Struggling Sotheby’s (BID) took a risky path to growth by guaranteeing sales before auctions. But that wasn’t enough to overcome Christie’s dominance in the market – or to prevent investors, who have lobbied for a change in company strategy for more than a year, from driving out the chief executive officer.
The fine art market is the most profitable it’s ever been. Sales of contemporary art alone surpassed $2 billion for the first time last year, according to arts-data organization Artprice. But Sotheby’s stock is down almost 16 percent since January, and Christie’s, the company’s chief competitor, is leading the sale of high-profile contemporary works. Sotheby’s sold 78 pieces at its contemporary sale on November 11 for a total of $344 million – less than half the $853 million Christie’s garnered at its 75-lot auction the next night.
“Christie’s has been more successful in attracting high-end consignments, through some combination of client relations, guarantees and commission rebates,” Don Thompson, author of the book The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art, said in an interview.
To compete with Christie’s, Sotheby’s has upped its own use of guarantees. Sotheby’s will pledge to the owner of a sought-after piece that the house will sell it for a minimum price. That means when a piece guaranteed for $50 million sells for $30 million, Sotheby’s takes a $20 million hit on its balance sheet. In his last call with investors as Sotheby’s CEO on November 10, William Ruprecht argued that guarantees were a worthwhile investment.
“In our October sales and last week’s Impressionist sales, auction guarantees have been meaningfully profitable to the company,” he said.
But the strategy cost the company in at least two prominent sales recently, and it could be even more dangerous if demand starts to tank, said Victor Wiener, an art appraiser and former consultant to Sotheby’s.
“It’s the law of the jungle; there are no rules,” Wiener said in an interview. “All you need is a market downturn.”
Sotheby’s largest shareholder, Daniel Loeb of hedge fund Third Point, isn’t having it, either. He penned a scathing letter to Ruprecht in October 2013 angling for changes to make the company more competitive, including moving auctions online, cutting wasteful executive perks and acquiring top-shelf contemporary and modern works by whatever means necessary. Loeb also called on Ruprecht to resign, lambasting the CEO’s management style, lavish pay package and lack of a coherent vision for the company.
“While you were an able caretaker of Sotheby’s during times of crisis, you have not shown the innovation or inspiration the Company sorely needs to play offense today,” Loeb wrote.
Since Loeb and two of his colleagues won seats on the Sotheby’s board in May, many of those changes have come to pass. Ruprecht, the company’s CEO since 2000, stepped down November 20. Wall Street seemed to agree that the company was due for a change. The day after the announcement, Sotheby’s stock jumped almost 7 percent.
Sotheby’s said in August that it had come to an agreement with one of its lenders, GE Capital, to increase the maximum amount of auction guarantees this season from $300 million to $600 million. But shelling out more money and taking on more risk to get sought-after auction lots still didn’t help Sotheby’s pull ahead of Christie’s in the contemporary market.
Much of Christie’s continued supremacy can be attributed to its focus on customer service and its wide network of sellers and collectors, Asher Edelman, an art financier and owner of the art consultancy Edelman Arts, said in an interview.
“The Sotheby’s contemporary group is a little bit more isolated and more directed toward a few collectors and owners and people who trade and deal in the market than Christie’s,” he said. “Christie’s has a much broader reach.”
Several high-profile guaranteed works were flops at Sotheby’s contemporary sale. Sotheby’s estimated that a stainless steel Jeff Koons sculpture called “Moon (Yellow)” from 2000 would go for $12 million to $18 million. It didn’t sell. Neither did Andy Warhol’s 1965 silkscreen “Little Electric Chair,” whose presale estimate was $7.5 to $9.5 million. The company will have to pay the original owners of those works a significant amount of money as a mea culpa. Nearly half the pieces at Christie’s sale were guaranteed, but they fared better.
Sotheby’s reported third-quarter revenue of $94.2 million, narrowly beating analyst estimates but falling short of last year’s revenue by almost 13 percent. The company posted a loss of $27.7 million in net income, compared to a $30.1 million loss in the third quarter of 2013. It also lost 40 cents per share, an improvement over last year’s 44 cents a share loss but 5 cents lower than analysts expected. The third quarter is traditionally an unprofitable one for the company, since its marquee sales take place in the fourth quarter during the fall auction season.
Despite BID’s shaky financials, investors aren’t spooked yet. Sotheby’s P/E ratio for the last year is 20.0, just above the overall S&P 500 P/E ratio of 19.4. The company’s 2014 revenue is estimated to hit $958 million, compared to last year’s annual revenue of $924 million. Analysts expect Sotheby’s to report fourth-quarter EPS of $1.31, nearly unchanged from last year’s EPS of $1.30. And the consensus among analysts is to buy Sotheby’s stock, a recommendation that has held steady since August.