Restoration Hardware (RH US) is up over 40% on better than expected 2nd quarter results with strong revenue growth fueled by same store sales growth as well as increased e-commerce activity. The firm also disclosed that they used a sizable portion of their free cash flow and balance sheet cash to repurchase 20.2 million shares of RH stock, or 49.5% of the shares outstanding. RH is open to additional stock repurchases in 2017 dependent on “market conditions and our capital allocation priorities”. RH’s stock price opened up over $20/share and is trading at $71/share, up 44% on the day.
Shorts sellers have been reducing their RH positions ever the since the stock hit its year-to-date high of $77.40/share on July 19th, buying back stock as RH’s price declined to the $40’s. Shorts that had stood strong even as they were paying stock borrow fees between 30% and 71% fee in July and August, were taking some short term profits and reducing their positions as RH’s stock price slid. Today’s 44% price move will only accelerate the buy to covers by short sellers who were gradually legging out of their positions.
RH‘s short interest hit its year-to-date high of $1 billion on July 20th. Short interest is now $528 million, down 48% from its yearly high. Along with the drop in short exposure, RH’s stock borrow cost has fallen from a high of 71% fee in July to 12% fee today. RH is the second largest short in the Home Furnishing Retail sector, behind Williams Sonoma (WSM US) but ahead of Bed Bath & Beyond (BBBY US).
Short sellers, although having high conviction in their short thesis, have not fared well as RH’s stock price was up 61% prior to today’s price spike and shorts were down $509 million in mark to market losses, or down 76%. Today’s 44% price move to $71 has added $231 million to their mark-to-market losses, giving them a year-to-date loss of $740 million, a 111% loss on their full year average short position of $669 million.
With virtually all of today’s price move happening on the open, shorts may be loath to realize their losses immediately and might wait a day or two to cover on price pullbacks that usually occur after such large and sudden price moves. As they are already down $740 million in mark to market losses for the year, long term short sellers with conviction may decide to stay in the trade and hope their long term short thesis is correct.
Over the next few days we will see the shorts with less conviction squeezed out of their positions. The remaining shorts will probably have to eventually suffer another round of RH stock buybacks but also see RH’s leverage and debt load increase to levels which will make their short thesis even more attractive. RH’s stock price was at its year-to-date high of $77.40 in July its short interest was $1 billion. Since short sellers have been at these price levels before, they are not in unfamiliar waters and may not stampede for the exits. A full-on short squeeze which decreases short interest significantly will probably not happen.
In fact, we are also seeing some new short selling today as some shorts may be pressing their bets and hoping to accelerate their profits if RH’s stock price slides after this run-up. Also, a $70 handle for RH may be too rich for short sellers to ignore and the “old” shorts that covered their stock today may be replaced with “new” shorts hoping to catch long shareholders selling their stock to realize some of their new found profits. There is a good chance that overall short interest will actually increase this week.
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Managing Director Predictive Analytics, S3 Partners
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