From Hero to Underdog: Here’s How We’re Playing the Lululemon Breakout
Activist investor Elliot Investment Management has purchased $1 billion of Lululemon. Can activists and solid earnings revive the former market darling?
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Shares of Lululemon Athletica (LULU) gained 3.5% on Thursday to close at a five-month high, and have now climbed by more than 10% in the past week. Activist investor Elliot Investment Management has accumulated more than $1 billion worth of the stock. EIM also holds significant positions in PepsiCo (PEP) and Workday (WDAY) , and is using its leverage to influence decision-making at those companies.
Current Lululemon CEO Calvin McDonald is scheduled to step down at the end of January. Former CEO and company founder Chip Wilson is also calling for changes in the company’s management.
Once a Hero Stock
From 2016 through 2021, Lululemon Athletica was a hero stock, providing investors with double-digit returns annually for six consecutive years. Then the momentum faded. Lululemon shares peaked in late 2023 at $511, and have lost 58% since then.
On December 11, Lululemon reported solid earnings and revenue. The company earned $2.59 per share, well ahead of the consensus estimate of $2.23. Revenues beat expectations by 3.4%.
How We’re Playing Lululemon Now
Lululemon is trading at a five-month high, and has been moving up on heavy volume (point A). The stock is above its 50-day moving average (blue), but is trading below its 200-day moving average (red). The latter indicator could act as resistance, as Lululemon hasn’t closed above its 200-day MA since early June (point B).
Our plan is to open a half-sized position at current levels (point C). We’ll add the second half of the position if and when Lululemon breaks above the aforementioned 200-day moving average, currently resting at $228 (point D).
For the first time since May, Lululemon’s relative strength index indicator (RSI) is overbought (point E). I don’t consider this a negative; many stocks experience their biggest gains after experiencing overbought RSI readings.
Consumers Can Be Fickle
What set this company apart during its glory days was the loyalty of its customer base, which was willing to pay top dollar for the look and feel of Lululemon's athletic and leisurewear.
At the time, competitors such as Nike (NKE) and Under Armour (UA) attempted to undercut Lululemon by offering similar products at lower prices, but consumers stayed with Lululemon.
However, fashion tastes have changed. New upstarts like Alo Yoga are gaining popularity at Lululemon’s expense.
For Lululemon to succeed, new management needs to increase its appeal to younger consumers, while maintaining its strong relationship with its current clientele.
According to the Wall Street Journal, Elliot Investment Management wants former Ralph Lauren CFO/COO Jane Nielsen at Lululemon’s helm, but this has yet to be confirmed.
At the time of publication, Ponsi was long LULU.
