Among elite auction houses, Sotheby's (NYSE:BID) has a worldwide reputation for being one of the most glamorous. With nine different sales rooms spanning from New York and Paris and London to Hong Kong, Sotheby's prides itself on facilitating sales between collectors in a wide array of categories, ranging from its landmark art sales to wine, diamonds, and watches. Coming into Monday morning's fourth-quarter financial report, Sotheby's investors were bracing for slight declines in both revenue and net income, but the stock had risen in recent months as optimism about the company's overall direction appeared to build. In its results, Sotheby's gave investors half of what they wanted, with strong revenue growth that failed to make it down to the bottom line. Let's look more closely at how Sotheby's did this quarter and what it means for 2015.
Sotheby's drops the hammer on 2014
Sotheby's surprised investors with the extent of its revenue increases both in the fourth quarter and for the full 2014 year. For the quarter, revenue climbed 3.5% to $351.2 million, easily topping the $338 million that most of those following the stock were looking to see. That brought sales growth to nearly 10% for the full year. But on the earnings front, Sotheby's fell short, with net income plunging more than 18% and leading to a drop in earnings to $1.06 per share. Even after adjusting for a one-time charge related to its leadership transition, Sotheby's still earned $0.16 per share less than investors had projected.
From a top-line perspective, a closer look at Sotheby's results reveals some interesting trends. During the quarter, the amount of revenue Sotheby's generated from its traditional role as agent for sellers actually dropped considerably, with a 5.5% decline. But Sotheby's also acts as a principal dealer for some transactions, and revenue from that segment climbed sevenfold during the quarter. Strength in Sotheby's Finance segment also contributed to gains, with revenue from the division almost doubling. Sotheby's gets almost 90% of its business from its agency role, so its other segments have small though meaningful impacts on its overall sales.
That added revenue didn't have much impact on earnings, though. The costs of generating higher principal and finance revenues almost matched the sales figures themselves, while higher agency direct costs helped contribute to a drop in operating income of 11% for the quarter.
Nevertheless, CEO Bill Ruprecht praised the gains in sales. "We had a remarkable 2014," Ruprecht said, "with double digit sales growth in many of Sotheby's key categories. ... These successes highlight the incredible depth and breadth of Sotheby's expertise."
Will Sotheby's win in 2015?
Already, Sotheby's has started off 2015 well. As Ruprecht noted, "We have seen a 12% growth in global participation, a 42% increase in online buying across categories, and we have doubled our audience for live-stream auctions viewed on sothebys.com. We're reaching more collectors, in more corners of the world, through more channels." Successful sales in New York and London over the first two months of 2015 show continued momentum for Sotheby's auction business, with new records helped by sales of highly prestigious Monet works.
Of equal importance are Sotheby's efforts to boost earnings. Cost-reduction initiatives helped boost margins to some extent, and Sotheby's did a good job of keeping overhead and salary costs down, claiming to have saved 50% more than it had originally believed it would.
The true test for Sotheby's this year, though, will come as it implements a higher pricing structure for its auctions. The company announced that as of Feb. 1, buyer's premiums would rise to 25% on the first $200,000 of each sale, 20% on any amount between $200,000 and $3 million, and 12% for remaining amounts above $3 million. Sotheby's hopes that implementing these increases could help reverse the downward trend in auction commission margins last year, which dropped more than a percentage point. Sotheby's blamed that drop on competition to win high-value consignments, so it'll be interesting to see if sellers will see the buyer's-premium increases as positive or negative.
With the U.S. economy soaring, Sotheby's has a good opportunity to get earnings moving back in the right direction in 2015. Nevertheless, the company will have to work hard to retain its strong reputation and keep shareholders happy this year and beyond.