Lululemon (LULU) Features Great Buying Momentum, Serious Potential Risk

There's one thing you can say absolutely for Lululemon (NASDAQ: LULU) it does not want for audacity. Not even slightly. It's made very bold moves in recent days, and it's been rewarded for this boldness with substantial gains. Like any other big run, though, it's always worth watching out for hyperextended muscles, and even as Lululemon flexes its own newly-expanded operations, it's also running a very serious potential to pop something.

A Marathon, Not a Sprint

Watching Lululemon stock for the last year would make anyone nod in admiration. The company has had a steady, if slow, upward climb for the better part of a year, going from $179.95 on July 1 of 2019 to hit a comparative high of $263.68 on February 20. Then the company, along with pretty much every other company in existence, twisted its collective ankle on the chuckhole in the track that was the Massive Indiscriminate Coronavirus Sales Event.

However, almost one month after the slide began, cooler heads prevailed and realized that the company really didn't need a whole lot of physical presence to carry on. A mostly V-shaped recovery kicked in, and the company started climbing. Not only did it recover every bit of loss—the stock price hit $267.53 on May 21, surpassing its previous pre-coronavirus top mentioned previously—but it's been carrying on climbing ever since. Well, not quite ever since; around June 10, the high of $323.25 started a downward retraction that brings us to yesterday's closing price of $294.35.

Profit Taking? Or a Second Wind in Progress?

Lululemon did seem to take a bit of a hit in mid-June, and that came with earnings season. The retailer announced that sales were down about 17% from the same time the preceding year, which was closely connected to stores forcibly shuttered by government mandate. The company's online presence saved it from utter disaster, but brick-and-mortar shoppers never translate completely into online shoppers, so some sales were lost.

Lost sales don't play well with investors, so likely some decided to take their profits—which were substantial—and run. We, meanwhile, suggested that this was a time to buy, and though the stock prices aren't what they were back then, they're not that far off.

That was when Lululemon got aggressive in its own retraining, so to speak. Just hours ago, the company announced it was buying Mirror, a home gym start-up that focuses mainly on its “connected exercise display.” Since Lululemon's main focus is on gym clothes, it's a natural extension of the product line to also offer home gym materials as well. This is especially the case given the pandemic; gyms are closed, just now opening, or closed again depending on where you look, so giving customers the option to continue working out makes sense. Breaking in on competitors' markets—especially those like Peloton (NASDAQ:PTON)—makes a certain sense in that light.

A Hyperextended Hamstring?

That's a big step for the company, but it's also not the only one. Recent announcements also featured the opening of its new flagship store in Tokyo's Roppongi Hills district. The store is actually the largest one it has in the Asia-Pacific region, and the ninth store in Japan alone. Additionally, Lululemon also joined the frequently-expanding Facebook (NASDAQ:FB) advertising boycott, part of the so-called #StopHateForProfit initiative that's featuring a laundry list of major names. So basically, to sum up Lululemon's position right now, it's just staged a come-from-behind run in the last year's marathon, and now it's about to start a whole new run, uphill, in unfamiliar territory and while carrying a half-full marketing water bottle.

Had it just bought Mirror, had it just expanded its stores, had it just stepped in on the ad boycott...any one of these by itself might have been a sufficiently bold move to carry the company forward. Now it's made several bold moves at the same time, and just after coming off a slight setback from June's numbers. It's put new weight on itself with a whole new product line to oversee (though reports noted that Mirror will remain its own business, so that minimizes the hands-on portion of things) and a massive new store, and it's done all this while forbidding itself access to pretty much the entire Facebook market.

That kind of dynamic response to market issues makes Lululemon a company to pay attention to, and if you buy in now, pay attention to closely. While this all could end successfully for the company, there are also several separate points of failure here. If more than one goes wrong at once, it could be a disaster. So for those who join in on Lululemon's latest run, be ready to sit it out if the company pulls something.