I am inflexible. I cannot touch my toes without a great deal of warming up. In second grade, I almost passed out in gym class when an instructor didn't believe my limitations, and pushed down on my shoulders to "help" me stretch. My limitation is part of my fascination with athletic-gear maker lululemon athletica (Nasdaq: LULU). Last quarter, the company increased revenue 53% from the first quarter in 2011, but the share price has suffered. Does the company have stretch left in it, or is this as good as it gets?

Diversification is kind of good
 Lululemon's signature products appeal to female yoga participants. According to TIME magazine, yoga studios saw a 12% annual growth rate between 2002 and 2012. Lululemon has capitalized on that growth by building relationships with studio owners before opening its stores in a new market. While the spread of yoga has sustained it thus far, the company has diversified its offerings in order to sustain its growth.

The company now sells running apparel, swimwear, and men's clothing, among other new offerings. This means that Lululemon is attempting to broaden its horizons, much like companies such as Nike (NYSE: NKE) have successfully done. While this is an excellent strategy to increase the potential customer base, it also puts Lululemon in direct competition with other companies that have strong brand strength in their areas of expertise.

The new competitive landscape
 With its expanded offering, Lululemon has entered the pool alongside Nike, Gap (NYSE: GPS), and Under Armour (NYSE: UA). On a P/E basis, the four companies fall into two broad groups. The first is the established group that contains Nike and Gap, with forward P/Es of 15 and 13, respectively. The second group is what we'll call the "Wow, that's pricey" group. Under Armour's forward-looking P/E is currently at 30. Lululemon comes in just behind at 27.

Clearly Wall Street is expecting big things from Lululemon. That's actually the reason the stock fell earlier this year, even on a good earnings report. The company revised its Q2 earnings estimate, and the new forecast fell below analysts' expectations. But even with the lowered revision, Lululemon is predicting a revenue range of $273 million to $278 million. That would represent a 29%-31% increase over Q2 last year. By contrast, Under Armour is expecting to grow revenue by 21%-22% over 2012.

What to watch for
If Lululemon beats expectations, then investors should have a nice little pop along with the company's earnings announcement. Luckily for investors, Lululemon has never missed an estimate. If it continues to perform this well, then the stock could easily regain some of the 21% loss it has seen since the last earnings call.

While Nike and Gap both compete with Lululemon, neither competitor is focusing on the same segment that makes Lululemon so profitable. Nike only earned 28% of its revenue through apparel last fiscal year. While this is still a staggering $2.1 billion, it's apparel that is spread across every conceivable sport. Once Lululemon makes inroads into running, I'll start to be concerned about Nike. As long as the majority of sales are from yoga clothing, I think the additional sales from running clothes should be seen as an add-on that the company isn't really fighting for.

Gap's Athleta brand of women's workout clothing is a better fit as a competitor, but Athleta is still a small brand in the Gap world. In 2011, the combined income from Athleta and Piperlime accounted for only $301 million of Gap's total $14.5 billion in revenue. Again, until this story develops to be a meaningful competitor, I'm not worried about Gap taking over yoga.

The bottom line
 Lululemon is not my favorite company. I think that the reliance on yoga is going to be a hindrance at some point -- but that point is not now. Lululemon should beat expectations again in the next quarter, and I imagine that trend will continue through this year as well. With that in mind, I think now is a good time to pick up the stock.

Lululemon is currently trading 30% below its 52-week high. Nothing about the business has changed in that time, except for the forecast number that it published. Once earnings realign with investor expectations, Lululemon should be set to jump. But despite the massive amount of love that this stock gets, it's still not good enough to be The Motley Fool's Top Stock for 2012. Even though the year is half gone, there's still time to get in on this excellent stock. Read the free report and get the information you need to get ahead.