Why Shares of RH Are Rocketing 40% Higher Today

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What happened

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Shares of RH (NYSE: RH), a luxury retailer in the home furnishing industry, are punishing bearish short-sellers this morning, gaining a staggering 40% as of 11:30 a.m. EDT after the company reported second-quarter results.

So what

This certainly wasn't your average second-quarter report, and there are a lot of factors to consider, but let's start with the basics. RH's top-line revenue jumped 13% compared to the prior year and its adjusted net income checked in at $19.7 million compared to the prior year's $17.9 million. On the bottom line, its adjusted earnings per share jumped to $0.65, far above the prior year's $0.44 per share and higher than estimates calling for $0.47 per share.

It's important to note that RH struggled in 2016, but it appears that its business is materially improving. However, investors also have to remember that the company announced a bold move and had completed a $700 million share repurchase program that reduced its number of outstanding shares by nearly 50%. While that move reduces shares outstanding, and thus boosts its earnings per share, it's also worth noting that at the time of that announcement, management estimated the second quarter's adjusted earnings per share to check in between $0.43 to $0.50 -- so it was still a strong second-quarter result.

Now what

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Another factor fueling the short squeeze was a management comment that it expects to generate approximately $400 million of free cash flow for the year, which alleviates some fear of its leveraged balance sheet -- remember RH has about $350 million in convertible debt due in 2019. The bottom line is that margins improved, fixed some of its inventory woes, and in general things are moving in the right direction, but today's share price increase was partly fueled by a short squeeze and those gains could erode quickly if management doesn't continue to improve the core business.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.