The stock market isn't the only way that people get rich. The market for high-end art and collectibles draws a loyal crowd of the well-to-do, and the ups and downs of art prices are often even more volatile than stocks. By looking at the performance of companies like venerable auction house Sotheby's (BID), you can get some valuable insight into the thought process that art collectors have and glean clues about their willingness to pay top dollar for some of the most famous works of art in history.
Sotheby's recently released its second-quarter financial results, and the company's performance generally reflected a healthy market for art and collectibles. Yet a couple of items that came up in the quarterly report point to some unusual activities that reveal the way some rich investors are behaving right now. That in turn could help typical investors understand better how the changing fortunes of the rich affect the stock market over time.
Image source: Sotheby's.
Painting the picture for Sotheby's
To set the proper context, it's useful to look at Sotheby's second-quarter numbers. Revenue was up 2% from the year-earlier quarter to $345.6 million, while adjusted net income dropped by 25% to $58.1 million. That produced adjusted earnings of just $1.09 per share, which fell far short of the $1.56 consensus forecast among those people following the stock.
In the report, Sotheby's explained some of the countervailing trends it experienced during the period. First, it noted that some of the company's annual spring sales occurred during the first quarter this year because of the timing of the calendar, which resulted in a slight bump early in the year at the expense of second-quarter results. Sotheby's estimated that $130 million in net auction sales and $20 million in operating income got shifted because of the calendar effect.
Some of Sotheby's fundamental performance reveals further changes in business conditions. On one hand, consolidated sales figures were up 15% during the quarter, and private sales soared by 57%. Yet auction commission margin dropped substantially, weighing on Sotheby's bottom line.
The company explained the disparity through the sources of its auction items. This year, Sotheby's has gotten more items on consignment from high-end sellers like wealthy family estates, as well as charities and foundations. Getting this business helps to cement Sotheby's reputation as a leader in the art auction market, but the company negotiates lower fees to obtain the right to auction the items, and that weighs on profits.
Sotheby's pointed specifically to two paintings on which it provided guarantees of auction results. The company didn't provide many details, but reports identified one painting that sold through a single bid that had been prearranged and therefore provided Sotheby's with little net revenue, while the other fell short of Sotheby's sale-price estimate by roughly $10 million.
More rich investors are looking to make statements
By most accounts, the high-end art market has seen a modest recovery from the worst conditions of the past several years. As CEO Tad Smith noted, "The market is clearly healthy, [and] the second quarter saw an enormous amount of property come to market." The CEO also pointed out that with the exception of those high-profile pieces, most of the artwork that Sotheby's auctioned got good reception from bidders.
The biggest success story for Sotheby's has been the way it's expanded its addressable audience. Online sales have soared, with new bidders gravitating to the e-commerce model. Social media exposure has grown, and the company is getting more of its revenue from sales of middle-market items. What that says is that a growing audience of high net-worth individuals is getting interested in art and collectibles, and even if they're not necessary as wealthy as the ultra-high net-worth families that have traditionally participated in the art market, they're helping to drive demand. Purchasing high-end art is a tangible symbol of success that one can't duplicate with a brokerage statement, and Sotheby's has sought to tailor its marketing campaign to provide the ego boosts that art buyers are looking to get from winning a high-profile auction.
The future of investing among the rich
For Sotheby's, miscues in pricing could hurt full-year results, but the auction house doesn't seem concerned about its long-term future. As it finds newly rich customers in areas across the globe -- especially within some of its highest-profile Asian markets like Hong Kong -- Sotheby's will have the opportunity to present its growing audience with the items they truly want.
What ordinary investors can take from this is that as nice as it is to have a lot of money, rich investors want something more, something they can see and treasure. High-end art and collectibles fill that need, and as long as booming stock markets provide a strong wealth effect, the rich are likely to keep showing up on the auction house floor.
