Under Armour reveals receipt of 'Wells notice' from SEC over sales probe

An Under Armour store front is seen on November 04, 2019 in Sunrise, Florida.

Joe Raedle | Getty Images

Under Armour on Monday disclosed it received notice of a possible enforcement action from the Securities and Exchange Commission related to the accounting treatment of sales it booked between the third quarter of 2015 and the fourth quarter of 2016. 

On July 22, Under Armour in addition to two executives — Kevin Plank, its former CEO and current executive chairman, and David Bergman, its current CFO — received Wells notices from the SEC related to a previously disclosed probe by the agency, the company said in an 8-K filing Monday. 

The SEC's investigation was looking into the timing of Under Armour's sales, and if the company tried to make them appear stronger than they were. A Wells notice doesn't necessarily mean the company or the executives violated the law. However, it does indicate the agency is considering an enforcement action. 

"The SEC Staff has not alleged any revenue recognition or other violations of generally accepted accounting principles relating to that or any other period," the company said in the filing. 

"The Wells Notices informed the Company and the Executives that the SEC Staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and each of the Executives that would allege certain violations of the federal securities laws," it said. 

The  retailer's stock was up nearly 2% in afternoon trading, having fallen premarket. 

"If hypothetically a response is a slap on the wrist ... I think investors will return to looking to what the future prospects are for the company," said BMO Capital Markets analyst Simeon Siegel. 

"After some painful corrections, Under Armour is voicing a view that the focus has shifted to health rather than growth," he said. 

Under Armour said Monday that it maintains its actions were "appropriate," and it intends "to work toward a resolution of this matter" with the SEC. 

"Next, the recipient of the Wells notice has the right to respond," said Marc Leaf, a former council to an SEC commissioner. "And in this case I think they certainly will." 

"Maybe they settle this case," he said. 

Last November, the company confirmed it was the subject of federal investigations by the Justice Department and SEC over its accounting practices. Under Armour began responding in July 2017 to requests for documents and information related to its accounting practices and related disclosures, a company spokesperson said at the time. 

The company had been on a sales streak, posting 26-straight quarters of sales growth of more than 20%, which came to a sudden end at the end of 2016. 

Since that dismal holiday season, Under Armour has been struggling to keep pace with peers such as Nike, Adidas and Lululemon. It is latest reported quarter, sales fell 23%. The company also announced about $325 million in cost cuts to weather the coronavirus pandemic. 

Meantime, Under Armour has faced turmoil in its executive ranks. The company went through three CFOs in the period between 2016 and 2017, and Plank stepped down from his job at the start of the year, to be succeeded by then COO Patrik Frisk. 

"When someone does something wrong in the past ... there is still an atonement," BMO's Siegel said. But with the retailer's shares rising, he said, it appears investors were already pricing this response from the SEC in. 

Under Armour shares have fallen almost 50% this year, and the company has a market cap of $5 billion. 

It is set to report quarterly earnings on Friday before the bell. 

Source
Check Our More