Under Armour Falls Most Since July as U.S. Probes Accounting

Eben Novy-Williams and James Ludden
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Under Armour Falls Most Since July as U.S. Probes Accounting

(Bloomberg) -- Under Armour Inc. 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 fell as much as 17%, the most since July 30, to $17.65 in New York trading.

On Sunday, spurred by a report in the Wall Street Journal, the company said that it’s cooperating with investigations by the U.S. Securities and Exchange Commission and the U.S. 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. Executives declined to comment further during Monday’s earnings conference call.

Investigators from the Justice Department and SEC were questioning people at the sports apparel maker’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 stock decline represents a buying opportunity as the accounting probe shouldn’t affect investors, according to Stifel analyst Jim Duffy.“While the accounting probe may continue to weigh, we see 2017 practices under a prior CFO as history (albeit unfortunate history) that doesn’t impact potential value for shares” for the next year, Duffy said in a note. Former Chief Financial Officer Chip Molloy left the company in early 2017.

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 chief executive officer, 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.

New CEO

But sputtering growth prompted it to embark on a multiyear restructuring plan aimed at regaining its edge. A new CEO, tapped last month 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 Jan. 1.

Plank, 47, is stepping aside after more than two decades in charge, though he’ll remain on as executive chairman.

“We understand that critical to our success, and what will actually get us there, is our ability to focus on ourselves, block out the noise and keep marching forward,” Plank said on the earnings call Monday.

The SEC declined to comment, while the Justice Department didn’t immediately respond to a request for comment.

Under Armour went public in 2005 and experienced rapid growth, with sales increasing to $5 billion in 2017 from $1.1 billion 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.

Revenue Forecast

Under Armour said its revenue would rise 2% for the year, down from the previous expectation of a 3% to 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 last year, the company’s $1.43 billion 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 Inc. and Adidas AG, 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 assistance from Molly Kissler and Frank Connelly.

To contact the reporters on this story: Eben Novy-Williams in New York at enovywilliam@bloomberg.net;James Ludden in New York at jludden@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, ;Matthew G. Miller at mmiller144@bloomberg.net, John J. Edwards III

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