Sotheby’s CEO Tad Smith on a conference call with investors and analysts this morning. He conceded that with respect to the season’s highest-priced lots “there appeared to be a bit less bidding than a year ago.”

Although Sotheby’s total sales were up 22% to $3.5bn over the first half of 2018 (up to 30 June), its earnings were down by – 23%, with a net income of $50.8m. However for the second quarter, net income was $57.3m, a fall of 26% from $76.9m last year. Earnings per share fell to $1.08 from $1.43.

After the results were announced, Sotheby’s share price fell by more than 10% (from $52.89 to $47.80) in the first five minutes after the Dow Jones opened, before rallying to around $50 per share.


Sotheby’s stock prices. Courtesy of Yahoo Finance.

High-value does not equal big profit

The chief reason for the drop in earnings was a sharp decline in the the auction house’s profit margin on commissions, down to to 14.1% in the second quarter and 15% over the first half of 2018. They mostly attribute this to the increasing highly competitive market pressure:

During the second quarter, “the art market was driven by competitive high-value consignments from fiduciary sources such as estates, foundations, and charities. Accordingly, when compared to the prior year periods, our auction commission margin was reduced by a higher level of auction commission shared with consignors in these situations.

In other words, the auction house was forced to sacrifice some of its profit to lure top-flight works. In particular, Adam Chinn, Sotheby’s chief operating officer, mentioned  the May season in New York as  “unusual”for the Rockefeller collection sale at Christie’s which surely “added some additional competitive pressures”.

Further, results were “negatively impacted” by buyer’s premiums, where were “used to offset auction guarantee shortfalls and fees incurred in respect of auction guarantee risk sharing agreements.”

Just two “trophy” paintings were able to significantly damage the auction house’s bottom line in the second quarter sinking its profits.

Ironically, the first must have been very likely  the most valuable painting sold at auction this year: Amedeo Modigliani’s Nu couché (sur le côté gauche, 1917) which in New York in May scraped away at its low estimate of $150m to a single bid,The work sold for $157 million, including premium, after sparse bidding. The auctioneer opened the bidding at $125 million but there did not appear to be immediate demand. However eventually it was hammered down for for a final bid of $139 million and sources said it was won by the so-called “irrevocable bid,” or third-party guarantor:  no doubt the irrevocable bidder received some financial reward for guaranteeing it at such a sizable sum, it is certainly hard to imagine they will have paid a buyer’s premium. As Sotheby’s chief executive Tad Smith observed during the call: “It was the very highest priced lots that were a little softer than the rest.”

Another major guarantee was for a Picasso portrait of Marie-Thérèse Walter, Buste de femme de profil. Femme écrivant (1932), which carried an estimate in the region of $45 million. Offered at the evening sale of Impressionist and modern art in London in June, it failed to reach the estimate and sold on a single bid, presumably to the guarantor, for £27.3 million ($36 million).

However Sotheby’s CEO tended to justify this negative impact of those “very once-of life” masterpiece  as  ” will be unique,”  “it will be hard to make [the loss incurred by] those two paintings back through the rest of the year”.

Reasons to be cheerful

Despite these disappointing results, the auction house still have also some positive points to be proud of, giving Sotheby’s shareholders some cause to be anyway optimistic.

Private sales were up by 63% to $543m during the first half of 2018 and this year, around 30% of buyers were new to the company. Many of those new buyers came in through online sales, which have grown 30% from last year, totalling more than $100m.

Also the auction house’s business in Asia is also strong, in line with Christie’s, Asian clients now account for around a third of global sales and have bought eight of the top 20 lots sold at Sotheby’s so far this year.

Moreover we should also take into account that, on the face of it, Sotheby’s year so far looks mute in comparison with the bullish news published by its competitor Christie’s $4bn profit  in July, the reality is not so clear cut at all: In fact as a private company Christie’s does not have to report profits, but it is also  in direct competition with Sotheby’s for the top consignments. Particularly in light of the £614m sale of the Rockefeller collection, Christie’s income may also not be as healthy as at first seems, as its commission margins are, doubtless, similarly squeezed by guarantee and other deals.

Framing the dip as a temporary setback Smith granted that  “We are confident that our strategic initiatives to differentiate our company are picking up steam,” as he  added that, in general, the market is “clearly healthy.”

Sotheby’s executives also  emphasized the importance to start looking on the  market’s depth at levels other than the eight- and nine-figure segment, and said their focus was matching supply and demand at all price points:there were many more buyers at the $500,000 or $5 million level than for works costing $50 million.
“We work very hard to figure out where there’s depth of market and try to match property with that depth of market,” said Amy Cappellazzo, chairman of Sotheby’s fine art division and an executive vice president.

Overall Smith still be positive and  upbeat about the outlook for Sotheby’s future, saying the auction house is on track “to deliver another year of excellent growth in auction sales and even more impressive growth in private sales.” 

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