Is Sotheby's Reluctantly Listening to Daniel Loeb?

For famed auction house Sotheby's , the past quarter was full of drama more commonly befitting of a reality show or soap opera. After accumulating enough of a stake to be a majority shareholder, billionaire activist investor Daniel Loeb aired his list of grievances with the company in a pointed letter to CEO Bill Ruprecht, which also bluntly suggested Ruprecht step down from his position.

Besides a conspicuously timed "poison pill" announcement that would prevent shareholders from holding more than 10% of stock (Loeb's hedge fund currently owns 9.3 %), you'd hardly know anything had ever been amiss on Sotheby's end. During the company's latest quarterly earnings call, Loeb wasn't brought up once, but that doesn't mean he isn't affecting the company, perhaps for the better.

A sale, a sale!
Sotheby's total quarterly revenues are up an impressive 57% compared to the same time a year ago, to $107.8 million. According to its press release, that growth came largely from an $11.3 million increase in private sale commissions, and a $6.6 million increase in auction commission revenues. It also didn't hurt that the company sold the most significant item in its Noortman Master Paintings segment for $18 million, before announcing plans to close all remaining Noortman offices by the end of the year.

Certain aspects of Sotheby's latest revenue report can be drawn back to complaints Loeb made in his Oct. 2 letter. Loeb particularly lamented Sotheby's inability to "grasp the central importance of Contemporary and Modern art" to the company's revenue, as well as a lag in capturing new markets in China, where arch-rival Christie's has already established solid customer relationships.

Perhaps it was no coincidence then that Sotheby's placed heightened emphasis on the progress it had made in both categories. Ruprecht reported $348 million worth of modern art sales in New York last quarter, a 71% increase compared to last year and "the second-highest series total in this category in the Company's history." Sotheby's will also be holding a sale of contemporary art in New York City on Nov. 13, which will include an Andy Warhol work titled "Silver Car Crash (Double Disaster)."

Sotheby's also made it a point to tell investors about its progress in Hong Kong. Overall sales are up 105% to $538 million, which is reportedly the highest total revenue in the area for any global art business.

The cost of fame
In his letter, Loeb also called out Sotheby's executives for what he called "numerous anecdotes of waste" that could take a toll on profits, including holding lavish meals at trendy, expensive New York restaurants. Sotheby's latest profit margins didn't do much to quell these allegations- operating and net losses were both over $30 million, which CFO Patrick McClymont attributed to costs associated with Chinese buyers, as well as marketing costs for sponsoring museums and other institutions.

McClymont also acknowledged that profit margins had actually improved since the same time last year, albeit slightly. Operating income was negative $37.9 million and net income was negative $32 million. Additionally, he explained that the company was also working on a financial review that includes thorough analyses of "our strategy, business, and cost structure" to see what might need changing.

To whom it may concern
In October I wrote that even though Loeb might not achieve his aspirations of serving on the Sotheby's board or throwing Ruprecht out as CEO, he could still create change within the company. Exactly how far Loeb's recent clamor will reach remains to be seen, but should its effects stall, Ruprecht might soon find another bluntly worded letter in his inbox for all investors to see.

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