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Given the reaction in the press to Sotheby’s rising stock in the months leading up to the announcement of Sotheby’s first half results and second quarter earnings—a blanket over-confidence that the stock price was a reliable indicator of the firm’s underlying performance—it is worth taking a look at how reporters interpreted the most recent earnings.
For the most part, reporters continue to rely upon the sell-side analysts. Here’s the Financial Times:
Earnings missed Wall Street’s expectations of $1.48 a share, with David Schick at ConsumerEdge Research noting that the miss could be attributed to “lower auction commission margins” than analysts had modeled for. However, Sotheby’s said on its earnings call that auction commission margins should see “meaningful improvement” in the fourth quarter. Meanwhile, revenue in the quarter rose 5 per cent from a year ago to $314.9m, driven by higher inventory sales but were a touch shy of analysts’ estimates of $315.7m.
The problem with following the sell-side is the dearth of comparable companies for the analysts to cover and model against BID. Christie’s, the auction house’s main peer, is private. So are Phillips and Heritage, two other firms that are more like Sotheby’s than not.
Add in the fact that sell-side research is not the robust source of information and analysis that it once was, we get projections and appraisals of Sotheby’s performance and strategy that are overly reliant upon the auction house itself which has an incentive to cast itself as being transformed by the application of greater technology to the auction business.
Journalists too seem to follow this line rather blindly. The New York Times put the debatable conclusion in its lead—”Innovation comes at a price”—when the vast majority of Sotheby’s increased costs came from paying bonuses it had withheld the year before. Bloomberg, at least, put the increased pay before the tech angle:
Expenses rose almost 20 percent. The company attributed this to the projected payment of target bonuses for employees and investment in areas such as technology, digital marketing and specialist expertise. Also with more higher-priced works in the mix, Sotheby’s auction commission margin was largely flat for the quarter at 16.3 percent.
The Art Newspaper got a little deeper into the details, unearthing the more newsworthy comments from Sotheby’s CEO when he suggested there would be more lay-offs on York Ave. before the end of the year. This time, however, the head count would be trimmed from back-office functions being improved by better systems that the company is putting in place:
Sotheby’s made a clear commitment to the increased use of technology and digital marketing in its second quarter results call this morning, but such innovations come at a cost. Tad Smith, the company’s chief executive, said that Sotheby’s has “been adding staff who are skilled specialists, experts in needed technologies, strong salespeople, and excellent digital marketers”, perhaps reflected in a $12m rise in salaries from the same period last year. But, he added the company will “pause and re-examine our cost structure in areas that are not growing or where automation, data, or standardisation of processes will yield significant savings.” He added: “We believe that there are numerous opportunities for our company to improve efficiency and productivity, and we will address this opportunity by the end of this year.”
Sotheby’s falls as less than picture perfect earnings disappoint (Financial Times)