What's Going On With Restoration Hardware?

RH RH, formerly Restoration Hardware, has been a pleasant surprise for bulls in 2017 and a head-scratcher for short sellers so far this year. The stock’s trading since early June is an excellent example of how it seems nothing can keep RH down at the moment.

RH bulls endured a horrendous 2016, with shares plummeting 60.7 percent. Short sellers, on the other hand, piled into the battered home furnishings retailer. Short interest climbed 17 percent last year, as bears anticipated the negative momentum would carry over into 2017.

Looking At The Fundamentals

From a fundamental perspective, they may have been right. On June 1, RH once again lowered its guidance outlook for fiscal 2017. The stock initially plummeted from above $57 to as low as $41.52. But the story of 2017 for RH has been the stock's resilience. After the initial guidance cut dip, RH quickly resumed its 2017 uptrend. By late June, RH was back up above its pre-cut level, and the stock is now up an impressive 120 percent year-to-date.

Deutsche Bank recently laid out the bull case for RH in an upgrade note.

“We are increasingly convinced that the threat of demand pull forward from well-above expected outlet sales is potentially overstated. We remain above consensus on comps and total sales for FY17-FY19,” said Deutsche Bank analyst Adam Sindler.

The firm said RH is benefiting from inventory initiatives that are improving supply chain efficiency.

Not Out Of The Woods Yet

But while short interest has declined 11.0 percent in 2017, not everyone is convinced that RH’s efforts will pay off in the long-term. Short percent of float remains at nearly 42 percent.

Ryan Craver, senior vice president at Lamour Group, says RH isn’t out of the woods yet. The company’s effort to drive growth by increasing store counts isn’t sustainable, Craver told Benzinga.

“Once the comp increases from Waterworks and outlets wear off, I anticipate RH struggling to grow sales at the relatively strong margin they currently have,” Craver said.

“Despite the grand efforts to build a brand that ‘stands alone,’ a greater percentage of sales will shift online and be impacted for decades to come. Long term I can’t see how the current strategy plays out well.”

Looking ahead, RH seems destined for some major volatility. If the company can deliver on its turnaround efforts, a major short squeeze may be coming. However, if the short sellers are right, RH’s 2017 run could come to an abrupt end in the near future.

Joel Elconin contributed to this article.