Under Armour was among the hardest hit by the bankruptcy and subsequent liquidation of Sports Authority in 2016 — and now the company and several of its executives are being sued for allegedly misleading investors about the risk of this financial blow.
Investors Brock Andersen and Balraj Paul filed a derivative shareholder suit against the athletic footwear-and-apparel brand in Maryland federal court on Monday, naming 11 current and former board members and officers as defendants, including CEO and Chairman Kevin Plank and former Neiman Marcus president and CEO Karen Katz, who joined the company’s board of directors in 2014. They allege that the executives issued “false and misleading representations about Under Armour’s vitality, continuing growth and revenues” in the lead-up to and during Sports Authority’s bankruptcy, downplaying its potential impact in order to artificially inflate the company’s share price.
The suit follows a separate but similar securities fraud class action lawsuit, filed in February 2017, which is currently ongoing on behalf of investors who bought Under Armour stock between April 21, 2016 and January 30.
“This lawsuit is another tactic to raise the same claims included in the securities class action lawsuit filed in early 2017,” a spokesperson for Under Armour told FN. “While we don’t comment on ongoing litigation, we believe the claims are without merit and we intend to defend the lawsuit vigorously.”
The suit filed this week points to numerous press releases put out by the company between July 24, 2014 and April 21, 2016 that projected rapid growth and ongoing financial strength despite signs that Sports Authority’s business was in trouble. In June 2014, for instance, Moody’s downgraded the retailer’s rating from stable to negative, warning that it would default on debt obligations due the following February, and in 2015, it downgraded it again due to supposed weak liquidity and heavy debt load.
Even after Sports Authority filed for bankruptcy in March 2016, revealing outstanding debts of more than $23 million toward Under Armour, the brand continued to reiterate its sunny expectations for the year. In its April 21 earnings report, it raised net revenue outlook from $4.925 billion to $5 billion, representing 26 percent growth over 2015, and updating operating income outlook to a range of $503 million to $507 million from a range of $440 million to $445 million.
Despite these reassurances, Sports Authority’s store closures and inability to pay back its debt did indeed hurt Under Armour’s bottom line: its net revenues for the full year 2016 were $4.8 billion, significantly below its previously-stated outlook, and 2016 operating income was $420 million when accounting for the $23 million impairment charge and the loss in revenues from the shuttered stores.
The suit also alleges that the officers personally profited from the omissions and misleading statements thanks to an artificially inflated stock price. According to the suit, Plank sold approximately $88 million in shares between April 26 and April 29, around the time Sports Authority announced it was planning to liquidate its stores rather than restructure the business. At the time, Under Armour’s share price hovered around the low $40s; today it sits around $20.