Art Slump Spreads to Mall Outlets : Investments: Martin Lawrence’s profit and stock price plummet as a softening of the market at auction houses reaches shopping center galleries.

Two months ago, a cover story in Business Week magazine on “Hot Growth Companies” began with a laudatory look at Martin Lawrence Limited Editions Inc., a Van Nuys company that has grown rapidly by opening galleries in shopping malls and selling art to the masses.

But just as the magazine appeared, events were unfolding in New York that have since caused Martin Lawrence’s sales--which zoomed from $6 million in 1985 to $48.8 million last year--to stall.

At sales conducted by the major auction houses Sotheby’s and Christie’s in May, demand for expensive art, and the prices actually bid for that art, were well below expectations. The disappointing results were initially masked by the record sales of a Van Gogh painting for $82.5 million and a Renoir work for $78.1 million that were bought by retired Japanese industrialist Ryoei Saito.

But the lukewarm interest in many of the auction houses’ other offerings soon spread to the broader, less-expensive art market on Main Street, where Martin Lawrence competes with art that sells mostly for between $1,000 and $10,000.

As a result of the market’s downturn and a general drop in consumer retail spending, Martin S. Blinder, Martin Lawrence’s chairman and chief executive, announced last week that the company will report a sharp decline in profit for the second quarter that ended Saturday. He predicted it would earn between 6 and 10 cents a share, about $510,000 to $850,000 overall, down as much as 75% from the 24 cents a share, or $2.02 million, it earned a year earlier.

Also, Martin Lawrence’s second-quarter sales will be 12% to 17% lower than a year earlier, when they totaled $12.9 million, Blinder said. During the past year, the company opened 16 new galleries, and now has 43 outlets in nine states and the District of Columbia.

The problems are an unaccustomed reversal for Martin Lawrence, and shocked investors dumped the company’s shares. The stock plunged 32%, to $4.50 a share from $6.625, in heavy trading after the company’s June 26 announcement, and it closed Monday at $4.375 a share--a near 52-week low--in over-the-counter trading.

In a move that could bolster the stock, Martin Lawrence announced Monday that it will buy up to 1 million, or 13%, of its shares in periodic purchases over the next 12 months. The company, which currently has 7.8 million total shares outstanding, just finished buying back 500,000 shares.

Analysts also were caught off-guard by the company’s slump. Jonathan Ziegler of Sutro & Co. in San Francisco said he expected some slowdown in Martin Lawrence’s growth because, with the current sluggish economy, consumers are likely to cut back on non-essential purchases such as art. But Ziegler still had looked for the company to show a slight profit gain, to about 26 cents a share, in the quarter.

Blinder, who owns 9% of Martin Lawrence’s stock, also signaled that the company might not rebound any time soon. He said “the next test of the art market’s strength will come in November,” when the New York auction houses hold their fall events. But he offered no prediction on how those events might fare.

“We’re on uncharted ground right now, and we’ll take it day by day,” Allen A. Baron, Martin Lawrence’s chief financial officer, said in an interview.

In the meantime, Martin Lawrence is re-evaluating its expansion plans, although new stores already proposed will open as scheduled, Baron said. “We may decide to consolidate, not open any more stores and really tune up the existing galleries,” he said. Martin Lawrence also is considering whether to cut back its work force of 400 through attrition, Baron said.

Sutro’s Ziegler said “a lot of people have laughed at” Blinder’s argument that the poor results in New York spawned the slowdown in the shopping-mall art market. But Ziegler said he’s not one of them, adding that although Martin Lawrence’s customers don’t spend millions of dollars for art, “they’re at least very aware” of conditions in the art market. That means they understand that art they buy today from Martin Lawrence might not appreciate in value any time soon because of the sluggish art market overall.

Others discount that argument. Lawrence Anenberg, president of Lawrence Unlimited in Northridge, which sells art priced under $5,000 to home-furnishing retailers, said “our sales are excellent, about 20% ahead of last year, and it’s basically a soft furniture market.” The company is unrelated to Martin Lawrence.

Martin Lawrence has always shied away from urging customers to buy its art strictly as an investment--for good reason, perhaps. With the exception of the headline-making sales at the major auction houses, art often yields an annual return no better than that on stocks and bonds, some financial analysts have said.

Nonetheless, Martin Lawrence has no plans to cut its prices simply to move merchandise, because “we believe art appreciates,” Baron said, “and our business has been running for the last 17 years based on that premise, and quite successfully.”

EARNINGS SETBACK

By selling art to consumers through stores in shopping malls and other outlets, Martin Lawrence Limited Editions has enjoyed sizable gains in sales and earnings in recent years. But the company now says its profit in the just-ended second quarter will be down considerably because a slowdown in sales of expensive art has spread to the consumer market.