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Sotheby's Moves Forward as Inventory Sales Skyrocket

By Dan Caplinger – May 10, 2017 at 10:24AM

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The auction house took a traditionally weak season and used it to clean up its balance sheet.

Like many other retail businesses, the market for high-end art and collectibles goes through seasonal ups and downs. For Sotheby's (BID), the winter months are usually a time to consolidate and prepare for larger opportunities later in the year.

Coming into Wednesday's first-quarter financial report, investors were prepared for the losses that usually come during the slow season, but they wanted to see at least modest revenue growth to build on last quarter's positive results. Sotheby's went a lot further, booking major sales of its internal inventory that reflected efforts to clean up its balance sheet. Let's look more closely at Sotheby's and what its results suggest about its future prospects.

Sotheby's auction.

Image source: Sotheby's.

Sotheby's sees sales soar

First-quarter numbers were surprising for those who've followed the stock over time. Revenue shot up by 76% to $187.5 million, crushing the $114 million estimate that investors had expected to see. Sotheby's wasn't able to avoid losing money, but the final net loss figure of $11.3 million was less than half the red ink it posted a year ago, and per-share losses of $0.21 were a lot less than the $0.38 consensus forecast among those watching the company closely.

Taking a closer look at the numbers, the most obvious thing that showed up was the more than tenfold increase in inventory sales. Sotheby's has been working to sell off the inventory of items it gets when it has to make good on auction guarantees it makes to its clients, and so the more than $71 million in inventory sales marks considerable progress toward converting that inventory to cash and other working capital assets.

Yet elsewhere, some solid results also popped up. Agency commissions and fees, which normally make up the bulk of its revenue, climbed 23%. A decline in finance-related revenue weighed on top-line growth, but the company did well in controlling many of its costs on the expense side of the income statement. Falling salaries and relatively modest gains in overhead expenses and marketing costs helped produce a smaller operating loss.

CEO Tad Smith expressed his satisfaction with how the quarter went. "In this seasonally quiet first quarter," Smith explained, "our results improved significantly, reflecting greater confidence in the market."

Can Sotheby's keep making progress?

Sotheby's has high hopes for its immediate future. The company believes that prospects for the art and collectibles industry are improving and should make spring sales favorable. In Smith's words, "We also see signs of strengthening in the consignments for our important upcoming sales of impressionist, modern, and contemporary art in New York that take place next week." If that auction goes well, then it could set the stage for further growth throughout the remainder of 2017.

One thing to look for in the second quarter is continued evidence of the auctioneer's liquidation of inventory assets. So far this quarter, it has sold a 60-carat fancy vivid pink diamond that it had in inventory, auctioning it for $71.2 million and realizing a modest gain. The move will bring total inventory below the $100 million mark, showing the progress that Smith and his team have made in a key strategic goal.

Finally, Sotheby's defended its rather rich stock valuation with an illustration of how art has become more accessible to its rich clientele. The company said that when you look at the median member of the Forbes 400 wealthiest individuals in the world, the percentage of net worth that one would have to spend to buy the most expensive piece of art has fallen from 10% to just over 5%. Sotheby's characterized that as an increase of purchasing power by 75%, and while some would say it's more a sign of greater wealth concentration and inequality, it hopes that that observation will spur more people to put their money into collectibles.

Investors were generally pleased with the report, and the stock climbed almost 3% in the pre-market session immediately following the announcement. If Sotheby's can carry its positive momentum into the high spring season, then its fundamental strength could improve dramatically going forward.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sotheby's. The Motley Fool has a disclosure policy.

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