Under Armour founder Kevin Plank resorted to “sales tricks” and improper accounting to attain unrealistic sales goals as the brand’s popularity faded, shareholders allege in a revised class-action lawsuit.
New allegations in a lawsuit initially filed three years ago say the company and Plank, as the sports apparel maker’s then CEO, violated federal securities laws to mask a slowdown after a streak of 26 consecutive quarters of at least 20% growth ended abruptly in late 2016.
“Plank set the tone at the top, and created an atmosphere which emphasized growth as the foremost priority regardless of what it took to get there,” said the amended complaint, filed Oct. 14 in U.S. District Court for Maryland.
The case represents shareholders who acquired Under Armour stock between Sept. 16, 2015, through Nov. 1, 2019. The market’s reaction to company disclosures of a slowdown in growth, excess inventory, and executive turnover and resignations caused millions of dollars in losses for Under Armour investors, the lawsuit says.
Under Armour shares have fallen from over $40 a share in early 2016 to levels at points below Monday’s closing price of $13.93.
Baltimore-based Under Armour said Monday that it believes the allegations are without merit.
“As we have stated previously, we firmly believe that our disclosures and accounting practices have been entirely appropriate,” the company said in an emailed statement. “The company intends to continue to defend this case vigorously.”
Plaintiffs said they based their allegations on Under Armour’s public filings and announcements as well as news stories and former employees of Under Armour and its retail partners.
“To preserve the Company’s carefully cultivated image as a fast-growing, premium sports brand and a legitimate challenger to Nike, defendants concealed the Company’s problems and improper accounting and sales practices,” the lawsuit says.
Under Armour disclosed last fall that both the U.S. Securities and Exchange Commission and the Justice Department were investigating the company’s accounting practices. Federal officials escalated their investigation in July at a time when the Baltimore-based brand was struggling with worsening losses amid coronavirus-related store shutdowns.
SEC staff issued warnings known as “Wells Notices” to the company and Plank, as well as David E. Bergman, the chief financial officer, on July 22. The notices recommend the SEC file an enforcement action against the company and those executives alleging violations of federal securities laws. Such notices are not formal charges of wrongdoing nor final determinations of any violations.
Lead plaintiffs in the amended complaint include the Aberdeen City Council, administrator of the North East Scotland Pension Fund; Monroe County Employees' Retirement System; and KBC Asset Management NV.
The shareholders allege that Under Armour used irregular practices repeatedly in 2015 and 2016 when selling to multiple retailers, including the largest customers Dick’s Sporting Goods and the now-closed Sports Authority.
The lawsuit says the sports brand pulled forward orders from the month after the quarter ended to ship within a quarter, a way to hit aggressive sales goals or close gaps. It accuses the company of “leaning on retailers” to take products early, including by adjusting contract terms, offering discounts and guaranteeing that Under Armour would buy back a certain number of unsold products.
Under Armour also shipped products earlier than planned or in the final days of a quarter, resulting in the return of truckloads of unopened boxes of inventory and in shipping plans that sometimes contradicted the dates on the boxes, the lawsuit says.
It also alleges the brand would ship new inventory intended for Under Armour factory stores instead to off-price seller T.J.X. Co., so Under Armour could book the goods immediately as revenue instead of having to wait for a customer to buy the items at its stores. And, it says, the brand continued to ship products to Sports Authority and booked sales when goods were shipped, even after it became clear Sports Authority was headed to bankruptcy.
“These suspect sales practices enabled the company to increase quarterly revenue, mask slowing demand for Under Armour products, and extend the 26-quarter streak of 20% sales growth,” the lawsuit says. “However, these illicit tactics were unsustainable” and robbed from future quarters.
Plank, the lawsuit said, “trumpeted explosive growth and strong customer demand, while downplaying and concealing the Company’s suspect sales practices, declining brand heat, ballooning inventory, liquidations, and gross margin compression.”
As a result, Under Armour’s common stock prices were artificially inflated throughout the period represented by the lawsuit, the complaint says. It says Plank personally cashed in on the artificial inflation by selling a substantial amount of company stock for total proceeds of $138.2 million during the months covered in the lawsuit. Plank announced last October that he was stepping down as CEO but would continue to serve as executive chairman and brand chief. He was replaced as CEO by Patrik Frisk.
In the shareholders’ initial lawsuit, filed in February 2017, investors said they suffered significant losses as a result of false and misleading statements about the company’s sales and growth prospects.
That filing had said Plank and former CFO Lawrence P. “Chip” Molloy, "failed to disclose that Under Armour’s revenue and profit margins would not be able to withstand the heavy promotions, high inventory levels and ripple effects of numerous department store closures and bankruptcy of The Sports Authority.”
An unrelated lawsuit by Under Armour stockholder Dale Olin was filed in August in U.S. District Court in Baltimore on behalf of Under Armour. It accuses company leaders of accounting irregularities and of failing to tell investors about a federal investigation of those practices for more than two years.