Art Market

Sotheby’s Sales Rose 16% in 2018, with Private Sales Topping $1 Billion

Anna Louie Sussman
Feb 28, 2019 9:29PM

Oliver Barker fields bids for Jenny Saville's 1992 painting Propped, 2018. Photo by Tristan Fewings via Getty Images.

Sotheby’s share price rose on Thursday as the auction house reported better-than-expected earnings per share for 2018, highlighting strong performance in Asia, a growing online presence, and payoffs from a multi-year investment plan to transform the business.

The house’s shares (NYSE:BID) opened at $42.90, and at one point, they rose nearly 10% to hit a day-high of $44.79 on Thursday morning after reporting adjusted earnings per share of $1.72, compared with an estimate of $1.48 from analysts, according to figures compiled by Thomson Reuters. Those figures exclude special items. Sotheby’s share prices are down around 11% from a year ago.

The auction house reported consolidated sales of $6.4 billion in 2018, a 16% rise from the prior year. That figure includes auction sales, private sales—which grew 37% in 2018 to just over $1 billion—and sales from Sotheby’s in-house inventory. Total auction sales were up 15%, to $5.3 billion; roughly $1 billion of that came from auctions in Hong Kong, Sotheby’s highest total there in its 45 years operating in Asia.

Non-art categories, such as watches and wine, showed robust year-over-year growth of nearly 57% and nearly 41%, respectively. In art categories, the highest growth rates were in Old Master paintings (33%), contemporary art (14%), and Chinese art (14%).

Rival Christie’s had an even bigger year, logging 6% year-over-year growth to reach $7 billion in 2018, with the help of the sale of the Rockefeller estate. However, Christie’s is privately held and does not have to report its profits or losses, so it is unclear how much of that take was retained by the company. Christie’s may have had to invest in significant expenses such as guaranteeing lots or marketing; for example, it lavishly marketed the Rockefeller estate.

Sotheby’s, by contrast, is publicly held, and reports details of its earnings quarterly to shareholders. Rather than pursuing market share at all costs, the company has been attentive to keeping its margins profitable, said Evan Beard, National Art Services executive at U.S. Trust, Bank of America Private Wealth Management. It has been paying particular attention to growing the middle segment of the market, where margins are higher.

“The middle market, particularly in the second half of last year, was stronger than upper reaches of the market, and that naturally has higher margins than the upper end of the market, so that benefited Sotheby’s bottom line,” Beard said. “The real margin is in the day sales. No one makes money on these $50 million–plus paintings. The air is so thin up there, it’s not a great place to build a business

Sotheby’s chief financial officer Mike Goss noted during an earnings call with shareholders on Thursday morning that auction commission margins had actually fallen from the previous year, to 16.1% from 17.2%, after the flops of two high-value paintings in the spring. Amedeo Modigliani’s painting Nu couché (sur le côté gauche) (1917) hammered down for $139 million ($157 million with fees) after just one bid in May, well below its $150 million estimate; the following month, Pablo Picasso’s Buste de femme de profil (Femme écrivant) (1932) sold for £27.3 million ($36.1 million), including fees, significantly lower than its estimate of $45 million. Without those two works, margins would have been 16.7%. Goss attributed the rest of the fall to “the greater mix of higher-value lots in 2018 and the higher percentage of competitive, price-driven estate and charitable sales that drove market growth in 2018.”

Going forward, Goss said, an updated buyer’s premium schedule and fewer high-value paintings should help margins improve in 2019, though he cautioned that “the guidance we made at the end of [the second quarter] that ‘16% is the new 17%’ is still relevant.”

Chief executive officer Tad Smith was bullish that Sotheby’s investments in digital offerings and technology improvements, many of which started two years ago and will be completed this year, will begin paying off soon. During Thursday’s earnings call, Smith acknowledged that the investments had dampened earnings margins, but said that capital spending would return to normal levels beginning in 2020. He also expressed optimism about the current revamp of the house’s New York City headquarters, and said he was excited to unveil similar refurbishments at its London and Paris flagships later this year.

Meanwhile, these investments provide ways for Sotheby’s to grow its online business especially, making it easier for people to consign and bid. Smith cited Sotheby’s Home, Thread Genius, and the house’s online consignment platform as the base of a strong middle-market segment. He added that the online consignment platform had brought in $16 million in property in January and February of this year, a 162% increase from the $6 million in November and December 2018.

That also sets Sotheby’s up for a down cycle, Smith said, noting that although the company anticipates a “favorable” year ahead, “the range of outcomes has a bit more uncertainty than when we entered 2018.”

“The middle market, for example, is not as sensitive to the cycle as the high end, and our efforts to grow there are bearing fruit,” he said.

“The street is excited about the potential prospect of more scalability through technology,” Beard said, referring to Wall Street investors who drove the share price up Thursday morning. “That hasn’t been executed yet, but the prospect of that has the street excited.”

Smith pointed to more cost reductions and efficiencies in the future.

“In 2019, we will continue to identify processes that would benefit from automation, simplification, greater alignment with customer needs, and, crucially, cost reduction or elimination,” he said.

In the near-term, both Smith and Goss said a number of charitable organizations and estates had promising lots coming up for grabs, with Goss citing “a very strong pipeline of potential consignments.” Smith said there were a number of lots Sotheby’s had already won, “and still much being competed for right now, especially for New York in May.”

He also noted that Sotheby’s will be celebrating its 275th birthday on March 11th. Sotheby’s is the oldest company listed on the New York Stock Exchange, where it will ring the opening bell on its birthday.

Anna Louie Sussman