Buffett's Berkshire Hathaway (NYSE:BRKa) has brought a high-end furniture retailer into the public eye after it revealed its latest position report.

Berkshire built a new position in RH (NYSE:RH), the parent company of Restoration Hardware, buying 1.2 million shares worth $220 million, making it RH's fourth-largest shareholder, according to regulatory filings.

This position is undoubtedly small in Berkshire's entire portfolio, but it has attracted attention because it is a highly volatile and very controversial stock. It is very different from Berkshire's familiar stocks such as Coca-Cola Company and Bank of America Corporation.

RH targeted by short sellers

First, RH has attracted a lot of bears over the years. Since October 2015, RH has launched a 14-month slump, with its share price plummeting from more than $100 to less than $30. In response to the influx of short sellers, RH bought back nearly half of the company's shares in 2017, costing them hundreds of millions of dollars.

But even so, RH's short position reached 5.81 million as of Oct. 31, accounting for 36.11% of outstanding shares. Why are all short sellers piling up on this stock?

Founded in 1979, Restoration Hardware is famous for selling high-end classical furniture and a beautifully decorated, thick and heavy catalogue. It was privatized by two private equity firms in 2008 and re-listed at $24 a share four years later. Since 2013, Restoration Hardware's valuation has been called into question.

At that time, the retailer expanded its business aggressively, introduced new product categories, built a large number of stores and improved the mailing quantity and quality of product catalogs in the face of a sluggish real estate market. these moves have kept its quarterly sales growing at double-digit rates. But the aggressive plan also led to a surge in capital spending, losing $12.8 million for the year to February 2013. And even after a massive sell-off by insiders, it was trading at 37 times expected 2014 earnings.

Such high valuations already mean less room for fault tolerance. A mistake made by the company in 2015 gave short sellers an opportunity.

In June of that year, RH announced the launch of a new modern-style product line, RH Modern, aimed at millennials and city dwellers. However, due to logistics problems led to serious delays in product delivery, coupled with the reduction in the number of SKU of the product line itself, profit margins squeezed and other problems, the stock price plummeted that year.

Gary Friedman, then chief executive, decided to fight back. He first used the company's balance sheet to buy back $1 billion of shares in the company and began a comprehensive restructuring of the company's operations, including redesigning the entire logistics network, changing door-to-door and return operations, and promoting membership. By the end of December 2017, RH shares had returned to an all-time high of $105.

In the era of e-commerce, the opposite is done.

Since then, RH has started the process of volatility and rise, so it is considered to be a successful case of transformation and reorganization. Its most wonderful move is to take a retro route in the era when e-commerce is king. It continues to mail heavy catalogs to customers, playing "lifestyle" cards, and opening new stores in the name of "galleries" in downtown metropolises, showing not only furniture decoration, but also cafes and bars. All of a sudden, it has become an online celebrity art gallery.

Moreover, like NASDAQ:COST, 95 per cent of RH's business is now member-driven. RH has a membership capital of US $100 a year and enjoys a 25% discount on full-price goods.

In its second-quarter results in September, RH's revenue rose 10 per cent to $707 million, and adjusted earnings of $3.20 per share beat analysts' consensus expectations. It also raised its revenue guidance for fiscal year 2019 to $2.68 billion to $2.694 billion from $2.658 billion to $2.674 billion. This is the third time this year that the company has raised its full-year guidelines.

But once targeted by bears, it is hard for RH to get rid of them. RH's share price has fluctuated sharply so far this year. From March to June, the stock lost 40% of its value as the results showed that sales fell short of expectations.

The high amount of debt that RH accumulated through share buybacks in 2017 has also been criticized. In 2014, RH's debt-to-EBITDA ratio was less than double, and now it has reached 4.41 times. In addition, it remains to be seen whether RH can continue to withstand the downturn in the real estate market and tariffs and achieve sustained growth.

In any case, Berkshire has made a lot of money by building a position in RH in the third quarter-RH's price-to-earnings ratio hit a new low in May, and its share price has doubled since then and just hit an all-time high last week.