Analysts Sound Alarm on Under Armour Accounting Probe as Shares Plunge

Under Armour’s stock has taken a hit amid a federal probe into its accounting practices and its downgraded sales forecast.

Shares for the athletic apparel firm plunged more than 18% on Monday — a day after a spokesperson confirmed that it had been working with the Securities and Exchange Commission and the Department of Justice as they investigate whether the company manipulated sales numbers by shifting them from quarter to quarter to appear healthier.

During the company’s third-quarter earnings call this morning, Robert W. Baird & Co. analyst Jonathan Robert Komp questioned the magnitude of the investigation as well as why investors were “just hearing about it now.”

CFO David Bergman responded, “We have been fully cooperating with these inquiries for nearly two and a half years. 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.”

Analysts, however, expressed worries about the recent discovery. In a distribution note, Susquehanna Financial Group analyst Sam Poser called it “disconcerting” that management failed to address why the investigation was not disclosed prior to last night.

“We expect the overhang of the federal investigations, [Golden State Warriors point guard] Steph Curry’s injury and [Los Angeles Clippers forward] Kawhi Leonard’s emergence with New Balance to cast shadows over Under Armour’s results and stock performance for quite some time,” Poser added. (Curry is one of Under Armour’s most recognized collaborators.)

Financial commentator Jim Cramer called the situation a “major problem” that could “produce some very bad results for Under Armour.”

In an interview at the New York Stock Exchange for his co-founded platform, The Street, Cramer said, “This is very bad, and I don’t think there’s a real sense of understanding about how bad it is when you have that kind of level of investigation. I can’t emphasize how wrongly they’ve handled it.”

In its third-quarter earnings report, released just two weeks after founder Kevin Plank said he was stepping aside as CEO, Under Armour logged adjusted earnings per share of 23 cents versus expectations of 18 cents. Profits grew 7.2% to $102.32 million.

Revenues, however, were down 1% to $1.43 billion, modestly above Wall Street’s forecast of $1.41 billion. Wholesale revenues decreased 2% to $892 million and direct-to-consumer sales dropped 1% to $463 million. Its North America business remains challenged, with revenues slowing 4% to $1 billion, while international sales climbed 5% to $368 million.

“Under Armour reported a third-quarter beat though the full-year outlook faces incremental troubles, with the revenue outlook lowered primarily likely due to less expected fourth-quarter off-price sales and perhaps additional direct-to-consumer pressure, further diminishing management’s guidance credibility,” Wedbush Securities analyst Christopher Svezia wrote in a distribution note.

Overall footwear sales were down 12%, which the firm attributed to softer demand and lower sales in the off-price channel. Despite the flat year-to-date figures, Under Armour expects the category to grow this year, boosted by its performance run and women’s training footwear departments.

“As we think about our opportunity in footwear, our expectations have not changed. We are playing the long game,” said president and COO Patrik Frisk, who will assume the role of CEO at the start of next year. “The work we’ve done to recalibrate the business, reduce inefficient volume and improve segmentation across price points are enabling us to drive greater focus on prioritization into the categories where we believe we can win.”

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