Lululemon Athletica Inc. (LULU) shares have climbed nearly 3% over the past week on news of activist involvement and an earnings beat, but here's the thing: a key fundamental indicator is flashing bright red warnings about the athletic retailer's operational health.

When Quality Takes a Dive

While legendary investors Michael Burry and Paul Singer's Elliott Investment Management are piling into the stock, the company's "quality" score has taken a nosedive week-over-week. We're talking about a metric that measures operational efficiency and financial health relative to peers, and it's not pretty.

Lululemon's quality percentile dropped significantly from 18.52 to 10.14 this week. That's now the stock's weakest attribute by far. To put this in perspective, the company ranks at the 78.26th percentile for growth and 60.42 for value, but quality has crashed into the bottom decile compared to the broader market. In other words, roughly 90% of comparable companies are showing better operational fundamentals right now.

The Numbers Behind the Warning

This deteriorating quality score isn't appearing out of thin air. It likely reflects the split personality in Lululemon's recent performance.

Sure, the company beat third-quarter earnings estimates with $2.57 billion in revenue. But dig into the regional numbers and you'll find the core market is struggling. Americas comparable sales decreased 5%, and Americas net revenue dropped 2%. That's a problem when North America has historically been your bread and butter.

International revenue did surge 33%, which sounds great until you realize the efficiency drag from the shrinking North American business is apparently weighing heavily on how the company stacks up against peers with more balanced operational stability.

The Activist Bet

So why are some of the smartest money managers on Wall Street buying in? Investors are looking past these fundamental concerns and betting on potential turnarounds orchestrated by activist heavyweights.

Elliott Investment Management recently grabbed an over $1 billion stake with plans to push for leadership changes. Meanwhile, "Big Short" investor Burry doubled his position in the third quarter, apparently convinced that the stock's valuation has fallen too low relative to its brand power and long-term potential.

The market seems torn between these competing narratives. LULU shares rose 2.92% over the last week but dropped 7.14% in the past month. Year-to-date, the stock is down a painful 43.74%. In Monday's premarket trading, shares edged up 0.26%.

The question for investors now: Are Burry and Singer seeing a turnaround opportunity that fundamental metrics haven't caught up to yet, or are they catching a falling knife? With quality metrics at decade lows and North American sales softening, this is shaping up to be a classic test of whether activist intervention can reverse operational deterioration.