Under Armour shares plunged Monday, a day after the company confirmed that federal authorities are investigating its accounting practices, prompting some to question why it wasn’t disclosed before.
Shares dropped even though the Baltimore-based brand reported earnings Monday morning that beat Wall Street expectations, but as sales slipped again.
Under Armour shares closed down nearly 19% Monday at $17.14 each.
The sell-off occurred after the Wall Street Journal reported Sunday that the company’s accounting practices are under investigation by the U.S. Securities and Exchange Commission and the Justice Department. Officials are looking into whether the athletic footwear and apparel company manipulated its sales numbers to make them appear stronger, the Journal reported.
An SEC spokesman declined to comment Monday. A spokeswoman for the U.S. Attorney’s Office in Baltimore said prosecutors could neither confirm nor deny the existence of an investigation.
During a conference call with analysts Monday, Under Armour’s chief financial officer, David Bergman, said he would break with company policy of not discussing regulatory or litigation matters to briefly address the report.
“We have been fully cooperating with these inquiries for nearly two and a half years,” Bergman said. “To this effect, we began responding back in July of 2017 to their request for documents and information. We firmly believe that our accounting practices and disclosures were appropriate."
Word of the federal investigation comes two weeks after Under Armour announced that Kevin Plank, who steered it from a basement startup selling sweat-wicking T-shirts in 1996 to a $5.2 billion global brand, is stepping down as CEO at the end of the year. Patrik Frisk, the company’s president and chief operating officer, will take over Jan. 1 as CEO.
The Journal story cited unnamed sources saying that investigators questioned people in Baltimore. Another source told the Journal that Justice Department prosecutors are conducting a criminal inquiry in coordination with SEC investigators.
During Monday’s earnings call, one analyst asked whether the investigation would have a material impact on the company and what the company has expended addressing it.
Jonathan Komp, a senior research analyst for active lifestyles apparel with Baird, asked Bergman for “any comment relative to the presence of document requests for the last several years, which we are just hearing about now.”
Bergman responded that the company is “prohibited” from offering any more detail.
That response sparked concerns for some.
“Failure of management, on the earnings call, to address why the investigation was not disclosed prior to last night is disconcerting,” said Sam Poser, an analyst with Susquehanna Financial Group, in a report Monday.
A company spokeswoman declined Monday to comment on why the investigation was not disclosed previously.
A company would be required to file a public disclosure only if it deems it an investigation of material information — that would have a material effect on its financial results, said Ken Joseph, a managing director and fellow at Duff & Phelps Institute, a corporate citizenship think tank.
“Companies receive requests from law enforcement for information fairly regularly,” including both informal and formal requests, said Joseph, who previously worked at the SEC as a supervisor in the division of enforcement.
Because most SEC investigations tend to take two to three years, the Under Armour probe could be in a later phase, where investigators compile testimony, Joseph said. Once testimony is taken, the SEC would decide whether or not to bring charges against a company or individuals.
Any action, which would be filed publicly, could include a settlement or go to litigation, he said. About half the time, an investigation results in no action.
One of the most common areas of enforcement action for the SEC is determining whether revenue was improperly recognized, Joseph said.
Public companies must follow strict rules regarding the way revenue is recognized, including proper timing, said Timothy Spence, a San Francisco-based financial consultant who advises companies on SEC matters.
“Some industries, like fashion, are highly seasonable, with sales varying widely from quarter to quarter,” Spence said. “There appear to be two questions here. The first is, was this a ‘smoothing’ of revenue to make quarterly revenue recognition more consistent?"
Another question would be whether the company recognized revenue in advance and expected to make it up in the next quarter, he said.
“Both practices are highly questionable accounting, if not outright fraud," said Spence, who added he has no specific information about practices at Under Armour.
The investigation into Under Armour appears to have begun shortly after a long run of year-over-year, quarter-over-quarter revenue growth came to a stunning halt in 2016.
The $5.2 billion brand has struggled since then to boost declining sales, particularly in the United States, its largest market. And as the company experienced doldrums in profitability and its stock price in recent years, Under Armour and Plank have been criticized for adhering to its founder-led executive structure.
Even with Frisk taking over as CEO, Plank remains executive chairman and controls the board with a majority of the company’s voting stock.
Company officials said Monday that the company’s turnaround plan remains on track and already has yielded positive results.
Still, for the quarter ended Sept. 30, Under Armour reported Monday that its global sales slipped 1% to $1.43 billion, while North American sales fell 4% to $1 billion.
However, the company reported a profit of $102 million, or 23 cents a share for the July-to-September period. Wall Street analysts had expected income of 18 cents per share on $1.42 billion in revenue.
In a research report Monday, Stifel analyst Jim Duffy applauded the company’s better-than-expected revenue and gross profit margin improvement, though the company now expects a slower rate of sales growth for the year.
Monday’s stock price decline likely “is more a reflection of concerns around SEC investigations into 2017 revenue recognition than reported fundamentals," Duffy said.
“While the accounting probe may continue to weigh, we see 2017 practices under a prior CFO as history [albeit unfortunate history] that doesn’t impact potential value for shares in the next 12” months, he said in the report. “We maintain our bullish view on potential for revenue and margin improvement.”
Under Armour saw some turnover in the CFO position before 2017. Longtime executive and former CFO Brad Dickerson left the firm in 2015, not long after being promoted to chief operating officer, to join meal delivery startup Blue Apron in early 2016. He was replaced by Chip Molloy, who had served as CFO of PetSmart. Molloy lasted just over a year, resigning in January 2017, joining an executive exodus from Under Armour that included the departures of a chief merchandising officer, a chief digital officer and a senior vice president of footwear.
Neither Molloy nor Dickerson could be reached for comment.
Bergman, who had been Under Armour’s senior vice president of corporate finance, stepped in as acting CFO in February 2017 and was named to the job permanently in December 2017.
Camilla Yanushevsky, an analyst with CFRA, was not impressed with Under Armour’s results and maintained a sell recommendation on Under Armour shares.
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“Prospects in a near-term turnaround in North America ... are dimming, we think due to growing competition from Nike, Lululemon and Columbia Sportswear, whose innovation pipelines are in the fast lane,” Yanushevsky said.
And though executives say they are cooperating with the federal probes, she said, “We expect increased awareness about these regulatory and litigation matters to weigh on shares and further adds to our negative view.”
Still, company officials touted their turnaround efforts Monday, saying Under Armour has reduced excess inventory and its reliance on sales through off-price or discount stores, while reviving sales at full-price stores. Improved results will allow the company to invest more in marketing the brand in the coming year, they said.
“Building our long-term brand strength remains at the center of everything we do,” Plank said in the earnings announcement. “Our ongoing transformation across the business continues to make us smarter, faster and more operationally excellent."
Poser, who also maintained a sell recommendation, remained unconvinced about the progress. The stronger than expected earnings were offset, he said, by lowered sales expectations for the year and by the federal investigation.
“Under Armour,” Poser said in a report, “continues to struggle to right the ship in North America, as new product fails to impress, and increased marketing will not make that product better.”
Baltimore Sun reporters Christina Tkacik and Kevin Rector contributed to this article.