Sotheby's loss on the sale of just one painting had a significant impact on its disappointing second quarter results, showing the high risks that top auction houses currently take to drive revenues.
Net income was $67.5 million in the second quarter, down from $77.6 million during the same period last year, even though analysts had been expecting a profit. The loss that the auction house took on the sale of one, unidentified painting in the second quarter was responsible for most of the $10 million increase in Sotheby's cost of inventory sales, compared to the same period last year.
Total revenues for the first quarter and first half of 2015 were $332 million and $487 million respectively, down 1% for both periods compared to the same periods last year.
A provision for a cancelled sale from a previous year and unexpected costs relating to a client's claim over the authenticity of a work sold by Sotheby's prior to 2015, also hit the second quarter results. Sotheby's said its indirect general and administrative costs jumped to $10 million from $3 million in the second quarter last year and that the authenticity dispute accounted for almost all of that increase.
The company said that its second quarter results were also dented by foreign exchange fluctuations, which led to a $12.4 million decrease in revenue in the second quarter, and the decision to hold its summer evening sale of contemporary art in London in the third quarter, rather than the second quarter. The company also booked over $9 million in leadership transition and severance costs in the second quarter, showing the hefty price of parting with former CEO William Ruprecht and installing new CEO Tad Smith.
On the upside, private sale commissions increased 32% to $22 million in the second quarter and Sotheby's Financial Services grew its loan portfolio by 30% in the second quarter, compared to the same period last year, which contributed $24.7 million of revenue.
However, in Sotheby's core business, auction commission margins only increased by 0.3%, even though Sotheby's increased the premiums it charges buyers in February. The auction house put the tiny improvement down to a higher level of shared auction commissions (third parties who partially or fully guarantee lots for sale at Sotheby's get a share in the upside) and an unfavorable change in the sales mix.
During the second quarter conference call, new CEO Tad Smith also announced that Sotheby's would buy back another $125 million of shares over the next 12 to 18 months, bringing its total share purchase program to $250 million.
Sotheby's expects its third quarter results will be mostly flat compared to the same period last year, even with the inclusion of the London summer evening contemporary sale, warning that the company's weaker sales in higher margin categories, such as Old Masters, could have a negative impact.
Smith said the company would focus on expanding its business in the contemporary art segment, in other collectibles areas such as jewelry and cars, and in mid market, private sales and financial services for the rest of the year.
