Sotheby’s Disappointing Earnings Highlight Risk of Art Market’s Overreliance on Trophy Lots

Sotheby’s reported lower-than-expected second-quarter earnings on Monday. The firm’s results were dragged down by the underperformance of two high-priced paintings, which dampened both its auction commissions and the shift of some Hong Kong sales into the first quarter. Shares traded as low as $47.38 during the day, before finishing the day at $49.93, down 5.63% from the previous close at $52.91.

That the performance of two trophy works could significantly swing the company’s results demonstrates risk for actors within the art market that rely heavily on the whims of a handful of ultra-high net-worth individuals who can afford works for eight figures and up, and who demand large guarantees for their sought-after consignments. (In the past, Sotheby’s president and chief executive officer Tad Smith has said the firm does not aim to do the “biggest” sales, but rather to be the “best choice” based on service and financial performance.)

Executives didn’t mention the two paintings by name on Monday morning, but one was likely Amedeo Modigliani’s Nu couché (sur le côté gauche) (1917), which sold after just one bid for a total of $157.2 million. While one of the paintings was profitable for the auction house, another was not, executives said in a discussion of the quarter’s results.

“In the second quarter of 2018, the art market was driven by competitive high-value consignments from fiduciary sources such as estates, foundations and charities,” the company said in a release. “Accordingly, when compared to the prior year periods, our Auction Commission Margin was reduced by a higher level of auction commissions shared with consignors in these situations.”

Overall sales at Sotheby’s (including auction sales, private sales, and sales from the company’s inventory) rose 15% to $2.4 billion in the second quarter, and to $3.5 billion for the first half—figures which Smith, the CEO, noted were in the realm of the firm’s best performances to date. Auction sales accounted for $2.85 billion of the first-half sales.

Earnings for the first half of the year fell 23% to $50.8 million from the prior period. For the second quarter, earnings were $57.3 million, or $1.08 per share, below analysts’ expected $1.52 per share.

Sotheby’s executives emphasized 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. Roughly 80% of over 23,000 lots offered in Sotheby’s auctions sold in the first half of the year.

“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, noting that there were many more buyers at the $500,000 or $5 million level than for works costing $50 million.

Smith highlighted several bright spots, including strong, continued growth in Asia; investments in editorial content paying off; and the pipeline of buyers and consignors coming into Sotheby’s through online-only sales. Online sales are up 30% for the half, amounting to just over $100 million, the company reported, and now account for 25% of all lots sold. Half of the bidders in online-only sales are new to Sotheby’s, and one-fifth of them went on to participate in a live auction, said Mike Goss, Sotheby’s chief financial officer.

“We suspect it’s just so much less intimidating to register online and for an online auction, and once you get comfortable with the whole format, you quickly graduate to some of the more lucrative businesses,” Goss said.

Private sales were also a strong point, rising 63% to $543 million in the first six months of the year compared to the same period in 2017. Sotheby’s also continued to aggressively sell down its inventory, reducing it by more than half to $32.6 million in the second quarter, down from $74.5 million at the end of the 2017 (and $215 million at the end of 2015). Inventory usually refers to stockpiles of art that went unsold at auction and for which the house is still attempting or required to find a buyer, though it can also include inventory the house is voluntarily taking on as part of a private transaction, for example.

Asked about potential headwinds, Smith said that while the firm obviously prefers a stable business environment, he was not too preoccupied with the trade disputes that President Trump has pursued with China and other economies. He noted that roughly 0.1% of sales of Chinese works of art in the last few years were in New York, and therefore would be subject to recently proposed tariffs that included art made in China. Smith also said the coming fall looked promising, with a “huge amount of supply” in the pipeline and eager buyers in Asia who were “flush with cash.”

This suggests continued strength in the market, since auction houses typically cite sourcing high-quality works as their main limitation.

Although rival Christie’s does not have to report its financials, for it is privately held by luxury magnate François-Henri Pinault’s conglomerate Groupe Artémis, it reported select details of its first-half performance at the end of July. Christie’s sold $3.6 billion of art at auction in the first half of the year, up 28% from the same period. Its sell-through rate was higher than Sotheby’s, at 84%, and an improvement from 81% in the first half of 2017.  

Christie’s had a record-breaking first half with its historic sale of the collection of David and Peggy Rockefeller, which had a nearly unheard-of sell-through rate of 100% over its hundreds of objects and works of art, bringing in a total of $835 million, which went to various charities.

Christie’s also drew in new buyers through online sales, with 40% of online bidders new to the auction house. The firm also had better luck at the very high end of the market, with 55 lots selling for more than $10 million—though it is not clear how profitable those high-end sales are, since Christie’s does not disclose the costs of pursuing such high-profile lots. Those can come in the form of guarantees or contracts that give the consignor a large share of profits.

The next big round of auctions comes in early October, when London’s major sales take place around the week of the Frieze Art Fair. Sotheby’s will also auction works from the estate of the late actor Robin Williams in New York that week.