The shrinking margins is likely a sign of things to come. Sothebys (NYSE:BID) 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 Dicks Sporting Goods Inc (NYSE:DKS) and Bed Bath & Beyond Inc. (NASDAQ:BBBY) 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 Stores, Inc. (NYSE:WMT), Barnes & Noble, Inc. (NYSE:BKS), and GameStop Corp. (NYSE:GME).
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.
The article Amazon’s Entry Into Art Sales Will Hurt Sotheby’s Margins originally appeared on Fool.com.
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. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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