Most businesses have their ups and downs, and even in the elite world of high-priced art and collectibles, buying and selling has its high and low seasons. Sotheby's (BID) knows the best times to lure would-be buyers to its auction houses, and they typically don't come in the winter months in the Northern Hemisphere. That sets up the company for a weak quarter to start out each year, but it also gives itself some time to plan out what it hopes will be its most successful year ever.
Coming into Thursday's first-quarter financial report, Sotheby's investors fully anticipated the usual seasonal lull that the auction house almost always experiences this time of year. Yet Sotheby's actually had some nice successes that support the idea that 2018 could be especially good for the auctioneer. With key sales going on this month, Sotheby's has high hopes to put the first quarter behind it and get busy with the business of making money.
A quiet time for Sotheby's
Sotheby's first-quarter numbers were solid at a time when many had expected far less. Revenue of $195.8 million was down 2% from year-ago levels, but that was quite a bit better than the nearly 25% drop that most of those following the stock were looking to see. The company actually posted positive adjusted net income of $5 million, avoiding the usual red ink and faring much better than the consensus forecast among investors for a $0.22 per share loss.
Calendar effects were one reason why Sotheby's first quarter was stronger than it sometimes is. The timing of spring sales in Hong Kong can vary from year to year, and they happened in the first quarter in 2018 after having been in the second quarter in 2017. Those events added $130 million in net auction sales to the results for the current-year quarter, helping to boost the figure by 46%. Even taking out the Hong Kong impact, though, adjusted consolidated sales were higher by nearly a fifth.
In addition, Sotheby's saw a lot more success in privately handled sales. The company reported $247 million in such sales during the quarter, up 70% from year-ago levels. Those numbers reflect the efforts that Sotheby's has made to ramp up in capabilities in that area. They also helped to offset the impact of a big drop in inventory sales year over year, as the auction house was successful last year in running down most of its inventory on its balance sheet.
Can Sotheby's keep climbing?
CEO Tad Smith summed it up very simply. "We remain on track to have an even better year in 2018 than we did in 2017," the CEO said, and Smith also noted that 2018 was only the sixth year out of 30 since Sotheby's IPO that the company produced an adjusted profit during the seasonally slow first quarter of the year.
A big reason for the success has been that strategic initiatives at Sotheby's have continued to gain traction. Almost half of Sotheby's clients used the auction house's online bidding platform, up from just a third last year, and online participation topped telephone-based participation for the first time. To support those trends, Sotheby's has kept working to enhance its digital presence, making the process easier and friendlier for would-be bidders. Videos that Sotheby's has made in support of auction efforts have even won awards for internet content. On the sales side, the number of requests for online estimates from potential sellers doubled from the fourth quarter of 2017, and the auction house has already seen some multi-million dollar business come from that channel. Those efforts will continue and should produce even better results as the year progresses.
May will be a critical month for Sotheby's. The Impressionist & Modern Art Evening Sale on May 14 should bring in at least $325 million, and the Contemporary Art Evening and Day sales should reap another $350 million or more. From there, the action moves to Europe, where a sale of watches and jewels in Geneva includes some impressive diamonds. Smaller sales with lower price-points will help Sotheby's in its efforts to build a pipeline of customers of more modest means, getting them familiar with the market and putting them in position to make larger future purchases as their circumstances improve over time.
Sotheby's investors seemed to have their eyes firmly focused on the spring quarter's ramp-up, and the stock didn't react in pre-market trading Friday following the Thursday night announcement. With so much ahead of it, Sotheby's should be able to take advantage of favorable conditions in the art and collectibles market and produce the growth it has sought for a long time.