Understanding Cettire's monstrous 78% rally

If there's one stock on the market that can double and then halve within a blink of an eye – It's Cettire (ASX: CTT).

Shares in the luxury online retailer soared 78% on Wednesday after auditor Grant Thornton signed off on its FY24 financial statements. This follows a disastrous August reporting season, where Cettire failed to receive auditor approval due to a dispute over how the company reports revenue.

Cettire's business model revolves around drop-shipping. The company holds no inventory and its suppliers ship products directly to customers. Revenue recognition in this model can be done as either a principal or an agent.

1. Principal: In this instance, Cettire would claim it controls the goods and services provided to the customer. This means they record the full amount of the sale as revenue

2. Agent: Cettire would only record the commission or a portion of the sale as revenue, since it only acts as the intermediary between the supplier and the customer

If Cettire recognises itself as the principal, then its revenue would look much higher. Interestingly, the official FY24 and unaudited results were a one-to-one across several financial metrics, including:

• Revenue up 81% to $978.3 million

• Adjusted EBITDA up 10.9% to $32.5 million

• Adjusted EBITDA margin of 4.4%

• Statutory net profit after tax of $10.5 million

How does this justify the move?

Despite the massive rally, Cettire is still down around 50% from the record high it set on 1 March 2024. The dramatic one-day rally can be attributed to two key factors:

#1 Restoring confidence: Cettire has faced heavy media scrutiny this year. Most of the stock's initial selloff in March was not driven by company announcements but instead, by media articles that flagged the company's poor customer reviews, ongoing tax queries from US authorities and discrepancies in declared goods values. The failure to deliver a timely audited FY24 result in August was the nail in the coffin, sending the stock 21% lower on 29 August to a near two-year low. But the auditor's sign-off on Tuesday effectively concludes that the company's financial results are compliant.

#2 Short thesis killer: Cettire's short interest has continued to trend higher post-August reporting season, to a record high of 11.2%. It's currently the sixth most shorted stock on the market. A slowdown in the luxury goods market has been known for quite some time, evidenced by the collapse of its international rivals including Britain's MatchesFashion.

Cettire's full-year result flagged that the June quarter observed "more challenging market conditions, evidenced by a softening demand environment, increased promotional activity ... and impacts of competitor clearance activity." Notwithstanding the macro weakness, the auditor approval may be a thesis breaker for all the shorters who believe the company's financial reporting is non-compliant.

Cettire short interest chart (Source: Shortman)

Sources told the Financial Review that prime brokers were recalling shares, triggering a short squeeze. This process forces short sellers to buy back shares, driving prices higher and creating a cycle of more covering and even higher prices.

Despite ongoing challenges in the luxury goods market, Bell Potter forecasts Cettire to grow its net profit by approximately 31% in FY25. The auditor's approval has effectively shut down the non-compliance thesis, potentially lifting the overhang that has weighed on the stock since March.