Under Armour sinks after disclosing its accounting methods have been investigated
The Wall Street Journal says the probe is focusing on whether Under Armour inflated sales from quarter to quarter
New York — Under Armour shares plunged after the company disclosed that federal officials have been probing its accounting practices for more than two years, bringing a fresh headache to investors just as the sports brand prepares for a CEO transition.
The athleticwear company also lowered its full-year revenue forecast on Monday, but it raised some other projections after posting solid third-quarter results. The shares pared their deep pre-market losses, down 12% to $18.60 at 7.21am in New York after falling as much as 20% earlier.
On Sunday, Under Armour disclosed that federal officials have been probing its accounting practices for more than two years. Spurred by a report in the Wall Street Journal, the company said on Sunday that it’s co-operating with investigations by the US Securities and Exchange Commission (SEC) and the US department of justice and doesn’t think it’s done anything wrong.
“The company began responding in July 2017 to requests for documents and information relating primarily to its accounting practices and related disclosures, and the company firmly believes that its accounting practices and disclosures were appropriate,” Under Armour said in the statement Sunday.
Investigators from the justice department and SEC were questioning people at the sports apparel’s base in Baltimore as recently as last week, the Journal reported, citing people familiar with the matter. The probe is focused on whether Under Armour inflated sales from quarter to quarter, the newspaper said.
The investigation comes at a difficult time for the company, which has been wrestling with increased competition at home and an underperforming share price. It rattled investors in July by warning that full-year revenue would decline in North America. The stock fell 23% since that statement through Friday’s close in New York.
Founder Kevin Plank, currently CEO, turned the company from a football-focused startup into a global powerhouse that makes men’s and women’s apparel in dozens of categories — and even spacesuits.
But sputtering growth prompted it to embark on a multiyear restructuring plan aimed at regaining its edge. A new CEO, tapped in October from within Under Armour’s ranks, is meant to help get the company back on a growth trajectory. Patrik Frisk, Under Armour’s president since 2017, will take the reins on January 1.
Plank is stepping aside after more than two decades in charge, though he’ll remain on as executive chair. No one at the justice department or the SEC immediately responded to requests for comment.
Under Armour went public in 2005 and experienced rapid growth, with sales increasing to $5bn in 2017 from $1.1bn in 2010. Recently, though, keeping that momentum going has been a struggle.
Under Armour’s best year-over-year revenue growth in the past three years came in the first quarter of 2016, when sales climbed 30%. It reported double-digit growth in each quarter of that year, slowing to single-digit rates thereafter. The first decline, a 4% drop from the year-earlier period, was in the third period of 2017.
Under Armour said its revenue would rise 2% for the year, down from the previous expectation of a 3%-4% gain. But it said gross margin would expand and operating income would be at the high end of its previously forecast range.
With Monday’s third-quarter results, the company has now beaten earnings expectations in six straight quarters.
Though revenue dropped 1% compared with the same period in 2018, the company’s $1.43bn in third-quarter sales slightly beat analysts’ estimates. Under Armour’s 4.1% drop in North American revenue also outpaced projections.
That said, Under Armour’s performance in its local market has consistently been a thorn in its side. Unlike Nike and Adidas, Under Armour does more than 70% of its business in North America. The company’s domestic struggles have become a bellwether for investors trying to gauge the success of its transformation efforts.
Under Armour attributed the lowered full-year revenue forecast to foreign-currency impact and less excess inventory to sell off-price.
With Molly Kissler and Frank Connelly