Sotheby’s Earnings Beat Forecasts, with Auctions and Private Sales Topping $5.3 Billion in 2017

The share price of Sotheby’s rose Thursday as the auction house reported better-than-expected earnings in the fourth quarter and strong full-year profits thanks to higher auction sales, robust private dealmaking, and a growing presence in Asia.

The house’s shares (NYSE:BID) opened at $48.02, and at one point rose over 10% to hit a high of $53.01 on Thursday morning after reporting adjusted earnings per share of $1.47, compared with an estimate of $1.34 from analysts who cover the stock. CEO Tad Smith was in a buoyant mood as he discussed earnings with analysts, opening the call by pointing to a $70 million sale of Pablo Picasso’s Femme au béret et à la robe quadrillée (Marie-Thérèse Walter) (1937) on Wednesday night in London, which he said bodes well for “an even better” 2018. Shares closed Thursday at $50.78, and the stock is down from the beginning of the year, when it traded just above $52.

The global auction house rode an improving art market to a strong 2017, with aggregate auction sales (a figure that includes the buyers’ premiums) up 8% over the prior year to $4.6 billion, and private sales up 28% to $744.6 million, a four-year high. Asian clients accounted for $1.6 billion of aggregate auction sales.

That top-line auction sales figure, however, lagged behind its rival Christie’s, which experienced a 38% year-over-year sales growth to £4.6 billion ($5.9 billion), and that of the global auction market overall, which grew 25% in 2017, according to a report from London-based analytics firm ArtTactic. Christie’s is privately held and does not have to report profit or loss, so it is unclear how much of that take was retained by the company, which may have had to make large investments for expenses such as guaranteeing lots or marketing.

Sotheby’s noted improvement on several key metrics. The all-important Contemporary Art and Impressionist and Modern Art auction sales categories improved by 29% and 33%, respectively, year-over-year.

The improving art market also meant higher-priced works coming to market, something Smith expects to continue. During the earnings call’s Q&A period, he noted that the business of Sotheby’s is driven by supply—in addition to “the 3 Ds” of death, debt, and divorce, its fate is in the hands of discretionary consignors who must decide if and when they want to bring a work to market. Despite volatility in U.S. financial markets in recent months, Smith expressed confidence in the “pipeline” of works coming to market for spring.

The average value of a lot rose 5% in 2017, Sotheby’s said. Even more importantly, lots were hammered down for 10% above their low estimate, on average, before taking into account buyer’s premiums. That’s up eight percentage points from 2016. The higher lot prices also meant that the house’s auction commission margin of 17.2%, which remained stable from 2016, translated into higher overall profit.

The fourth quarter was marked by several solid evening sales in New York and London, but Sotheby’s ceded the art market limelight during New York’s November sales to rival Christie’s, which sold Leonardo da Vinci’s Salvator Mundi (c. 1500) for a record-breaking $450 million. Earlier in the year, Sotheby’s had reigned when it sold Jean-Michel Basquiat’s Untitled (1982) painting for $110.4 million in May, a record price that crowned Basquiat America’s most expensive artist.

Some market-watchers wonder how Sotheby’s can compete on blockbuster lots when it may have to take a more disciplined, sober approach, given its accountability to shareholders as a publicly traded company, a question Smith alluded to in his scripted remarks.

“Crucially, Sotheby’s strategy is not to be the ‘biggest’ market share player—although many times it turns out that we do have the largest sales—nor to be the ‘cheap’ consignment deal,” he said. “Instead, we aim to be the ‘best choice’ for those clients who care about service excellence and overall financial performance, and then to deliver that performance over and over again.”

His strategy also includes ongoing investment in data tools and technology, expanding in the middle market, and investing in the house’s private sales arm, which now manages 13 artist clients (including artists’ estates such as those of Vito Acconci and Robert Graham), and works with collectors all over the world, including those building private museums, Smith noted. He also flagged the importance of China to its strategy, noting that Sotheby’s “led all international auction houses in 2017 with its Hong Kong sales.”

Sotheby’s has already made two acquisitions in the first quarter of 2018: Thread Genius, an image-recognition technology company, and Viyet, an online marketplace of high-end antiques and collectibles. The first acquisition speaks to the growing role of the house’s internal data capabilities, which initially expanded with its 2016 purchase of the Mei Moses Art Indices, which measure repeat auction sales across eight categories.

The second highlights the importance of online sales for its strategy, and the house’s ambitions to sell to high-net worth individuals across categories. Those include home goods, wine, and lower-priced items—what Sotheby’s defines as the middle-market, lots valued between $100,000–$1 million. That sector, which Smith described as a “very profitable category,” accounts for 9% of the firm’s lots but 27% of sales, and grew in 2017 by 9% in value terms. It’s also a good candidate for online-only sales, of which Sotheby’s held 36 last year, over twice as many as in 2016.

Both Sotheby’s and Christie’s view online sales as important gateways for new bidders. The number of online bidders rose by 107% as of mid-February this year versus the same period last year, Smith said, and Sotheby’s hopes to increase that by rolling out mobile bidding this year. They also helped boost sales as underbidders: the total value of underbidding exceeded half a billion dollars in 2017, and is already trending higher, the company said Thursday.