What Sotheby's Earnings Could Mean for Luxury Retail and eBay

Sotheby's (NYSE: BID  ) will release its quarterly report on Monday, and investors expect the auctioneer to report its typical seasonal loss after profiting during the busier spring season. Yet Sotheby's results have implications not just for its shareholders but for investors in mass-market auction website eBay (NASDAQ: EBAY  ) as well as luxury retailers Michael Kors (NYSE: KORS  ) and Coach (NYSE: COH  ) .

With auctions of everything from artworks worth tens of millions of dollars to rare jewels and one-of-a-kind manuscripts, Sotheby's squarely aims at the high-end bidder with its auction business. As recent results from Michael Kors and Coach show, upscale retail has tended to hold up better than their more mainstream competitors, and Sotheby's hopes to see the same dispersion in its results to beat out eBay and its auctions aimed more at the general public. Can Sotheby's keep benefiting from a rise in interest in collectibles? Let's take an early look at what's been happening with Sotheby's over the past quarter and what we're likely to see in its report.

Stats on Sotheby's

Analyst EPS Estimate

($0.47)

Year-Ago EPS

($0.48)

Revenue Estimate

$70.26 million

Change From Year-Ago Revenue

2.6%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Will Sotheby's earnings move in the right direction?
Analysts have had mixed views on Sotheby's earnings recently, boosting estimates for the rest of 2013 by a penny per share but cutting 2014 projections by about 2%. The stock has performed well, though, rising 16% since early August.

Sotheby's came into the quarter on a mixed note. Revenue was flat and a rise of 7% in its quarterly earnings came largely from an income-tax-related item, without which profits would have been mostly unchanged from year-ago levels as well. CEO William Ruprecht cited a strong art market as helping drive the company's growth efforts. That's consistent with the hit-or-miss nature of luxury retail more broadly, as Michael Kors has continued to see explosive growth in sales while Coach has had to consolidate after a long track-record of past growth.

But Sotheby's has gotten less flattering attention from activist investor Dan Loeb, whose Third Point hedge fund started buying shares of the auctioneer earlier this year. Last month, Loeb called for Ruprecht to resign, citing outsize corporate perks and spending at the company's expense. At the same time, Sotheby's also hasn't taken full advantage of growth opportunities in emerging markets, losing market share to privately held Christie's as well.

Sotheby's responded to Loeb's remarks by implementing a takeover-defense plan that effectively prevents Third Point from acquiring more than 10% of the company. The big question, though, is whether Ruprecht will eventually give Third Point other concessions that could take Sotheby's more in the direction Loeb wants to go.

One area where Sotheby's probably won't expand is in online auctions. The company gave up on a partnership with eBay 10 years ago, suffering losses of about $100 million as it found that the target audience didn't work out as well as Sotheby's had hoped. That arguably held eBay back from one potential area of growth, but it might also have helped it move more toward its fixed-price marketplace strategy, which has helped it compete better with other online retailers.

In the Sotheby's earnings report, watch to see how the company positions itself in relation to Third Point. With Loeb turning up the heat, Sotheby's needs to demonstrate its ability to grow in order to keep shareholders happy with its leadership. Meanwhile, if auction results continue to be strong, then it should bode well for Kors and Coach's prospects as well.

Is Sotheby's too old-school?
Sotheby's is set in its ways, but whether you're talking about priceless paintings or dollar-store trinkets, how companies sell their products has dramatically changed. To learn about two retailers that are doing a good job of adapting to changing conditions in retail, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Click here to add Sotheby's to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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