The art and collectibles world is a lot different from the stock market. Rather than having a daily trading session where prices can change dramatically minute by minute, collectors have to rely on periodic auction sales from well-known auction houses like Sotheby's (NYSE:BID) in order to determine price trends. With the recent volatility in the stock market potentially putting an end to the positive wealth effect that many wealthy art market participants have enjoyed for years now, some investors worry that Sotheby's might see more difficult conditions ahead.
Coming into Thursday's fourth-quarter financial report, Sotheby's investors expected to see relatively flat performance for both revenue and earnings. Sotheby's managed to outdo those modest expectations, and at least for now, the market for collectibles doesn't look like it's prone to any immediate slowdown. Let's take a closer look at Sotheby's to see how its latest results reflect on its business.
Bringing the hammer down on a solid year
Sotheby's fourth-quarter numbers outpaced what many were looking to see from the auction house. Sales were up just 2% to $315.6 million, but that was still better than the $311 million most investors had expected. Adjusted net income rose 7% to $79.1 million, helping to push adjusted earnings higher to $1.47 per share, well above the consensus forecast among those following the stock for $1.34 per share.
One key reason sales growth slowed to such a great extent during the quarter was that Sotheby's efforts to sell off existing inventory have largely come to fruition. That led to a $20 million drop in inventory sales for the quarter compared to the fourth quarter of 2016, but proceeds from agency commissions and fees jumped 10% from the year-ago quarter. Near-double-digit percentage increases in revenue related to financing transactions also helped bolster the company's top line.
What's particularly impressive about the way revenue held up was that calendar-related changes created a seasonal shift that put downward pressure on Sotheby's fourth-quarter performance. Typically, annual autumn auctions in Hong Kong happen early in the quarter, but 2017's events began in September, pulling some of the resulting sales into the third quarter. Yet events like the December Century Design sale in New York in late December helped Sotheby's make up the difference, with proceeds that more than doubled all of its competitors combined.
Operational statistics for the full year were impressive. A larger number of auctions and items for sale, better sell-through rates, higher average lot values, and a greater number of clients and bidders set the stage for a strong marketplace. Private sales hit their best levels in four years, adding to the revenue that the company's higher-profile auctions bring in.
What's next for Sotheby's?
CEO Tad Smith made his feelings very clear and very simple. "We had a very good year in 2017," Smith said, "and are planning to have an even better one in 2018." Already in the beginning of the year, promising results are building enthusiasm. The CEO pointed to the sale of a 1937 artwork by Pablo Picasso for $70 million in London the day before Sotheby's earnings announcement as indicative of the auction house's potential in the coming year.
Overall, Sotheby's has a lot of ideas on how to grow its business. Efforts to focus on middle-market items of $25,000 to $1 million have helped draw in new bidders and create an entry level from which collectors can evolve and deepen their relationship with the art world and the auction house. Boosting its geographical presence around the world, especially in China, has paid dividends, and a new focus on jewelry, watches, and wine has broadened Sotheby's reputation beyond the fine-art world. Mobile apps, online auctions, and a social media presence have made Sotheby's more technologically savvy, showing its efforts to keep up with the frenetic pace of advances to make its business stronger.
The recent stock market decline has hit Sotheby's stock hard, with shares trading more than 15% off their highs from late January. If the auction house can manage to make good on its strategic initiatives to drive more sales throughout 2018, then Sotheby's should be in a prime position to make the greatest use of its reputation in the collectibles world to boost its fundamental business prospects in the long run.