Jul 17, 2018 at 4:25PM High-end furniture maker RH - formerly Restoration Hardware - continues to defy skeptics. The company's most recent propelled the stock higher by more than 30% in a single day. Since hitting a low in February 2017, shares are up a whopping 450% as of this writing. It has been easy to make a bearish case against RH in recent years considering a challenging brick-and-mortar retail environment and the company's. But short-sellers look woefully unstylish at the moment. Here are three reasons this stock is soaring. The business is humming along First off, RH is getting things done at an operational level.
It is successfully selling high-end furnishings both in stores and online - what's called an 'omnichannel' strategy in the retail world. In 2017, for example, transactions in stores accounted for 56% of total sales, and the remainder were from 'direct business' through its catalog and website. This balanced approach is critical to compete with purely online, low-cost heavyweights like Amazon.com and Wayfair in the furnishings space. Customers searching for sofas that cost thousands of dollars want to see and feel the product in person, but they also want to be able to customize their exact purchase through an easy-to-use website.
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RH has done an enviable job of meeting their needs. An added benefit is that optimizing for a specific sales channel has not consumed the company's salesforce. Instead, CEO Gary G. Friedman has emphasized a product-first strategy, with the various channels - brick-and-mortar, online, and catalog - being equally capable of facilitating and closing the sales of those products.
This is described in the company's 2017 annual report as follows: 'We encourage our customers to shop across our channels and have aligned our business and internal organization to be channel agnostic.' Two things are particularly impressive about RH's channel shift: (1) The company has prevented cannibalization such that sales have continued to grow at a steady clip over the last eight years and (2) the transition has not created excessive marketing and administrative expenses as RH dialed in its omnichannel approach.
The following chart shows why the market's impressed with RH's recent sales and marketing accomplishments. In eight years, sales have grown 290% versus a comparably slower increase in sales, general, and administrative expenses of 200%. Data source: Morningstar data, author's calculations. Overall, this trend has been a significant contributor to the recent quarterly earnings surprises (see, and ), and is illustrative of the operational execution that has propelled RH's stock price higher. The company is heavily buying back shares The second factor contributing to RH's rapidly growing stock price is a string of executed by the company.
These share repurchases are nothing to sneeze at: More than $1 billion of the company's capital has been dedicated to buying shares off the open market, which has led to a 40% reduction of shares outstanding since the fourth quarter of 2016. The following chart shows the decline in outstanding stock, with the largest reduction taking place in 2017 when a $300 million and $700 million buyback were proposed, approved by the board, and executed. Data source: Morningstar data, author's calculations.
Perpjestimi i drejt dhe perpjestimi i zhdrejt .pdf | updated. With share buybacks, companies typically use excess cash on their balance sheets to 'retire' shares, ideally at a point in time where leadership sees the company's stock as undervalued by the market. A share repurchase doesn't change the of the company by itself, but it does entitle the remaining common shareholders to a bigger slice of the earnings pie. As a result, this can send the stock higher, as has been the case for RH.
RH's share repurchases look extremely savvy in retrospect, given the stock has soared since their execution. However, there are some legitimate reasons to question this move, especially considering the fact that RH is not sitting on a pile of cash and instead to effect the share repurchase. Discussing the merits of RH's share repurchase is a debate for another article, however, and it's a topic that's been by my Foolish colleague Brian Stoffel. As he points out, there are perfectly valid reasons to be skeptical of the CEO's incentives for propelling RH's stock price higher through leveraged share buybacks. Despite the risk of added, the share repurchases have propelled the stock higher by boosting quarterly earnings per share, and they've also had an effect on the company's unique short-seller situation. This brings us to our final - and perhaps most important - driver of RH's recent share price run-up.
The short-sellers are getting squeezed big-time The third reason RH's stock price has ballooned is due to a unique 'short-squeeze' situation. A involves investors betting against a stock by borrowing shares in the expectation that the stock price will decrease in the future. If the stock price does not decrease, those short-sellers are in a losing position because they must purchase the shares at a higher price to return the ones they borrowed. This is not only happening with RH's stock, but it's happening on an exaggerated level.
RH, as a risky, debt-laden participant in the declining brick-and-mortar retail industry, has found itself heavily shorted, to the point where more than 60% of its shares outstanding were sold short in the middle of 2017. In the past two years, the average percent of shares outstanding short at RH has hovered around 35%, which is roughly where it stands today. Here's a look at that trend and how it compares at retail peers Williams-Sonoma and The TJX Companies. As you can see, there's a greater proportion of short-sellers tied to RH than to its peers.
Investors are betting against RH's future in hopes that it will underperform. Ironically, as the opposite happens - i.e., when RH posts better operational results (see point No. 1 above) and buys back shares (see No. 2 above) - these catalysts push the stock higher and force short-sellers to decide whether they want to ride out their bet longer or close their position.
If they do the latter, they must buy shares in the company to do so, which in turn pushes the stock even higher. There is a compounding effect at work here, and it doesn't end there. With RH, there aren't hundreds of millions of shares outstanding. There are roughly 25 million at RH, compared to 625 million at The TJX Companies. This is called a small 'float.' This can lead to a scarcity of sellers when the shorts need trading to take place, which can in turn force them to bid the price even higher.
What ends up happening is an 'infinity squeeze' is created when the unusual shortage of supply rockets a share price upward. It is one thing to see a stock price grow on strong earnings, but quite another for those results to be inflated by share repurchases and propelled beyond logic by the peculiar machinations of an infinity short squeeze. But this is what's happening at RH. The takeaway for investors With a track record of 450% stock price growth in less than two years, it's not surprising to see that there's something unusual happening here at RH, something that goes beyond the fundamentals of the business. Yes, the company is performing well and adapting to change in the retail world, but it has also benefited from some risky bets where a large sum of debt was used to repurchase its own stock. Beyond that, it's seen external factors - a high percentage of short-sellers - contribute to the stock's meteoric rise as they get squeezed out of their position.
RH has an impressive tailwind, but it's definitely not a stock for the faint of heart right now.
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All this concern about Major League Baseball’s free-falling attendance misses the point a little bit: It’s less a reflector about the economic health of the game than it is an early indicator of something, a something the meaning of which nobody’s quite sure. Attendance has fallen in each of the last three seasons but in the point-something per cent range, which is more or less stability. That’s not the case in 2018, however, when going into the weekend the 30 teams had combined to attract 6.9 per cent less fans than in 2017. It’s no surprise that the are among the greatest contributors to this decline. The Miami Marlins have seen a 50 per cent drop in attendance – the product of a draconian rebuild as well as a decision to announce actual tickets sold instead of fans in the park – but the Blue Jays admitted a decrease in season-ticket sales this winter, combined with an increase in prices of some tickets, failure to make the playoffs and the loss of popular players has left the team staring at a decrease of 11,500 fans per game on average and 423,700 in total attendance through 38 home dates, around a 30 per cent decrease.
Weather is contributing factor that commissioner Rob Manfred points to in many markets, but that leak earlier this season aside, the Rogers Centre’s retractable roof puts the lie to that in this marketplace. I fear that attendance issues in Toronto are more complex than elsewhere and I also fear not as easily solved because of the complicating factor of ownership by a publicly traded company. But I’m not certain it’s as telling in other markets. The game itself is in robust financial health: a US$10-billion-per-year industry with multiple revenue streams beyond attendance. The game’s economics are more nuanced, going back to the day when new stadiums were built with smaller capacities than some of the older facilities they replaced. Bigger was no longer better. Instead of the number of fans in the seats it became how much they were paying to get into the fewer seats, and how much they were willing to pay for food and drink.
Aggressive sponsorship (I can still remember finding out the Boston Red Sox sold branding rights to the folding chairs in the home clubhouse), dynamic pricing, the advent of regional sports television networks, advanced media, the creation of what Manfred described earlier this season as “millennial areas.” It was and is all about revenue. Not surprisingly, the decrease in overall attendance has led to serious navel-gazing, about the manner in which the game is played – defensive shifts that are apparently too complex for today’s hitter; a spike in strikeouts, pace of play, all of them creating what seems to be a critical mass that will lead to lowering the pitcher’s mound or adopting the designated hitter in the National League or limiting pitching changes or the number of pitchers on a team or restricting shifts. Some of those ideas are worthy of consideration – the DH should be adopted in the NL for conformity’s sake; there haven’t been separate league offices since 2000 and while that alone won’t increase excitement the way the AL wanted it to do when it adopted the DH in 1973, it can’t hurt – but most fail to address what keeps fans coming back: A chance to win. Or at least make the playoffs. I’m not opposed to efforts to speed up the game. I like limiting the number of trips to the mound.
Prevent catchers from going to the mound at all; have wireless communication between the catcher and pitcher. But, let’s face it: a lousy team isn’t going to sell more tickets because it plays shorter games. “Come see the 2018 Marlins: 40 per cent fewer wins at a rate of nine less minutes!” isn’t much of a marketing campaign. The single best thing baseball has done has done is expand the playoffs to create more drama. So, am I suggesting a further expansion? Not a chance in hell. I just want to make it easier or at least more efficient for teams to tank, which is what several teams are doing this year.
I can hear heads exploding in the commissioner’s office and in the MLB Players Associations office, since keeping a lid on incoming player salaries suits established pros just fine, thank you. And I understand that trading picks doesn’t remove the fact that it can take five years for a prospect to develop and make an impact. But hear me out: Even with that fact, teams are tanking, which on the face of it seems ludicrous and short-sighted. But you know what? The game is skewing younger, and my guess is the next generation of players will be drafted closer to being MLB ready than even the Ronald Acunas or Juan Sotos or Vlad Jrs.
So if a team wants to compile four or five first-round picks, why shouldn’t it be able to do so? If it wants to trade two of those picks to a team thinking of a rebuild in the near future, why shouldn’t it be able to do so? I understand it would require a seismic philosophical and logistical shift, but it would make it easier to sell hope, which is about all they’re doing in 20 cities this season.
NOW TWEET THIS In which we wonder what Masai Ujiri will do to kill time before LeBron makes up his mind hate to Harp on Bryce’s woes worry about Neymar and Germany and wonder about Marc Bergevin’s Max effort. Hate to say this, but if I’m Raptors president Masai Ujiri I don’t do a thing until LeBron James makes up his mind whether he stays East or goes West. Tough, I know but that’s what happens when your team can’t beat one guy #kingme. Nationals manager Dave Martinez said he won’t sit the slumping Bryce Harper – who has six hits in his past 12 games – but he is thinking of telling him to cut back on swings between games and at BP #clownpractice. Speaking of Harper, here’s a nightmare scenario for MLB: he declines participation in the Home Run Derby at Nationals Park because he’s mired in a rut. #buzzkill. Brazil’s Neymar was fouled 10 times in Sunday’s World Cup draw with the Swiss, the most for a player since England’s Alan Shearer drew 11 fouls against Tunisia in 1998 #getusedtoit.
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Alex Galchenyuk for Max Domi? Sounds more like culture change than addressing a tactical and personnel need #deckchairs THE ENDGAME Elephant in the room stuff: How do you fire a manager, anyhow? Here are some hints from somebody who has covered too many of these things. First, it is best done with the team on the road – especially if an interim manager is being brought in. That means less media on-site; in the case of the Blue Jays, at most three travelling reporters. It also means somebody’s less likely to go off, if that’s a concern.
An all-star break is always a good time, too: fresh start for the new guy, players off for a week, all that stuff. And, depending on the long-term plan for the manager coming in, picking a weaker opponent is a good thing. You treat the hiring of an interim manager a little more differently than if you are bringing in a long-term replacement. The Blue Jays schedule, in case you’re wondering, doesn’t get soft until after the break when the Baltimore Orioles come into town. Not that I’m agitating for John Gibbons to be canned.
I keep asking myself the same question general manager Ross Atkins says he asks himself: Can Gibbons still be part of the process the rest of the year? Is he engaged? Now that Vladimir Guerrero Jr. Is hurt the question about his promotion in 2018 is more “if” than “when” and in the meantime there’s a bunch of other stuff to do here, folks: seeing if Ryan Tepera can close, getting Aaron Sanchez and Marcus Stroman right, keeping the lid on a clubhouse that gets sour awfully fast. Whoever replaces Gibbons – and make no mistake, he won’t be back in 2019 – deserves a fresh start.
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