Sotheby’s Q4 earnings call with Wall Street analysts was the usual affair of signaling and interpolated information. We’ll have a more detailed analysis of what we think management is saying for AMMpro and AMMdaily subscribers. In the meantime, here are some highlights from CEO Tad Smith and CFO Michael Goss’s comments.
There have a been a number of estates on the market this year. Smith dropped a few hints that Sotheby’s might have won a couple of these for May and June:
We acknowledge that, although the base case expectation for our company in 2019 is favorable, the range of outcomes has a bit more uncertainty than when we entered 2018. On the other hand, there is a great deal of property in the marketplace that we have already won, and still much being competed for right now, especially for New York in May. And we expect the comparison of 2019 performance to 2018 to be much more favorable in the second quarter than in the first quarter
Smith also continued to send signals that the big bet for the future growth of the company lies in a technology-driven, low-touch approach to selling luxury objects. In other words, Sotheby’s big bet is that it can use its extraordinary brand power to develop a higher margin business of online sales. Last year, Sotheby’s did $220m in online sales or 3.5% of total sales. Here’s Smith again:
Moreover, we do believe that our efforts in recent years to retool the company to make it easier to do business with us will be beneficial when we next face market headwinds. 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. There will also be a new base of business that comes to us simply because our online consignment technology makes it easy to do so. Finally, our technology platforms will enable us to be more cost efficient and flexible in our service offering.
Going deeper into the question of margins, CFO Goss addressed the fluctuating auction commission margin:
I’d like to share a few thoughts with respect to our Auction Commission Margin. Although our Auction Commission Margin (“ACM”) rebounded to 17.1% in the fourth quarter, for the full year, we reported an ACM of 16.1% versus 17.2% last year. As many of you may recall, our margin for the year was suppressed by two specific high value paintings in the second quarter. If you exclude the effect of these two paintings and look at what happened with the remainder of our business, our ACM would have been 16.7%. When comparing this level to the 17.2% level of 2017, those last 50 basis points are explained by 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.
Looking ahead to 2019, we continue to see a market dominated by estate sales that can carry lower margins, but we also anticipate fewer of the very high value paintings that impacted 2018. On balance, the guidance we made at the end of Q2 that “16% is the new 17%” is still relevant, but we also see a pathway to slight improvement in 2019. I should note that we recently revised our Buyer’s Premium schedule to help toward that end.
Goss also addressed the share repurchase program:
During the course of the year, we returned approximately $295 million through share repurchases, retiring another 6.5 million shares, or 12% of the shares outstanding at the end of 2017. Today, we currently have 46.4 million shares outstanding.