Sotheby’s on Friday reported that revenues decreased year-over-year by 12 percent to $129.3 million for the first quarter of 2008, primarily due to lower auction commission margins.
Auction commission margins for the period ended March 31 were 13.6 percent compared to 16.6 percent margins in the first quarter of 2007, the international auction house said. Net auction sales increased a modest 2 percent; however, the company that the figure reflects an increase in higher value works of art, consistent with our long-term strategic objectives, and is partially offset by a significant decrease in single owner sales from the prior first quarter. Typically, high-value objects carry relatively lower commission margins.
The company’s net loss for the first quarter of 2008 was $12.4 million compared to net income of $24.3 million for the prior period, a $36.7 million decline, largely due to the shortfall in auction commission revenues and secondarily to planned higher operating expenses. These results include a $6.4 million, or 12 percent, increase in salaries and related costs, due to higher full time salaries and stock compensation expense over the period, partially offset by lower employee benefits expense, and a $7.4 million, or 20 percent increase in general and administrative costs due to higher professional fees and travel and entertainment expenses.
The company said that because of the seasonal nature of the art auction market and Sotheby’s sales calendar, first and third quarters are expected to be loss quarters. First quarter auction sales have historically represented approximately 9 to 14 percent of annual auction sales, and the first quarter has been a loss period for the company all but twice in the last eighteen years. As a result, typically, first quarter results have not been indicative of expected full year results and we caution investors, as always, to assess the business in six and twelve month periods.
“The market continues to be strong, and the demand for great works of art remains high, as we have seen throughout the spring,” said Bill Ruprecht, president and chief executive officer of Sotheby’s. “We are encouraged by year to date sales thus far, which are up 11 percent as of yesterday and include strong results from our New York Impressionist sales.”
Ruprecht added, “In the first quarter we reduced our auction guarantee risk exposure as we believe it to be an appropriately prudent approach to risk management during this time of greater financial market uncertainty. This necessarily required our agreeing to thinner commission margins in order to win consignments. In addition, competition at the high end accelerated in the quarter which also brought pressure on commission margins. That more conservative approach, which is the right one for these times, was a major factor in these results.”
Ruprecht continued, “In order to enhance our revenue stream and strengthen profit margins, we are today announcing a pricing change of 25 percent on the first $50,000 of hammer; 20 percent on the next $950,000 of hammer; and 12 percent above hammer of $1 million effective as of June 1st. For over 95 percent of the lots we sell, this change will represent an increase of 2 percent or less in the final purchase price.”