Consumer Edge Research

Sotheby's Posts First Quarter Loss Amid Tumult

Robin Pogrebin, New York Times
May 09, 2016

On Monday, as the spring auction season began in New York, Sotheby’s announced a $25.9 million loss for the first quarter of 2016, compared to income of $5.2 million the year before. The publicly held auction house said that the loss was unremarkable, having posted a first quarter loss for 22 out of the last 25 years.

Still, Sotheby’s could have used some good news at a time when the art world is watching to see whether the tumultuous changes wrought by the company’s president and chief executive, Tad Smith, are paying off.

Mr. Smith has invited this kind of scrutiny by spending up to $85 million for a boutique art advisory business in January even as he reduced staff by 80 people through buyouts, incurring an expense of $40 million.

The reorganization included bringing in Amy Cappellazzo, a former Christie’s executive and co-founder of the acquired Art Agency, Partners, to lead a new fine art division, above several of Sotheby’s longtime specialists. This helped contribute to the departures of more than a dozen executives, resulting in a significant brain drain for the auction house, several art experts said.

Mr. Smith also oversaw the largest guarantee in auction history paid for a single collection, to the family of A. Alfred Taubman last fall. Sotheby’s guarantee to the family was $509 million and sales thus far have brought $473 million, including post auction private sales. But the company says its shortfall on the sale is only $3 million because of the potential value of the unsold Taubman lots it still owns.

“The days of the two major auction houses making big losing bets on guarantees just to gain market share may be behind us, but many other challenges face both houses in a choppy market,” said Thomas C. Danziger, a New York lawyer who negotiates auction sales for major dealers, advisers and collectors. “The next two weeks may well be a watershed moment for Sotheby’s.”

On a conference call with analysts on Monday, Mr. Smith said that Sotheby’s nevertheless “experienced a number of high points so far in the second quarter,” including a 17 percent sales increase in its April Hong Kong sales, adding that he was hopeful about the coming week of auctions.

Mr. Smith also said on the call that an undisclosed outside Sotheby’s investor might make further purchases of the company’s stock — through the open market, private transactions, block trades or derivative transactions — to bring that person’s holdings to at least 10 percent of the outstanding shares. The auction house’s stock jumped on this news, rising six percent to close at $28.91 a share.

While it is unusual for Sotheby’s to float the prospect of a stock purchase without providing more specifics, some analysts said they were encouraged by the forthcoming nature of the announcement.

“There is a naturally high level of opacity to Sotheby’s talking about their business,” said said David Schick, the lead luxury analyst at Consumer Edge Research. “So a wide-ranging talk about the art cycle, details on expenses, changes in strategy and an outside buyer all worked to break down that lack of understanding.

“More clarity improved investor confidence,” Mr. Schick continued, “and, we think, helped contribute to a rally for the shares.”

The loss, Sotheby’s said, was partly because of a 35 percent decrease for the company in its auction sales over all, the primary factor in a 33 percent decrease in commissions. The auction house’s total revenues were down $49.1 million compared to last year.

Some analysts agreed that a general market trend was largely responsible. “This is a big reflection of where the art cycle is and what that does to the financials,” Mr. Schick said.

The impact of Mr. Smith’s changes, Mr. Schick said, have yet to be seen. “When you bring in a new manager, it actually gets worse before it gets better,” he said. “The company is repositioning under new leadership.”

Since the second and fourth quarters include the biannual marquee New York Impressionist, Modern and contemporary sales, they have in recent years represented about 80 percent of total annual auction revenue. Sotheby’s said that investors should focus on results for those periods, “which better reflect the business cycle of the art auction market.”

David Kusin, who runs the consulting firm Kusin & Company, said it was “way too soon” to draw any conclusions about Sotheby’s performance. “The froth has gone out of the uplift,” he said. “Prices should be down compared with the past few years.”

An anticipated softening in the market has made inventory more limited at all auction houses, and guarantees more circumspect. “We might be in that situation for quite a while,” Mr. Smith told analysts on Monday, adding that he was “going to be very careful and conservative on guarantees.” However, Sotheby’s evening contemporary sale this Wednesday features 10 works whose sellers have been guaranteed minimum prices, amounting to a total of at least $70 million.

Among those who have left or are leaving Sotheby’s are David Norman, vice chairman of Sotheby’s Americas and chairman of worldwide Impressionist and Modern art, who has been at the company for 31 years; Melanie Clore, Sotheby’s co-chairwoman of Impressionist and Modern art and chairwoman of its business in Europe (35 years); Cheyenne Westphal, Sotheby’s head of contemporary art worldwide (25 years); and Alex Rotter, the co-head of contemporary art worldwide.

“We’ll know in six months if these moves were an upgrade,” said George Sutton, an analyst at Craig-Hallum. “You’d have to think that would affect things in the short term, so we weren’t surprised to see the spring auctions very thin.”

Many in the art world have also questioned the long-term viability of bringing in Art Agency, Partners — which, in addition to Ms. Cappellazzo, the former chairwoman of Christie’s postwar and contemporary-art development, includes Allan Schwartzman, a longtime art adviser, and Adam Chinn, a former investment banker.

Don’t these three create a conflict of interest, the art world has asked, given that it would seem difficult for an in-house Sotheby’s advisory firm to counsel clients impartially? And can Sotheby’s longtime specialists feel comfortable reporting to Ms. Cappellazzo, who may not have as much expertise in their practice areas? On Monday, Mr. Smith suggested that his acquisition of the advisory group was partly an effort to improve Sotheby’s private sales. “We have a terrific team,” he said, “but on some of the other pieces of that value chain, we’ve got a little work to do.”

http://www.nytimes.com/2016/05/10/arts/design/sothebys-posts-first-quarter-loss-amid-tumult.html