Michael Burry of "The Big Short" Just Bought Shares of This Beaten-Down Activewear Stock (Not Nike)

Key Points

• Michael Burry loaded up on Lululemon stock and call options in the second quarter.

• The apparel maker faces a group of issues today, but is still growing sales and earnings.

• It's constantly refreshing its products to meet the needs of its users, and they're responding.

• 10 stocks we like better than Lululemon Athletica Inc. ›

Michael Burry, who runs Scion Asset Management, gained fame after his incredible play on the mortgage crisis was chronicled in the Michael Lewis book (and subsequent movie) The Big Short. At the time, he was just getting started. Today, he manages a portfolio worth nearly $600 million.

Unlike many hedge funds, his fund owns very few stocks, and he makes options a central component of his strategy. That makes sense for someone who rose to prominence through a contrarian short scheme. As of the end of the second quarter, Scion owns only six stocks, plus an assortment of call options.

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One of Burry's new positions is struggling activewear giant Lululemon Athletica (NASDAQ: LULU). Let's find out what this contrarian player might see in Lululemon and whether it's a good play for the average investor.

Image source: Getty Images.

No longer the new name in activewear

Lululemon helped popularize the athleisure trend that made gym clothes an everyday staple and became part of the reason several officewear brands went under. It was thriving before the pandemic, but remote work was a strong tailwind when offices closed down.

More recently, however, Lululemon has been struggling, or at least decelerating. There are a number of reasons it's had a falling out with the market, including missing the seasonal colors that are vital to resonating with its consumer base, being subject to tariffs as a foreign company (it's based in Canada), not having enough inventory of its most popular items, and growing competition in the premium activewear market.

In some ways, it's been a victim of its own success, since its affluent customers want the most premium experience, and there are always new players who can enter and vie for that position. Also, as return-to-work orders abound, investors are concerned that these trends will only deepen. That's quite a load of issues, and Lululemon stock has tumbled 60% off of its all-time highs.

Not just yoga pants

It's not that bad. Here's how Lululemon performed in the 2025 fiscal first quarter (ended May 4):

• Revenue increased 7% year over year.
• Comparable sales were up 1%.
• Gross profit was up 8%, and gross margin was up 60 basis points.
• Operating income was up 1%, but operating margin was down 110 basis points.
• Earnings per share (EPS) increased from $2.54 last year to $2.60 this year.

Lululemon had a strong quarter internationally, where sales increased 19% over last year. CEO Calvin McDonald noted that U.S. customers are being more intentional about their buying behavior, considering the pressure in the economy.

The business performed particularly well in China, where sales increased 22% over last year, and where it's expecting sales to grow 25% to 30% this year. It's expecting to open 40 to 45 new stores for the year, most of which will be in China. This is a huge market opportunity and demonstrates that even if Lululemon is facing more brand competition in the U.S., it's still a hot brand in China.

As a premium brand, Lululemon may lose out when there's high inflation. That points to its status among mass consumers, who typically reach to afford the company's premium products. That's usually a good thing for the company, but since it relies on these customers to generate growth, it may feel changes in the economy more acutely that brands that are ultra-luxury and don't reach a mass consumer base.

Keep your eye on the ball

Lululemon has developed a huge and growing global business and remains a popular brand. That gives it some edge over newcomers, and it's working to protect that by sticking to its successful formula: creating innovative, stylish products that bring value to its users. There have been many knockoffs of Lululemon's best-selling and genre-redefining men's dress pant, for example, but people who pay for Lululemon's quality and patented fabrics get it.

"Key to our success within all our markets is our product," McDonald said, "which offers unique and innovative solutions for guests across both athletic and lifestyle product categories." He mentioned several new lines for women, including Daydrift, Shake It Out, and Be Calm, and said that customers "responded well to the newness."

Despite that effort, Lululemon stock is trading at its cheapest-ever forward, one-year P/E ratio. It trades at only 13 times forward, one-year earnings, near an all-time low, and likely lower than when Burry took a position.

LULU PE Ratio (Forward 1y) data by YCharts

He also bought call options, which are a straight-out signal that he thinks the stock price will rise. At this price, and with the company's continued opportunity, that's likely to happen soon enough. Lululemon reports second-quarter earnings this week, and there's a chance the stock will already begin to climb on the update.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.