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While the art market remains weak, that didn't stop Sotheby's (NYSE:BID) from bidding up its second-quarter earnings, which were released before the gavel on Monday. Despite slumping sales, adjusted earnings were up sharply, especially on a per-share basis, after a combination of cost reductions and share buybacks padded the bottom line. 

Examining the numbers

Global economic headwinds and foreign currency fluctuations have hurt art sales in recent quarters, and that trend did not reverse during the second quarter:


Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Agency commissions and fees

$273.8 million

$310.4 million


Inventory sales

$5.3 million

$7.0 million



$14.8 million

$12.0 million


License Fees

$2.9 million

$2.5 million



$2.0 million

$0.2 million



$298.7 million

$332.0 million


YOY = year over year. Data source: Sotheby's.

While revenue slumped by double digits, the decline was less than the 12.3% anticipated heading into the quarter. Driving this decline was a 16% slump in net auction sales, which reflected the decline in the global art market.

That said, the company offset the softer art market by improving its auction commission margin, which rose from 15.5% to 16.4% year over year. Among the factors driving the margin improvement were a 51% decrease in incentive compensation expenses, a reduction in inventory losses, and a lower income tax rate. These factors combined to drive adjusted net income up 21% to $88.6 million. Even better, adjusted earnings per share surged 45% to $1.51 as a result of the 21% reduction in the company's share count over the past year.

Another important factor contributing to the current quarter was the timing of the summer Contemporary Art sales in London. This year, those sales were in the second quarter after occurring in the third quarter of 2015, which skewed results a bit.

What management had to say

About the quarter, CEO Tad Smith said that "while we would certainly prefer to see a stronger art market, we are pleased with the progress we have been making on our strategic initiatives and the beneficial changes to our team and organization." In particular, the company's share repurchase program is paying big dividends. Those buybacks have helped the company mute the impact from the slumping art market this year, which is evident in comparing reported earnings versus the per share result. For example, through the first six months of the year net income is down 13.3% to $63.1 million. However, on a per-share basis earnings are down a mere 1% to $1.03 per share.

The company's ability to meaningfully reduce its share count has the potential to drive much stronger earnings growth when the art market improves. That is a near-certainty, according to Smith, who noted:

When the art market improves -- and it certainly will -- our company is poised to do very well for shareholders. Until then, we continue burnishing Sotheby's for even more success and being very careful on capital allocation.

While there is no telling when the art market will turn around, the company is doing what it can to adjust to the current market by cutting costs so that it can bid up earnings when collectors return to the market.

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