Amazon's Entry Into Art Sales Will Hurt Sotheby's Margins
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since 1995, Amazon (NASDAQ: AMZN) has been synonymous with online shopping. The leading e-tailer has taken on rivals in several areas and dominated. As online shopping grew, Amazon also diversified into other areas and continues to have success. The company’s latest entry into fine art should have one publicly traded company worried.
The Art Newspaper has reported that Amazon is once again entering the fine art market. Back in 2009, Amazon teamed up with auction giant Sotheby’s (NYSE: BID) in a joint venture aimed at capturing additional high end sales in the art community. That venture turned into a short event as it was eventually closed. Amazon will now take its one time partner head on with a new offering.
Amazon plans on launching an art retail site that will initially cater to small time artists and art dealers around the United States. Rumors have Amazon charging no monthly fee and instead taking a small percentage (5% to 15%) of final sale prices. This is a smaller rate than Sotheby’s currently receives for many of its auctions. Amazon’s new venture will most likely be similar to its Amazon Wines business launched last fall.
In 2012, Sotheby’s saw its New York and London showrooms represent 77% of total auction sales. Despite growing international sales and a small online presence, Sotheby’s continues to rely on live art sales. In 2012, jewelry and books made up only 10% and 2% of auction sales respectively. The rest of auction sales came from the art industry.
Revenue declined 8% in 2012 and it has already fallen in the 2013 year as well. In fiscal 2012, revenue dropped to $768.5 million. The decline came from a 10% drop in net auction sales. Earnings per share declined to $1.57 as net income fell due to smaller margins. In the most recent first quarter, Sotheby’s saw revenue decline 3%. The company’s auction commission margin declined to 18.1% from 15.0% in the previous year. Net income also declined to a loss of $0.33 per share versus a loss of $0.16 in the prior year. This decline in revenue and earnings came despite a 23% increase in net auction sales.
The shrinking margins is likely a sign of things to come. Sotheby’s did change its auction commission structure in March to stabilize its margins, but another change will likely come once Amazon takes on the market. The new tiered commission gets Sotheby’s a 25% cut on the first $100,000, 20% on the rate after $100,000, and 12% on anything over $2 million. With these rates, Sotheby’s will likely see high end artists and art dealers choose its auction service.
However, small art dealers will likely take a chance on Amazon with its lower commission structure. Amazon will be charging only 5% to 15% on final sale prices, which is cheaper than all items through Sotheby’s auction service. Amazon is looking to start with 1,000 art objects from 125 galleries.
Sotheby’s shares continue to trade at high valuations. With shares approaching a new 52-week high, it is time to take a breather on this auction giant. Analysts are expecting Sotheby’s to earn $1.86 per share in fiscal 2013 and $2.31 in fiscal 2014. These numbers make for price-to-earnings ratios of 21 and 17 respectively. In the first quarter, Sotheby’s missed earnings per share by $0.21. This trend may continue with lower margins and pressure from Amazon.
For Amazon investors, the entry into art sales is a good one. The one-time book e-tailer has taken on large rivals with great success. I profiled recent competitions against Dick’s Sporting Goods and Bed, Bath, & Beyond in an article. I also highlighted Amazon’s newest venture into children’s clothing through its subsidiary Quidsi. Amazon has dominated its online market and hurt sales of large rivals like Wal-Mart, Barnes & Noble, and Gamestop.
Despite some analysts’ opinion that Amazon will never be able to capture share in the art world, Sotheby’s should be scared. The auction giant has seen declining sales, margins, and earnings over the last several years. These items, along with a high price-to-earnings multiple, should send Sotheby’s shares down as investors consider the long-term effect of Amazon on the art market. If you own shares of Sotheby’s, now might be the perfect time to get out. If you’re reluctant to go long on Amazon stock because of its high price- to-earnings multiple, consider the company's plan to take on any sales space it can.
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Chris Katje has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Sotheby's. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!