Jim Cramer: Restoration Hardware Is Still Poised for A Bigger Move

 | Jun 12, 2018 | 7:25 AM EDT
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Who would possibly pay up 30 points for the stock of Restoration Hardware Holdings, Inc. (RH) after it beat earnings and raised its forecast last night?

The answer: The people who failed to buy Tiffany & Co. (TIF) and Ralph Lauren Corp. (RL) after they beat earnings and raised their forecasts.

We are in an era of unquestioned consumer consumption brought to you by full employment and, except for a couple of pockets of cities that went Democratic in the presidential race, much lower taxes. That makes for fine shopping at Lauren, Tiffany and Restoration Hardware.

Last night's RH call was so powerful and almost without parallel that the actual numbers don't represent the magnitude of greatness. When Wall Street was looking for $1.02 and you got $1.33, when they were looking for $1.51 next quarter and it's probably going to be $1.70 to $1.77 while the year goes from $5.91 to $6.34, you know that the stock's going to react with alacrity, especially because they are roughly the same magnitude as Tiffany and Ralph Lauren.

That's why when Piper Jaffray raises its price target to $153 and Loop Capital to $160 and Citigroup to $170, you better get out of the way.

We got similar target boosts when the price went from $101 to $126, and after meandering for a few days around the $120s, it then broke out to $133. Ralph Lauren's stock powered from $116 to $133 and then went from $142. Neither one gave you much of a decline after their romps.

It stands to reason that Restoration Hardware, with a bigger beat and fabulous gross margins, might have an even bigger move ahead of it.

Out of these names, Tiffany's jump is the most surprising because it had a very small short position going into the quarter. It was "figure-out-able" because the dollar had gotten weak, helping its Manhattan store which was also not as preposterously difficult to reach this year despite its proximity to Trump Tower. The president's decision to spend more time in the White House than in Manhattan helped the store, it would seem, as much as the increased tourist traffic.

Ralph Lauren's stock, with a 12% short position, was harder to figure out because it involved the CEO executing very well including closing outlets that weren't delivering good sales, thus boosting gross margins.

But Restoration Hardware had a humongous short position, 35% of the float, although some of that was against a convertible bond that the company did several years ago.

You have to hand it to Gary Friedman, CEO of Restoration Hardware. Not only did he buy 32,918 shares of stock at $27.59, but he used two-thirds of the money raised from the convert he issued when the stock was about $100 to buy back a huge amount of it when the stock fell into the same range that be bought. That took the company's fully diluted share count from 40 million to 25 million shares.

Heaven help the shorts who aren't protected by the convert because index funds and Gary own, together, about 34% of the float and none of those holders is a seller.

In Gary's case you really had to be an idiot to sell this one short. Restoration Hardware's sales had been soft because of the Florida hurricane, the Texas hurricane and the decline in the price of oil-it has huge sales in the Lone Star state.

So, it stands to reason that all those areas would come back strong. Plus, the last quarter showed that Gary's switch to a membership model, which had been viewed with such skepticism, was a total hit, with 95% of its core business coming from members. Finally, Gary's decision to go for profits, not just revenue growth, was really beginning to pay off. The company cut sales growth but raised earnings growth the previous quarter.

It was all there for the pickings.

Now, just like Tiffany and Ralph Lauren, the stock will go up so fast that sellers don't even have a chance to materialize. As Steve Guilfoyle reminds me, part of every squeeze is a realization that the index holders don't sell no matter what price. Meanwhile, no firm will short any stock anymore for fear that they will have an RL or a TIF on their hands.

So, it pays to buy stock up 30, even if there's bad macro news around.

It's a new world, but with the Ralph Lauren-Tiffany template, you can make a pretty good bet that your first buy might very well be your best buy.

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