Sotheby’s 1H 2012 Results: Rapid Decline in Core Activity Forces Auction House to Refocus

August 9, 2012

Sotheby’s results for the first half of the 2012 show an important trend that the auction house must address. Traditional auction sales can no longer comprehensively sustain the business due to high volatility, which is leading Sotheby’s to concentrate even more strongly on other services such as private treaty sales, financial services and exhibition activity.

While Sotheby’s logically attributed the last quarter’s decline to the seasonality factor and fluctuations in supply and demand, the latest disclosure reflects disturbing conditions within the company that must be addressed. Sales are down by 16%, falling to USD 409 mln. Affected income has dropped even more with a decline of 45%, leaving the company’s net profit at USD 75 mln. Commission sales are also down due to growing competition for high value consignments. According to Oliver Chen, a Citigroup research analyst, commission margins remain a significant pressure point, showing a decline to 15.3% from 16.4% during the same period last year and compared to 18.1% in the first quarter of this year.

Sotheby’s offers two reasons in its explanation of the situation: 1) the slowdown in Chinese buying activity and 2) a smaller number of single-owner sales in China, North America and Europe. The year 2011 turned out to be one of the best performing periods in Sotheby’s history in terms of single-owner sales, leaving 2012 in a highly unfavorable position when it comes to making comparisons. Even though Sotheby’s remains optimistic and expresses confidence in the high-end market, it also feels the need to protect itself from ongoing volatility associated with the auction business. Thus, the leading auction house has announced a plan to focus on segments that have shown strong growth over the past several years: lending services and private sales.

In the first six months of 2012, Sotheby’s financial segment showed the highest revenue among all the company’s segments, increasing by 34% to reach USD 8.2 mln. According to the company’s president & CEO, Bill Ruprecht, investors are turning to the liquid side of art, having exhausted the potential of other assets. Sotheby’s continues to benefit from this trend, remaining one of the few players in the art-lending business. Private sales also remained robust, growing by 19% in comparison with the same period last year.

Despite the slowdown in Asian activity, Sotheby’s still claims that the Chinese segment is one of the key areas for the next six months. In fall 2012, the company plans to present unique pieces by Giuseppe Castiglione for Hong Kong sales as well as host an exhibition of works by graduates of China’s premier arts academy at the School of Design of CAFA. Makers of luxury brands have recently published disclosures confirming growth in Asia, and Sotheby’s hopes to maintain similarly strong performance. In some cases, such as that of Prada Group, which just announced exceptional revenue growth in Asia that contributed to approximately 60% of its total sales, in general, luxury brands such as LVMH and Richemont are concerned with an overall slowdown in performance. Although Mr. Ruprecht prefers not to define Sotheby’s as a luxury brand, he nevertheless admits that the auction house still needs to engage with the same group of wealthy clientele.

Please click here to download the full issue of Skate’s Market Notes with data.

Collectors Universe versus artnet AG: The Case of How Quality of Management Impacts Shareholder Value

August 3, 2012

This week two of Skate’s Art Stocks Index companies reported their interim financials. Collectors Universe reported robust sales growth of 22% and 10% net income growth on a like-for-like basis, declared its usual quarterly dividend and confirmed that the arts & collectibles consumer segment remains very strong this year. At the very same time artnet AG published its first six months financials and once again negatively surprised the market by reporting a dramatic loss of EUR 1.1 million for the period and depleting its cash position to an amount equivalent to just 6 to 9 months of life given the current burn rate at the firm. As Skate’s reported on Monday, artnet AG is in a bitter standoff with its minority shareholders and is unlikely to be able to access any outside financing unless the shareholders meeting on August 8 votes against the poison pills in the firm’s articles of association sponsored by Hans Neuendorf and replaces a board of directors that has so far presided over accelerating value destruction at artnet AG.

The tale of Collectors Universe versus artnet AG is a case study in management efficiency. Both firms serve the arts & collectibles segment, both are the first time movers in their field and both are publicly traded, thus providing a treasure trove of information to benchmark their respective performance. While Collectors Universe serves a much smaller numismatics market, it manages to have an enterprise value that is larger by a factor of 2.5. Its revenue per employee is three times higher than that of artnet and it has more cash than artnet AG receives in revenue for the entire year.

Clearly artnet’s problem is the management. The firm’s losses are mounting with the six month loss of EUR 1.1 million representing a 1,215% negative change over the same period last year. In May, the management of artnet in May responded to the cash burn with two significant business decisions—the closure of the company’s Paris office, which had employed a dozen specialists, and the cessation of Artnet Magazine. Both of these discontinued operations saw a loss of EUR 1.374 million. Unfortunately for artnet’s shareholders, these actions not only served to terminate artnet AG’s key marketing channel, but they also failed to address the even more important cause of the company’s operating loss—the loss from the auction segment. The auction loss more than doubled on a like-for-like basis in the first six months of the year to EUR 565,000 (based on artnet EBT business segment reporting), and as artnet had significantly weakened its marketing muscle it may not be able to sufficiently push growth in the auction business far enough to reverse the trend.

It would be one thing if the latest poor results were an isolated case, but unfortunately artnet’s first half results show that the company is once again demonstrating a strategy of avoiding segment weakness through the introduction of new products, and, as was the case this time, dropping underperforming business units completely. The recent introduction of artnet Analytics was meant to complement already existing segments, although its current condition suggests that despite its usefulness, the product still requires significant investment and careful adjustment. Neither of these is possible given the general difficulties artnet is experiencing.

Rather than solving artnet’s problems, the company’s chaotic management style continues to result in low revenues and the mere hope that the auction business will sooner or later make up for the efforts. Strategically this growth might be the right direction, as the auction segment’s topline did indeed grow for the period, but this was not enough to bring the business into operating profit (in fact, the segment’s loss increased faster than its revenues, by 139%(!) for the period versus the 27% auction sales increase). artnet’s management should have focused on auctions with priority being given to the right marketing and customer relations systems. Coupled with the investment needed to widen the customer base and ensure better customer experience, a turnaround could already be the reality. However, the marketing and customer relationship management function at artnet has been completely ignored so far, and, as a result, the firm is bleeding and no longer has the cash to compete with a quickly expanding army of challengers in the e-commerce space.

What makes artnet continue to exist is its Price Database product where the firm remains the clear global market leader. The segment produced 5% growth in revenue to more than EUR 2.5 million and a 22% increase in EBT compared to the same period last year. Provided artnet’s AGM on August 8 makes a decision to replace the Supervisory Board and the new Supervisory Board quickly replaces the management, there is still a strong foundation at artnet to allow for a quick turnaround and significant shareholder value creation going forward. Market conditions in general seem to be very favorable for the consumer art & collectibles business model as demonstrated by Collectors Universe.

Focusing on three segments—coins, trading cards, as well as autographs and other high-end collectibles—Collectors Universe enjoys stable and growing revenue from authentication, grading, publication, web advertising and subscriptions. Gradually working on its reputation as the leading expert in the field, Collectors Universe is experiencing growth in all of its key financial indicators (see Exhibit 4 for a comparison of Collectors Universe and artnet). Its carefully applied strategy allows Collectors Universe a degree of stability that has recently enabled it to expand into Asia, make a small add-on acquisition and at the same time continue to pay a quarterly dividend. All of that is achieved by Collectors focusing largely on the numismatics market that by different counts is 5 to 8 times smaller than the art market served by artnet AG.

The stark differences between the two firms make for a very compelling case of the management factor in the process of shareholder value creation today and set a very clear stage for the artnet shareholder vote on August 8.

To download the full August issue of Skate’s Art Stocks Review, please click here.


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