Source: RH Website
Summary Investment Thesis
RH: Reasons for high short interest –
There have likely been a number of reasons contributing to the large short interest in RH (RH) shares. These include –
The possible dilution from new share issues, if RH does not have the cash to redeem its $350MM of senior convertible notes falling due in mid-June 2019. The threat of 25% US tariffs on Chinese imports, and its potential adverse effect on RH earnings. First quarter guidance forewarned of an adverse impact of ~8% reduction in adjusted EPS, due to a change in the accounting treatment of leases. Effects of possible negative trends in the stock market on the high end housing market. In conjunction with the offering of the 2019, 2020 and 2023 secured convertible notes, RH entered into convertible note hedge transactions with counterparties (the “hedge counterparties”). Both these hedge counterparties, and the note holders, have reasons to hedge their own positions, by shorting RH shares.
RH: Shorts are very exposed to a potential short squeeze –
At May 23, 2019, RH had 18.36MM shares outstanding. Insiders hold 2.56MM of these shares, leaving a free float of 15.80MM. Although the free float is 15.80MM shares, share ownership filings show institutions hold 25.60MM shares, 9.80MM more shares than the free float. At March 31, short interest was ~7MM shares, By May 15, short interest had dropped to 5.89MM shares, but still 37% of the free float.
RH: Reasons for mispricing
Despite the fears of the market, RH has the capacity to meet the redemption of the 2019 senior convertible notes, either wholly in cash, or mostly in cash. Whether the redemption is in cash, or shares, or a combination of both, is entirely at RH’s discretion. In the unlikely event RH elects to settle