Circle Fine Art, Dyansen, Martin Lawrence
Junk Art - Some Public Firms Are Cashing In on It

October 30, 1989

It's been said that the ideal product costs pennies to produce, sells for big bucks and is addictive. The stuff sold by three art gallery chains-Circle Fine Art, Dyansen Corp., and Martin Lawrence Limited Editions-doesn't quite fit that bill, but it comes close.

The three, whose shares trade over the counter, use mass merchandising to sell "signed limited edition" prints and sculptures, usually produced in lots of 300-500. Each work is described as "fine art"-a term that many critics would call a misnomer. And these art objects carry very lofty retail margins. Simply put, the name of the game is selling class to the masses-at least the masses of 30- to 50-year-olds with enough discretionary income to shell out several thousand dollars for objects produced in bulk and which may satisfy some buyers' psychological need to show that they have "arrived."

In a time when a Van Gogh commands $50 million, it's not altogether surprising that many people can be talked into purchasing high-priced prints to hang on their walls. To ease the sales process, all three chains have done away with the imperious attitude found in many galleries. Prospective customers are made to feel welcome by accommodating salespeople. At the Dyansen Gallery in Manhattan's glitzy Trump Tower, a saleswoman cheerfully asks a visitor, "Are you a collector?" while she extols the virtues of "The Museum Edition" of Woman With Tambourine III, a sculpture by Pierre Auguste Renoir. Of course, Renoir, the great Impressionist, is known primarily for his paintings; and the original terra cotta-"his profound masterpiece," according to a glossy sales brochure-actually was executed by his assistant Richard Guino. A careful reading of the brochure also reveals that the piece offered for sale isn't an original, but one of 319 bronzes cast recently. However, along with the sculpture, the buyer receives a hand-crafted portfolio that includes essays on Impressionism, a certificate of authenticity and "unique replicas" of letters written by Renoir. All for a mere $25,000.

Welcome to the wonderful world of the chain-gallery art merchants, where $5,000 prints can be paid for with revolving financing offered by General Electric Credit Corp., where journeyman commercial painters and sculptors are called "major artists of the 20^th century," where jewelry is sold as "art to wear" and less expensive items are displayed in "museum shops."

By far the most successful chain has been Martin Lawrence Limited Editions, which racks up 60% of its sales from 40 galleries in high-traffic regional shopping malls in major metropolitan areas. Revenues have zoomed from $3.7 million in 1984 to a projected $48.8 million in 1989. Net after-tax profit margins run about 17%, which should bring 1989 net income to about $8.3 million -- $1 per share-according to analysts' projections. Even Tiffany's margins are only 9%. How does Martin Lawrence bring so much down to the bottom line? Simple: Last year, its cost of goods sold was just 22%. That means its average markup is almost 400%.

One key to success is vertical integration. This means hiring your own artists, keeping them under contract, publishing and printing their limited editions, then distributing the work through your own retail and wholesale network. It's rather reminiscent of the penny stock business and, coincidentally, Martin Lawrence's chairman and founder, Martin Blinder, is the son of Meyer Blinder, founder of Blinder, Robinson & Co., the controversial penny-stock promoter. As a matter of fact, Blinder, Robinson underwrote Martin Lawrence's initial public offering back in 1984.

These days, Martin Lawrence's underwriter is PaineWebber, which raised $15 million for the firm this year, via a stock offering at $11 a share. At the time, insiders availed themselves of the opportunity by unloading $3.5 million of their own shares. The company's balance sheet certainly looks rock-solid now. As of June 30, it had $15 million in cash, total liabilities of $4.4 million, and a net worth of $41.3 million. With a recent price around $10, the stock is selling at only 10 times earnings and about twice book value. That doesn't sound very expensive for a fast-growing specialty retailer.

However, a few caveats are in order: A gander at the 1988 annual report-itself a "limited numbered edition" of 6,500, complete with an embossed copyright seal-reveals that two of the company's published artists, Hiro Yamagata and Susan Rios, accounted for 54% and 11% of net sales in 1988. Martin Lawrence alone has sold over $40 million worth of Yamagata's work in the past few years-perhaps as many as 10,000 pieces. Talk about a franchise player!

In Martin Lawrence's lexicon, Yamagata is a "popular contemporary artist" who is "internationally acclaimed." Not by curators, critics, museums and auction houses, though. Indeed, mention of just about anyone or anything connected with the gallery chains can elicit downright nasty comments from the art cognoscenti. John Rewald, perhaps the foremost authority on Impressionism and an honorary trustee of New York's Museum of Modern Art, is critical of such operations. Commenting on Dyansen's Woman With Tambourine III, he says: "They get a mold and blissfully cast away. It's very sad that people fall for it. . . . The whole thing is sickening."

To such criticism of the wares he and his competitors sell, Martin Blinder retorts: "Why should a critic or museum be the ones to decide who the major artists are? We're introducing people to art. A lot of our business is entertainment." He's got a point. After all, Saul Bellow may be the better writer, but Harold Robbins sure sells a lot more books. Who's to say that a yuppie who pays $5,000 for one of 300 prints by a minor artist is getting rooked? Perhaps the psychological benefits received are similar to those of a tycoon who spends $17 million for a Jasper Johns.

Although Martin Lawrence seems to have struck it rich with self-published limited editions in the $2,000-$5,000 range, the company is branching out into more expensive work by recognized artists. Last year, it spent $1.4 million for an Andy Warhol that Blinder thinks would now fetch three times that amount. The painting is on loan to the Museum of Modern Art. Martin Lawrence also has allocated $7.5 million to buy art costing $25,000-$500,000. This raises some questions: If business is so great, why switch tactics? There's no way Martin Lawrence can achieve its usual near-400% margin on such goods, and furthermore, it may prove somewhat difficult to unload $250,000 paintings in shopping malls. Then again, it may not. Notes Blinder: "You have a better chance of selling a painting when it's offered by 40 galleries instead of one." However, holding a lot of expensive works would leave the company more susceptible to a downturn in the art market.

Perhaps this shouldn't be of concern to shareholders. Various company documents state that Martin Blinder has "extensive knowledge and experience with respect to art" and that he frequently attends auctions at Sotheby's and Christie's, as well as numerous other exhibits. In any event, Blinder, whose compensation was $666,000 last year, clearly knows how to turn a profit. In 1987, Martin Lawrence Limited Editions paid him $188,100 for various works of art that he'd bought for $60,890 and, in 1988, paid him $196,900 for art that had cost him $81,400. The company's vice president and largest shareholder, Jack Rounick, did even better. Martin Lawrence shelled out $425,980 for art for which he had paid $166,280. Blinder says the company merely acted as a broker on these transactions, that they were profitable, and approved by the board. He declined to identify the works or to provide other specifics.

The oldest of the chains is Circle Fine Art, founded 25 years ago by Chicago lawyer Jack Solomon, who now runs it with his wife, Carolyn. At first, it concentrated on cheap posters and prints, but in the early ‘Eighties began selling more expensive limited editions. Since ‘84, sales have grown from $12 million to an estimated $35 million this year, and earnings per share have climbed from 19 cents to a projected 72 cents. The stock has gone from a low of $2 ½ to a recent price around $10.

Limited-edition graphics-three-quarters of which are self-published-comprise about 70% of volume. Circle's roster includes some of "the world's most talented and important artists" whose output ranges from the popularization of Modernist works to outright kitsch or illustrations. The firm's big names-many of which aren't too big with critics-include Lebadang, Frank Gallo, Jan Balet, Vicky Montesinos, Chryssa, Judith Bledsoe, Annie Retivat, Yaacov Agam, Clarence Measelle, Marcestel, Sanford Roth, Carol Jablonsky, Calman Shemi, Marcel Salinas, Douglas Hoffman and Robert Kaupelis. Artists Vasarely and Erte are better-known, and the company also has begun selling cartoons by Jules Feiffer and Gahan Wilson and photographs by Alfred Eisenstadt.

In recent years, Circle has hit upon a good thing with its fast-growing "Art to Wear" limited edition jewelry, which accounted for almost 30% of sales last year. Circle is now expanding into Art to Use, selling watches and clocks produced in conjunction with Bulova; and china, glass and ceramics produced by Rosenthal. Animation art-limited editions from Disney, Chuck Jones (Bugs Bunny), Friz Freleng (the Pink Panther), Hanna-Barbera (Yogi Bear, the Flintstones), etc.-also is hot and now accounts for 25% of revenues. Circle hits customers through the mails, too, marketing selected items to American Express cardholders. This arrangement accounted for over $2 million in sales last year.

Jack Solomon is outspoken in defense of his wares. "Look, there is no definition of great art. The critics are highbrows. I happen to think Vasarely is one of the greatest artists alive, and I'll stack him up against anybody. A few arrogant people in New York don't decide what the rest of the world likes. The critics are always wrong. When we sold Norman Rockwell in the 1970s, everybody laughed at us. We want our customers to be happy, and they are. We offer a full refund for 90 days and allow a trade-in for a year, and we've gone beyond that. But few people take us up on the offer." And he adds: "We sell popular works. If that makes me a Philistine, so what? I was born in Nebraska. I live in Chicago. I don't care what the critics say."

Although Circle's per-share earnings were up 35% in this year's first nine months, to 44 cents, more than half this gain resulted from a lower tax rate due to a rehabilitation tax credit. The company's balance sheet is also showing signs of strain. As of June 30, book value was $9.7 million, or $3.76 per share, but debt stood at $17 million. Inventories, artists' advances, plus a $2.1 million "investment in art" totaled $16.5 million -- 1.7 times net worth-and cash flow has been negative for years.

Solomon doesn't seem worried by any of this: "We use very conservative accounting. There's no goodwill on our balance sheet and our art and real estate are understated."

Still, although Circle doesn't depend on any one artist, it must stay on top of trends-since it's essentially selling fashion. And because it's stretched so thin financially, things could get ugly if a recession strikes. With the stock currently around $9-13 times this year's earnings and over 2 ½ times book value-it's trading at a premium to Martin Lawrence's valuation. Nonetheless, Solomon has never sold a share.

Whereas Martin Lawrence and Circle have concentrated on graphics, Dyansen has historically gone after the limited-edition sculpture market. This year, sales should be about $40 million, up from $10.4 million in 1984. Earnings growth hasn't been as impressive, but net should come in around $1.32 million, or 24 cents per share, vs. just $390,000, or six cents, last year. Although Dyansen (once known as Fine Art Acquisitions Ltd.) has only a dozen galleries-far fewer than the other two chains-its average transaction price is higher, at $4,000. And its sales-per-square-foot come to an impressive $924.

Over the years, the company has relied heavily on 97-year-old art deco designer Erte, whose work accounted for 45% of sales last year. In 1987, it almost lost the right to publish the old-timer's sculptures, but ultimately came to an agreement. In a nutshell, Dyansen has the right to market 20 new sculptures, each in limited numbered editions of 500. That's 10,000 in all, with a retail value of perhaps $150 million-$200 million. (Dyansen Chairman Harris Shapiro's contract gives him the right to purchase Erte sculptures from the company at foundry cost. It also provides a minimum salary of $275,000, plus 5% of pretax profits). So far, Dyansen has sold 5,500 of these pieces, but still has a three-year supply of Erte's work. It's worth pointing out that Erte doesn't personally produce these pieces. Although he apparently oversees the original mold, the actual sculptures are made by craftsmen in Dyansen's foundry. By the way, this process holds true for most of the limited editions sold in all of the galleries. Dyansen also is selling 161 Leroy Neiman paintings that were purchased from Playboy Enterprises recently, as well as works by Ginsburg, Bragg and others. Shapiro doesn't take kindly to criticism. "Museums, critics, curators, the art dealer associations all work together to protect their little monopoly," he asserts. "When newcomers get into the business, they try to stamp us out. But our collectors are very satisfied."

Although the gallery chain's balance sheet appears stronger than Circle's, it has been taking on debt to fuel growth. As of June 30, net worth was $8.5 million and debt stood around $6.2 million. Earlier this year, Dyansen arranged a $10 million line of credit with Chrysler Capital, which subsequently lent it $5 million.

On Sept. 26, the company said that it had completed a private financing in which, in return for $3.5 million, it issued debentures bearing interest at the prime rate and convertible into common stock at $3 a share-just about where Dyansen common is trading now. At the time, Dyansen stock was trading at $4.

Shapiro sold 50,000 Dyansen shares for $3.79 each in late August, before the debenture deal was announced. Since 1985, he has disposed of 841,600 shares, in 11 sales, at prices ranging from $1.25 to $3.79. He and his wife still own 1.3 million.

There's no shortage of product for Dyansen and its two chief competitors to peddle. Indeed, the size of the market capitalization of various limited editions is quite impressive. For example, Martin Lawrence was recently offering some of Andy Warhol's Mao silkscreens for $18,000 apiece. (These weren't published by Martin Lawrence.) Warhol produced 10 Maos, each in a different color and in an edition of 300. That means there are 3,000 altogether, with a total market value of $54 million (assuming they all bring the asking price). Of course, Andy didn't personally produce most of his silk screens or many of his canvases either, for that matter.

Circle is currently selling a Frank Gallo sculpture in an edition of 99. Each sculpture costs $7,800. Martin Lawrence's Yamagatas, which sell for about $6,000, are produced in issues of 300. Dyansen makes 350 of its Charles Bragg sculptures, which go for about $5,500. (However, over the phone, a saleswoman confides: "If you come in this week, we can probably do a little better on the price.")

In any case, for those who don't want to blow 25 grand on Dyansen's Renoirs or $1,000 for Circle's Art to Wear, there's a much less costly alternative. One can stroll uptown to a true museum shop, in the Metropolitan Museum. There, a reproduction of Edgar Degas's sculpture Grande Arabesque can be had for a mere $265, and jewelry can be picked up for under $100. The Met doesn't pretend that these are valuable works of art, but rather that they are merely attractive reproductions. And its salespeople don't intimate that what they are hawking might grow in value.

That's not always true at Dyansen, Circle and Martin Lawrence. Although all three companies have stated that they don't sell art to the public by emphasizing its investment merit, a gallery visitor found that, sooner or later, the salespeople got around to talking in financial terms. All suggested buying now "before prices go up." A Circle representative asserted that "Balet and Vasarely are the most investment-worthy" and a Martin Lawrence salesman mentioned that the art world is "like the stock market." Which may mean that it can crash as well as rise.

As a potential customer was leaving the Dyansen Gallery in Manhattan, a saleswoman (aka "fine art consultant") offered a final inducement: "You live in New York, but I assume you have a friend who lives out of state. We can ship the sculpture to them so you don't have to pay sales tax."

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