Auction specialist Sotheby's (NYSE:BID) has gone through some tough times lately. Interest in the art market has started to wane, and with it, bids on works of art have become harder to get. Coming into Friday's fourth-quarter financial report, Sotheby's investors were already prepared for its results because of its preliminary release of how it did to finish 2015, but even though the auction house did a little better than it had expected, it still didn't dispel fears about whether it can withstand what some are already calling an art-market correction. Let's look more closely at the latest results from Sotheby's and whether the company can rebound in 2016.
Sotheby's brings down the gavel on 2015
Sotheby's fourth-quarter results finished the year with modest performance. Revenue fell 4% to $335.8 million, which was a bit better than the 6% drop that investors had expected to see. The auction house's GAAP earnings went negative, but adjusted net income of $80.6 million was up 3% from the year-ago quarter. That translated to adjusted earnings of $1.19 per share, which was $0.05 better than the consensus forecast and better than its guidance range from its preliminary call in January.
Looking more closely at the numbers, Sotheby's GAAP results included a net loss of $11.2 million. The major reason for the disparity was a huge $65.7 million non-cash income tax charge that is related to Sotheby's plans to repatriate some of its foreign earnings. The company also took a $23.6 million after-tax charge for severance packages paid to those who accepted incentives to leave their positions during the latter part of 2015.
Sotheby's revenue drop came solely from its agency commission line item, which fell more than 8%. A gain of 23% in inventory sales helped cushion the blow, as did finance-division revenue increases of 25%. Yet the cost of inventory sales actually wiped out gross profit and had a negative impact on Sotheby's bottom line, and the cost of agency commission revenue also rose despite the modest drop in the top line.
Sotheby's CEO Tad Smith referred to 2015 as a "year of transition" but was "incredibly excited about our prospects." Smith noted the progress that the company has made on strategic objectives including overall growth, technology use, capital allocation, and talent optimization.
Can Sotheby's bounce back in 2016?
However, Sotheby's did give some words of warning. As Smith said, "We will likely have one or more difficult quarters as we ride through the current cycle." Even though the CEO remains confident, there could be further difficulties given market conditions.
Investors are already prepared for what could be a rough patch for Sotheby's. The company eliminated its dividend in January in lieu of an increase in its share buyback program, and it hopes that its increased flexibility in returning capital to shareholders through repurchases will let it be more opportunistic about taking advantage of any further drops in the share price.
One area where Sotheby's can hope for a rebound is from the Internet. The company has done a better job than many of its competitors in attracting followers on various social media sites, and its online bid volume has risen dramatically. Sotheby's said that the number of online bidders has jumped by nearly two-thirds since the previous year.
For Sotheby's to rebound, it needs one simple thing: interest in high-priced art needs to reawaken from its recent slump. That could prove difficult, simply because the wealth effect among the high-net-worth individuals who form the majority of Sotheby's bidders has shifted into reverse. Only if the global economy rebounds -- something that seems increasingly unlikely in the near term -- will Sotheby's truly see the growth boom it so desperately wants.