Message 17228645
To:Anthony@Pacific who started this subject
From: tradermike_1999 Thursday, Mar 21, 2002 2:42 PM
View Replies (1) | Respond to of 75347
Time to short RSTO:
The Spotlight: Glenn Krevlin's Restoration Hardware(RSTO) Pyramid Scheme
Most people try to make money in the stock market by picking out good stocks. Others though try to make money through manipulation. They might buy shares of a low float penny stock. Or IPO a penny stock themselves. Then they hire stock promotion companies to send out emails and faxes to people saying that it is going to the moon. The manipulators then sell into the market that the promoters have created for them. If the manipulators are big enough or well connected they might by shares of a big cap company and pull some strings to get the people on CNBC to talk about it.
Other manipulators think that if they buy up a stock's flaot that they can corner the market on it and force other people to pay their price for it. We saw this last year with Khashoggi and Genesisintermedia(GENI) and the year before with Stuart Jackson and Creative Host Services(CHST). In both cases the manipulators succeeded in causing some short sellers to cover at outrageous prices, but the game didn't last forever and when the manipulators started to bail out they caused a panic. Jackson lost money in his pyramid scheme and Kashoggi would have if he had done it legally - instead he sold short the stock himself and had a stock broker outright steal money for him.
I've identified another stock in which someone is trying to play the pyramid corner game. The symbol is RSTO and the company is called Restoration Hardware. The company describes itself in its form S-3/A prospectus:
" Our company, Restoration Hardware, Inc., together with our subsidiaries, is a specialty retailer of home furnishings, functional and decorative hardware and related merchandise that reflects our classic and authentic American point of view. We market our merchandise through retail locations, mail order catalogs and on the worldwide web at www.restorationhardware.com. Our merchandise strategy and our stores’ architectural style create a unique and attractive selling environment designed to appeal to an affluent, well educated 35 to 55 year old customer. As of January 5, 2002, we operated 104 retail stores in 31 states, the District of Columbia and Canada."The company is the classic story of a retail chain that started out small, then went public, and tried to increase its earnings by using debt to expand its operations. However, instead of increasing its earnings it just became a bloated debt machine. It lost .18 cents a share in 1999 and 2000 and then lost .43 cents a share in 2001. The company has high costs because 43% of its store space is back room storage. It started out in California and then expanded into the Southeast with little success, a move that created only unprofitable stores. What is worse is that they sign 3-5 leases for these unprofitable leases and can't just move away from them.
RSTO shares traded at around 35 dollars a share in the summer of 1998 shortly after it went public. The share price dropped to a low of .68 cents in December of 2000. It then started a rapid climb in September and is now trading under $12 a share.
Why the big advance?
A year ago the company hired a new CEO, Gary Friedman, who promised to turn it around. He carried out a secondary offering for the company which has since been used to pay off all of its debt and says that he will turn around the whole company by slashing prices on poor selling items and closing several stores, while opening a new one in Durham, NC.
However, the company has placed a smokescreen over its financial results. It does not report monthly sales figures like most retailers and offers no guidance on its future earnings. It only states that it plans on becoming a billion dollar a year retailer. Earlier this year the company said that it would release detailed sales figures on February 7th. But when February 7th came they were silent. In a conference call the CEO said "Train leaves station April 9th," but gave no detailed figures. Although he did predict a return to profitability by January of 2003. It seems that the company can give a prediction about the next year, but can't give any guidance about the next quarter
Because of the lack of visibility only one analyst follows the stock. It is mostly individual investors who are caught up in the stock now.
There are a few figures that will tell you the real reason why the stock has gone up. As of March 8 it has 28.4 million shares outstanding and a short position of 2.13 million. However, the float is only 900,000!
Since this fall the stocks has seen massive insider buying, which has taken shares out of circulation and caused the price to rise.
If you look on Yahoo you'll find that the following entities have been the most recent and largest purchasers of RSTO stock:
GJK Capital Management
Glenhill Capital
Krevlin Advisors
Glenn Krevlin
GJK Overseas Management
Glenhill Capital Overeas Partners
Reservior Capital Management
These entities also own 10's of millions of shares from the private placement.
On February 6th RSTO filed a form S-3/A to register securities for sale. It listed the following selling shareholders:
Reservoir Capital Partners, L.P.(6)(7)
2,152,629
1,933,577
650 Madison Avenue, 26th Floor
New York, New York 10022
Reservoir Capital Associates, L.P.(6)(8)
3,544
3,006
650 Madison Avenue, 26th Floor
New York, New York 10022
Reservoir Capital Master Fund, L.P.(6)(9)
361,921
325,101
650 Madison Avenue, 26th Floor
New York, New York 10022
Glenhill Capital, L.P.(10)
925,764
683,264
650 Madison Avenue, 26th Floor
New York, New York 10022
Glenn J. Krevlin(10)(11)
67,612
60,612
650 Madison Avenue, 26th Floor
New York, New York 10022
The filing also had the following details:
7) In addition to shares of Series A preferred stock, Reservoir Capital Partners, L.P. owns 219,052 shares of our common stock. Reservoir Capital Partners, L.P. beneficially owned approximately 7.1% of our common stock as of December 10, 2001. Reservoir Capital Partners, L.P., Reservoir Capital Associates, L.P. and Reservoir Capital Master Fund, L.P. are affiliated entities. Reservoir Capital Group, L.L.C., an entity controlled by Reservoir Capital Management, L.L.C., serves as the general partner in each of Reservoir Capital Partners, L.P., Reservoir Capital Associates, L.P., and Reservoir Capital Master Fund, L.P.
8) In addition to shares of Series A preferred stock, Reservoir Capital Associates, L.P. owns 538 shares of our common stock. Reservoir Capital Associates, L.P., Reservoir Capital Partners, L.P. and Reservoir Capital Master Fund, L.P. are affiliated entities. Reservoir Capital Group, L.L.C., an entity controlled by Reservoir Capital Management, L.L.C., serves as the general partner in each of Reservoir Capital Partners L.P., Reservoir Capital Associates, L.P., and Reservoir Capital Master Fund, L.P.
(9) In addition to shares of Series A preferred stock, Reservoir Capital Master Fund, L.P. owns 36,820 shares of our common stock. Reservoir Capital Master Fund, L.P. beneficially owned approximately 1.3% of our common stock as of December 10, 2001. Reservoir Capital Master Fund, L.P., Reservoir Capital Partners, L.P. and Reservoir Capital Associates, L.P. are affiliated entities. Reservoir Capital Group, L.L.C., an entity controlled by Reservoir Capital Management, L.L.C., serves as the general partner in each of Reservoir Capital Partners, L.P., Reservoir Capital Associates, L.P., and Reservoir Capital Master Fund, L.P.
(10) In addition to the shares registered by Glenhill Capital, L.P., Glenhill Capital, L.P. owns 153,769 shares of our common stock. Additionally, Glenhill Capital Overseas Partners, Ltd., an affiliate of Glenhill Capital, L.P., owns 88,731 shares of our common stock. The general partner of Glenhill Capital, L.P., GJK Capital Management, is controlled by Glenn J. Krevlin, one of our directors. Glenhill Capital, L.P. beneficially owned approximately 3.2% of our common stock as of December 14, 2001.
(11) Mr. Krevlin holds an option for 7,000 shares of our common stock exercisable within 60 days of December 14, 2001. Mr. Krevlin, individually and through Glenhill Capital L.P. and its affiliates, beneficially owned approximately 3.4% of our common stock as of December 14, 2001.
If you'll notice all of these entities share the same mailing address. It is Glenn Krevlin's mailing address. He bought millions of shares in the private placement between $2 and $3 a share and has been responsible for almost all of the insider buying over the past few months, which has been the real engine that drove the stock price higher. Krevlin has bought so many shares that the float is now only 800,000 while the short position is over $2.1 million.
Now I can't say this for sure, but I've seen enough similar situations in the past to know that this looks like a stock manipulation attempt. Like Jackson with CHST and Khashoggi with GENI, Krevlin has cornered the market on RSTO shares. That puts him in a situation in which he can try to force the short sellers to pay the price that he creates. That is the theory at least. In reality things never work out the way the manipulators think it will.
The problem is once the person with the corner starts to sell people usually get scared and sell the stock in a panic. There are no real institution buyers out there who are going to buy the stock up. The float is too small, the fundamentals are screwy, and there is no earnings visibility. The only buyers are individual investors who buy into the turnaround story and squeezed shorts. But the float is so tiny that any Krevlin selling will overtake these people....RSTO shares are a time bomb waiting to go off. But rest assured, even if it dumps Krevlin will still make a killing despite having bought all of the way up the past few months. Remember he got in cheap with the private placement.
Another time bomb is if some event past casts a pale over a stock. This could be a simple story in Bloomberg(remember CHST) or revelations of accounting fraud. The latter hit RSTO yesterday. The company announced that the SEC forced it to restate its earnings for the past two years, claiming that it booked sales that never happened:
biz.yahoo.com.
"Restoration Hardware said the effect of the change in revenues from amounts previously reported should not exceed $5 million in any fiscal quarter or $3.5 million for fiscal 2001, when the company generated sales of $367 million.The effect on net income should range from $50,000 to $450,000, or 1 cent to 3 cents per share, for any fiscal quarter, and but will not exceed $400,000, or 3 cents a share, for fiscal 2001, the company said.
The impact on the current quarter is not expected to exceed $800,000 for sales, $250,000 for net income, and 3 cents for earnings per share."
The company then held a conference call this AM saying that the SEC investigation didn't change anything and made more predictions without solid figures about a fantastic future. They also filed another form with the SEC to register another batch of shares for sale on behalf of insiders. No matter what happens in the future some people will be well rewarded for a manipulation well done.
Bottom line is I think this stock is a manipulated fraud and will eventually fall to the single digits. The news about its accounting issues should serve as a catalyst to provoke insiders into selling. If I'm wrong and the stock makes a new 52 week high then I'll cover and look to short it again later. |
