Under Armour Accounting Probe Could Ripple Out Into Fashion Industry – WWD

The U.S. Securities & Exchange Commission’s probe into Under Armour’s past accounting records could have far-reaching consequences for the retail industry. 

The Baltimore-based active company disclosed in an SEC filing Monday that regulators had given the firm a Wells Notice, indicating it intended to pursue legal actions regarding disclosures Under Armour made beginning with the third quarter in 2015 and through Dec. 31, 2016.

In addition to the company, founder and executive chairman Kevin Plank and chief financial officer David Bergman received Wells Notices earlier this month for allegedly pulling forward sales, or registering revenues from retailers earlier than usual in an effort to boost the activewear brand’s top line for a quarter by borrowing from the next quarter.  

While the Wells Notice is not a formal charge or determination by the SEC, it is still something that should be taken very seriously — at Under Armour and in the industry at large, according to Erik Gordon, a professor of business and law at the Ross School of Business at the University of Michigan, Ann Arbor. 

“This could be a signal that the government is on to it — this quarterly channel-stuffing and liberal return policy to make your quarterly numbers, and hope somehow that the next quarter you can catch up — and considers it to be illegal,” Gordon, who is also a licensed attorney, told WWD. 

“I think another side effect of this could be — not that any laws would be changed — but that other vendors in the industry will be a little bit more careful about how much channel-stuffing and other earnings-solution gimmicks they want to use,” Gordon said.

“A Wells Notice is double-barrel bad news; it means the government is after you,” he said. “It means Under Armour has been talking to the government, giving them documents and information. They’re trying to persuade the government that really there’s nothing there to worry about. But when a company gets a Wells Notice, it means whatever they sent so far, the government is not buying it and is putting them on formal notice that it intends to bring proceedings. And the DOJ is involved, which makes it very serious,” he said. 

Under Armour could not be reached for further comment, but said in the filing it plans to “pursue the Wells Notice process, which will include the opportunity to respond to the SEC staff’s position and also expect to engage in a dialogue with the SEC staff to work toward a resolution of this matter.”

The exact details regarding Under Armour’s sales accounting practices are not publicly known. But the proceedings could result in fines and penalties for the company, as well as for some of its executives, Gordon said. Furthermore, shareholders would also be able to take action in the form of civil suits.

And there are law firms ready to jump into the fray. Rosen Law Firm, for instance, said Monday it was investigating potential breaches in fiduciary duties by Under Armour’s management, including the possibility that it misled investors about the company’s financial health.  

Despite the news of the SEC action, investors didn’t seem to mind. The company’s stock, which is down more than 59 percent year-over-year, closed up 2.66 percent on Monday at $11.20 a share. 

“Looking at shares up right now, from an investor perspective, I don’t know that this is viewed as some breaking news,” said Simeon Siegel, managing director and senior retail analyst of BMO Capital Markets. 

He added, however, that, “The Under Armour that was focused on growth at all costs, from 2015 and before, does not seem to be the same company as today. The Under Armour of today is focused on a healthy path forward over profits.”

Plank relinquished operational control of the company he founded to Patrik Frisk last fall and the retailer said earlier this year that it was ditching plans to open the 53,000-square-foot flagship along Manhattan’s Fifth Avenue to help to curb expenses. 

But not everyone is quite so optimistic about Under Armour’s future.

“While some may take comfort that the period in question, which is isolated to 2015 to 2016, [sic] we expect there will be ongoing concerns about the culture at Under Armour,” said Jamie Merriman, an analyst at Bernstein. “At best, this is a distraction during a period when Under Armour is facing share losses and a pandemic and needs management focused on the business. At worst, this could lead to formal charges against Under Armour executives.”

Brian Nagel, equity analyst at Oppenheimer, added that the news signals another challenge for Under Armour as it seeks to restore its market value while competing against “much stronger positioning of companies, such as outperform-rated Nike and Lululemon.”

He remains cautious on the stock, rating it “perform,” and pointed out that it is hard for investors to gauge with any certainty the ultimate effect a legal proceeding could have on a company’s shares.

“For investors, handicapping outcomes of potential regulatory actions is notoriously difficult,” Nagel wrote in a note.

Under Armour — like most retailers — is struggling to mitigate losses caused by the coronavirus shutdown. The retailer, which is scheduled to release its latest earnings report on Friday, lost $590 million last quarter after being forced to close stores in an effort to prevent the spread of COVID-19. And last quarter’s results were only through March 31. With many of its retail stores in North America closed through parts of May, further losses are inevitable.

“The fact that the SEC filed a Wells Notice suggests they are closer to issuing a finding against the company and/or the individuals named, one that likely entails monetary fines,” Camilo Lyon, managing director of BTIG Research & Strategy, wrote in a note. “Given Under Armour’s fundamental issues with declining sales and waning brand relevance that serve as the basis for our ‘sell’ rating, coupled with its recent actions to dispose assets, an unexpected fine could further impinge on the company’s cash position.”