Sotheby's (BID) Prelim. Q4, FY15 adj.-EPS Outpaces Expectations; Eliminates Dividend

Sotheby's (NYSE: BID) disclosed the following on Friday:

Overview

For the fourth quarter of 2015, Sotheby's estimates that it will report a net loss of ($10) million to ($19) million (or ($0.15) to ($0.29) per diluted share), as compared to net income of $74 million (or $1.06 per diluted share) in the prior year. Adjusted Net Income* for the fourth quarter of 2015 is estimated to be $75 million to $79 million and Adjusted Diluted Earnings Per Share* is estimated to be $1.11 to $1.17, as compared to Adjusted Net Income* and Adjusted Diluted Earnings Per Share* of $78 million and $1.12, respectively, in the same period of 2014.

*** The Street sees Q4 EPS of $0.84 and revenue of $317.5 million.

The estimated net loss for the fourth quarter of 2015 is due to two factors. First, a non-cash charge of $63 million to $68 million (or $0.94 to $1.02 per diluted share) will be recognized as a result of the incremental U.S. income tax associated with pre-2014 accumulated foreign earnings, which will no longer be indefinitely reinvested outside of the U.S., as discussed above. This charge is the result of a detailed and complex calculation that will be finalized prior to the filing of Sotheby’s Form 10-K for the year ended December 31, 2015. Second, during the fourth quarter of 2015, the Company recorded a $37 million pre-tax charge (or $0.35 per diluted share) associated with the voluntary separation incentive programs that were implemented in the period.

The comparison of net loss and Adjusted Net Income* for the fourth quarter of 2015 to the same period in 2014 is adversely impacted by a decrease in Agency segment gross profit due to a lower level of various-owner auction sales, as well as income statement charges associated with the sales of property from the collection of A. Alfred Taubman (the “Taubman Collection”). The Taubman Collection is subject to an auction guarantee and has resulted in income statement charges currently recognized in 2015 of approximately $12 million, consisting of an estimated $6 million auction guarantee shortfall and $6 million in sale-related expenses. As a result of the auction guarantee shortfall, Sotheby’s will not recognize any net auction commission revenue associated with the sale of property from the Taubman Collection, which is a significant contributing factor to a decline in Auction Commission Margin versus the prior period, as set forth in the Financial Data Table below. The remaining property from the Taubman Collection, with a pre-sale low estimate of approximately $24 million, will be offered at auctions in 2016, primarily at the Old Master Paintings sale in New York on January 27, 2016, and will not earn any auction commission revenue because of the auction guarantee shortfall and could result in additional auction guarantee losses if the property offered at these auctions does not meet pre-sale expectations. Any further loss associated with the Taubman Collection auction guarantee would be accrued to the fourth quarter of 2015, if material. These factors, which unfavorably impact the comparison to the prior period, are largely offset by a lower level of Adjusted Expenses*.

For the year ended December 31, 2015, Sotheby's estimates that it will report net income of $36 million to $45 million (or $0.52 to $0.65 per diluted share), as compared to net income of $118 million (or $1.68 per diluted share) in the prior year. Adjusted Net Income* for 2015 is estimated to be $138 million to $142 million and Adjusted Diluted Earnings Per Share* is estimated to be $1.99 to $2.05, as compared to Adjusted Net Income* and Adjusted Diluted Earnings Per Share* of $142 million and $2.03, respectively, in 2014.

*** The Street sees FY15 EPS of $1.77 and revenue of $962.1 million.

Buyback and Dividend:

On January 21, 2016, the Board of Directors of Sotheby’s approved a $200 million increase to the Company’s remaining $125 million share repurchase authorization, resulting in an updated total share repurchase authorization of $325 million. Management expects to begin to repurchase shares of Sotheby’s Common Stock immediately under this increased authorization through open market purchases and/or accelerated share repurchase agreements, subject to the factors described in the following paragraph.

On January 21, 2016, in light of management's recent capital allocation analysis, Sotheby's Board of Directors decided to eliminate the Company’s $0.10 per share quarterly cash dividend, effective immediately, and allocate the capital instead to repurchase shares of Common Stock.

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