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Under Armour Federal Accounting Probe: Why Investors Are Suddenly Optimistic

After a tumultuous few months, things could be looking up for Under Armour.

The athletic footwear and apparel maker’s shares are jumping today after Raymond James & Associates analyst Matthew McClintock upgraded its stock, citing strong sales of new products and optimism about the outcome of a federal accounting investigation involving the brand.

As of 10:30 a.m. ET, Under Armour’s shares had climbed more than 7% to $17.66.

“We now believe that recent news regarding ongoing communication between Under Armour and the [U.S. Securities and Exchange Commission and Depart of Justice] is likely less of an overhang to the stock than we originally feared,” McClintock wrote Wednesday, upgrading the stock from “outperform” to a “strong buy.” “We have talked to a broad spectrum of investors — ranging from high-risk-appetite hedge funds to high-risk-adverse pension funds — and it appears that the consensus expectation is for minimal, if any, outcome from these discussions.”

McClintock, who maintained a price target of $30 for UA shares, added that those upbeat perspectives “[fall] in line with our view for this event to largely be immaterial and unrelated to the fundamental story for an inflection in the business in spring 2020.”

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Baltimore-based Under Armour has been under pressure for the better part of two years, after it experienced a sales slowdown on its home turf in North America, amid heightened competition from Nike, Adidas and a few niche brands, and shouldered negative headlines about its company culture.

The latest blow came early this month when Under Armour confirmed that it was the subject of a two-and-a-half-year federal investigation surrounding its accounting procedures. The Department of Justice as well as the Securities and Exchange Commission have been looking into whether the company manipulated sales numbers by shifting them from quarter to quarter to appear healthier.

The news sent its shares plunging nearly 20% and was followed by an explosive Wall Street Journal report detailing allegations that Under Armour “pushed early shipments” and “dumped goods at off-price chains” in an effort to boost revenue growth. That report prompted Under Armour founder and CEO Kevin Plank — who announced in October his plans to step down as CEO but remain as executive chairman of the company — to speak out in defense of the brand. Company president and COO Patrik Frisk is set to become UA’s new CEO at the start of 2020.

“Given recent events that have entered the realm of public opinion without full context, it is disappointing to have our integrity and reputation called into question,” Plank wrote in the letter that FN obtained on Nov. 15. “We’ve certainly never claimed to be perfect, but our team has earned and deserves more respect than this reporting currently affords us.”

Nevertheless, market watchers expressed concerns about the probe. Robert W. Baird & Co. analyst Jonathan Robert Komp, during a third-quarter conference call, pressed the brand’s management regarding the magnitude of the investigation as well as why investors were “just hearing about it now.”

The brand has consistently reiterated its stance that it “firmly believes that its accounting practices and disclosures were appropriate” and that it is “cooperating” with the SEC and DOJ in their investigations.

For the third quarter, reported Nov. 4, the company 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.

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