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Sotheby's Holdings (BID) |
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WIKI ANALYSIS
Sotheby's Holding's, Inc. (NYSE:BID) is the world's largest publicly traded auction house. Sotheby's main function is to serve as the intermediary between buyers and sellers of art. Auction commissions accounted for 83% of the company's revenue in both 2006 and 2007.[1]
Revenue jumped 38% from 2006 to 2007 due to an increase in global art sales driven by expanding markets in Asia and the Middle East.[2] By the third quarter of 2008, revenue was down 10% from the same period in 2007.[3] While overseas business already contributed to roughly 60% of the company's total revenue in 2007, Sotheby's has recently opened new offices in China, Russia, and Dubai, where oil-driven economic growth is coupled with rich collections of art.[4] Sotheby's sales of Chinese art alone have tripled from $124.1 million in 2001 to $561.8 million in 2007.[5] It is also in the process of shifting its concentration to the highest end of the art market. While it has always been associated with luxury goods, the company has recently been trying to reduce its lower price point auction categories in London, New York, Amerstdam, and Milan in a mission to reduce quantity and improve quality. In London, for example, the company closed its Olympia sales center, which traditionally facilitates sales at significantly lower price points than Sotheby's main salesrooms, in order to refocus staff and energy on higher-paying clientele.[6] The company has also made significant investments in informational technology, such as a web-based portal that provides clients with real-time access to their account data and balances.[7]
Sotheby's main competitor in the global art market is the privately-held French auction house, Christie's International.[8]
Company Overview
Sotheby's Holdings is the world's largest publicly-traded auction house, functioning primarily as the intermediary between buyers and sellers of fine art, jewelry, and collectibles. It also is an art dealer in its own right and provides art-related financial services to people looking to liquefy assets from valuable artwork and jewelry.
Business and Financial Metrics
Sotheby's net income has more than tripled in the past three years, while its total revenue increased by 79% over the same period.[10] Also responsible for long term growth is the company's greater initiative to build its business abroad. Sotheby's earned roughly 60% of its revenue in 2007 from outside the United States, and while much of that continues to come from the company's strong base in Great Britain, where it has 19 offices (in comparison, it has only 13 offices in the Unites States, its second-largest presence), an increasing portion of revenue is being generated in places where the company previously had no presence, such as China and Russia.[11][12] New locations in Beijing and Moscow have contributed to the growth of the company in those regions.[13] China made up approximately 6% of Sotheby's total sales in 2007, aided by a well-established location in Hong Kong, where in 1973 Sotheby's opened the city's first auction house.[14][15] The Russian Art Market at Sotheby’s has increased dramatically, from $5.5 million of Aggregate Auction Sales in 2000 to $190.9 million in 2007.[16]
Business Segments
Auction (91% of Revenue, 63% of Net Income)
The Auction segment of Sotheby's accounted for 91% of the company's total revenue in both 2006 and 2007.[18] The majority of the company's activities fall in this segment, and include identifying and appraising works of art through an international staff of specialists, creating purchaser interest and matching sellers and buyers through the auction process itself. The Auction segment also serves as a broker in the private purchases and sales of art, jewelry, and other collectibles.[19]
Finance (2% of Revenue, 8% of Net Income)
The Finance segment provides collectors and dealers with loans that generally use works of art as collateral. The majority of its revenue in this segment is generated from loan interest. It also issues loans based on collateral works of art. Finance accounted for roughly 2% of Sotheby's total revenue in 2007.[20] Though many traditional banks offer conventional loans at a lower cost to borrowers, few accept works of art as collateral as most do not have the resources to appraise and sell them.[21] The Sotheby's loans are typically not interest rate sensitive and are made at loan to value ratios of less than 50%.[22] Consequently, loan volumes tend to increase when interest rates increase, such as in 2006, when the loan balance at Sotheby's rose by 54%, driven by increasing interest rates elsewhere.[23]
Dealer (7% of Revenue, 29% of Net Income)
The Dealer segment acts as a broker in the purchase and sale of art, jewelry, and collectibles. The Dealer segment is different from the Auction segment because it involves the investment and resale of art directly by Sotheby's, as opposed to acting as the intermediary between individual buyers and sellers. This segment purchases art from individual dealers and resells it for a profit.[24]
Key Trends and Forces
Luxury good sales bolster Sotheby's profit margins despite slowing economic tides
Because Sotheby's cultivates clients in the highest income brackets, the company appeared immune to downward trends in the market in 2007 and the first half of 2008.[25] It turned in record sales in 2007 and aggregate auction sales reached a record breaking $3.0 billion in the first six months of 2008.[26]
However, the stock value has faltered in the third quarter of 2008, and Sotheby's stock price faced the steepest decline of all consumer companies reliant on discretionary spending in the Standard and Poor's Midcap 400 Index. [27] In October 2008 Sotheby's stock price hit a 52 week low of $11.69, reflecting the third-quarter earnings report that showed the company had earned $460.6 million, in comparison to $509.7 million by the same time in 2007.[28][29] . Stock prices were also affected by news that auction sales were suffering as well, such as a disappointing auction in October 2008 in Hong Kong where two-thirds of 20th century Chinese art went unsold.[30]
Additional overseas locations sow seeds of growth
Sotheby's has tried to increase its presence in the Chinese art market by opening up a branch in Beijing and cultivating Chinese buyers and sellers. In 1995 Sotheby's began staging traveling exhibitions around mainland China and in 2004 they began holding sales of Contemporary Chinese Art as its own auction category.[31]As a result, sales of Asian art at Sotheby's has tripled from $124.1 million to $561.8 million between 2001 and 2007 and sales in China accounted for 6% of Sotheby's total revenue in 2007.[32]
Internet auction sites cut into Sotheby's potential profits, while a deal with eBay has faciliated a partnership
Internet sites like eBay Inc. and Artprice.com have introduced a new form of competition to the art business.[33] While most of these sites cater to price ranges lower than those of Sotheby's targeted clientele, the immediate ease and wide range of the Internet poses a threat to Sotheby's more traditional approach of hands-on appraisals and auctioneering.[34] As a means to combat this potential loss of revenue, Sotheby's set up a partnership with eBay Inc. in 2002 that allows customers to use eBay technology to participate in live auctions happening in London and New York.[35] In addition, Sotheby's has also stepped up initiatives to improve its own information technology by providing real-time access to account details.[36]
Competition
Sotheby's is the world's largest publicly-traded auction house. Its direct competition is Christie's International, a privately-held French auction house. Otherwise, the most prominent competition in the marketplace includes:
- EBay- EBay is an Internet auction site that connects indivdual buyers and sellers. It sold $52 billion worth of collectibles and other various items in 2006. It generated approximately $4 billion of revenue from its auction segement in that year, though it is only in competetion with Sotheby's on the highest end of the retail scale.
- Tiffany- Tiffany & Co. is a high-end retailer that sells diamonds and lower-priced silver jewelry. It reported net sales of $2.9 billion in 2007.
- Yahoo!- Yahoo! is an Internet service company that provides a range of products. It earns most of its revenue from advertising and only a fraction from its Yahoo! Auction site.
- Artprice.com (PRC: EPA) is a publicly traded French-based company that functions both as an auction Internet site and a provider of informational services within its online database of fine art. Its total revenue in 2007 was roughly $7.5 million.
References
- ↑ BID 2007 Annual Report pg. 1
- ↑ pg=33 BID 2007 Annual Report
- ↑ Template:Cite 10q
- ↑ BID 2007 Annual Report pg. 9
- ↑ BID 2007 Annual Report pg. 7
- ↑ BID 2007 Annual Report pg. 6
- ↑ BID 2007 Annual Report pg. 6
- ↑ BID 2007 Annual Report pg. 3
- ↑ BID 2007 Annual Report pg. 15
- ↑ BID 2007 Annual Report pg. 20
- ↑ http://www.sothebys.com/app/live/office/OfficeLanding.jsp
- ↑ BID 2007 Annual Report pg. 9
- ↑ BID 2007 Annual Report pg. 7
- ↑ BID 2007 Annual Report pg. 70
- ↑ http://www.sothebys.com/app/live/office/OfficeAuction.jsp?office_id=3
- ↑ BID 2007 Annual Report pg. 7
- ↑ BID 2007 Annual Report pg. 70
- ↑ [ BID 2007 Annual Report] pg. 1
- ↑ [ BID 2007 Annual Report] pg. 68
- ↑ [ BID 2007 Annual Report] pg. 71
- ↑ [ BID 2007 Annual Report] pg. 4
- ↑ [ BID 2007 Annual Report] pg. 4
- ↑ [ BID 2007 Annual Report] pg. 36
- ↑ [ BID 2007 Annual Report] pg. 5
- ↑ http://www.sothebys.com/app/live/office/OfficeAuction.jsp?office_id=3
- ↑ http://files.shareholder.com/downloads/BID/436103064x0x219956/7092dc48-efe0-465b-81b8-acd46f33c812/2Q08EARN.pdf| pg=2}}
- ↑ http://www.marketintelligencecenter.com/articles/671914
- ↑ http://www.marketintelligencecenter.com/articles/683181
- ↑ {{cite 10k| ticker=BID| year=2007| form=Quarter Report| http://www.sec.gov/Archives/edgar/data/823094/000093041308006546/c55546_10-q.htm
- ↑ http://www.artinfo.com/news/story/28866/sothebys-shares-drop-after-disappointing-asian-sales/
- ↑ http://www.sothebys.com/app/live/office/OfficeAuction.jsp?office_id=3
- ↑ [ BID 2007 Annual Report] pg. 7
- ↑ http://news.bbc.co.uk/1/hi/business/1793281.stm
- ↑ http://investor.ebay.com/releasedetail.cfm?ReleaseID=70972
- ↑ http://investor.ebay.com/releasedetail.cfm?ReleaseID=70972
- ↑ [ BID 2007 Annual Report] pg. 36
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