“I feel good,” Tad Smith repeatedly declared during Sotheby’s earnings call with securities analysts this morning.
Buoyed by New Year’s hopes for better performance in 2017 after a lackluster 2016, Sotheby’s president and CEO enumerated the ways in which his firm had upped its game—the addition of an advisory service for artists and their estates to Art Agency, Partners (which Sotheby’s had acquired more than a year ago); the acquisition of Jamie Martin‘s Orion Analytical, an art-authentication firm specializing in scientific analysis (to try to address fears of fakes); the acquisition of Mei Moses Art Indices, which purports to “measure of the state of the art market” by tracking repeat sales of the same object.
More conventionally, Smith touted the highlights of this and next month’s Impressionist/Modern and Contemporary sales in London, for which the top-estimated lot is this fragrant array:
Presale estimate: over $45 million
But notably unmentioned in the upbeat remarks by the CEO and his CFO, Mike Goss, were their firm’s key metrics for profitability—net income and adjusted net income. You had to peruse the earnings press release to learn that adjusted net income for the full year of 2016 fell 30%, as compared to the previous year—from $143.1 million to $99.6 million.
What’s more, the firm’s $4.9-billion consolidated sales total (from auctions, private sales and inventory sales) marked a 27% decrease from 2015, “primarily attributable to a softening art market in the first half of 2016 as well as $433 million in aggregate auction sales relating to the Taubman Collection,” most of which occurred in the fourth quarter of 2015. Although the Taubman auctions had boosted the 2015 sales total, they had lost money for Sotheby’s (as explained here). After that debacle, the company discontinued its quarterly dividends to stockholders (last issued in December 2015). Christie’s, not publicly traded, does not disclose its net income but reported overall sales of $5.4 billion for 2016.
Investors caught the “feel good” vibe of Smith’s polished presentation and focused on the firm’s improved fourth quarter, when net income was $65.5 million, as compared to a net loss of $11.2 million for the same period in 2015. (Adjusted net income for the fourth quarter of 2016, however, decreased 8% to $73.8 million. The adjustment was connected to an anomalous 2015 income-tax expense associated with the repatriation of foreign earnings.)
Sotheby’s stock closed today at 46.39, up 15.7% from yesterday’s 40.09 close.
The elephant in the salesroom is the sluggish auction market. As explained in Sotheby’s Form 10K annual report for 2016:
Auction sale results in the fourth quarter of 2015 and throughout 2016 indicate that the global art market has entered a period of lower sales [emphasis added]. With the art market declining from its most recent peak, consignors have exercised greater discretion in offering their works of art for sale, which has resulted in lower consignment levels, particularly in the Impressionist, Modern and Contemporary Art collecting categories.
To boost sales, Sotheby’s seems to be hoping for a Trump Effect on taxation and regulation that could jumpstart discretionary spending.
During the analysts’ Q&A period, Smith stated:
In the United States, there is a high degree of enthusiasm for pro-growth policies, including regulation changes and also, particularly, tax reform, which has lots of positives if the corporate rates become more favorable….If more money gets put into our pockets [i.e., the pockets of Sotheby’s well-heeled buyers], that will definitely have a positive impact, going forward.
He did acknowledge uncertainties about how this will play out, cautioning that “if we hope to see any recovery, it will likely be later in the year,” not in the first half.
Touting Sotheby’s relationships with clients around the world (with recent additions of facilities in Geneva, Mexico City and Dubai), Smith admitted to one organizational shortcoming:
We’ve got a little work to do in Antarctica…but we’ll get there!
In the meantime, this and next month’s major auctions in London (also including Christie’s Impressionist/Modern and Contemporary sales) will be anxiously watched as indicators in an erratic market.