Jim Cramer says Kohl's short sellers should cover and move on'

• CNBC's Jim Cramer advised against shorting the stock of Kohl's, comparing the scenario to GameStop's short squeeze four years ago.
• Kohl's balance sheet isn't bad enough to justify such a heavy short position, Cramer said.
• “The shorts have clearly overstepped their boundaries with Kohl's. They've run into a buzz-saw of their own creation,” he said.

CNBC's Jim Cramer on Tuesday advised against shorting Kohl's stock, comparing the scenario to the GameStop short squeeze four years ago.

“The shorts have clearly overstepped their boundaries with Kohl's. They've run into a buzz-saw of their own creation,” he said. “Even now, I think they'd be wise to cover their short and move on before they have another GameStop on their hands.”

Shares of the legacy department store saw a volatile session Tuesday, and trading was temporarily halted at one point in the morning. The stock ultimately finished the day up 37.62%.Kohl's has about 50% shares outstanding sold short, according to FactSet.

Short selling is a strategy where investors borrow shares at one price and then sell them, hoping the stock will plummet. They intend to buy back the shares at a lower price and then return them to the borrowers, pocketing the difference.

Cramer said investors aren't buying Kohl's for any tangible reason, such as its business with cosmetics company Sephora or partnership with Amazon. Instead, he said, the stock is being bought because of its extreme short position.

Whenever there's a large short position, it's easy for many buyers to collaborate online and orchestrate a short squeeze, Cramer said. He likened Kohl's to GameStop, remarking that the department store chain was discussed in the Wall Street Bets forum on Reddit. The forum gained immense popularity in 2021 when it helped facilitate GameStop's massive short squeeze that took Wall Street by surprise — and cost short sellers nearly $20 billion. Kohl's was “a textbook example of a stock that had become perfect for the GameStop playbook,” Cramer said.

Kohl's balance sheet isn't bad enough to justify such a heavy short position, Cramer continued. He suggested that the company “may not be great, but it isn't terrible either.” According to him, Kohl's short sellers should have covered their positions — meaning returned their borrowed shares — back in the spring when the stock fell as Wall Street panicked over President Donald Trump's new tariffs.

“In the end, the short sellers have the wrong target: a company with declining sales and a lot of debt, but not one that's about to fall apart, which is what you need if you were still shorting Kohl's down here in the single digits,” Cramer said. “Hedge funds, take my advice: cover and move on.”

Kohl's did not immediately respond to request for comment.