Kevin PlankUnder Armour 'I Will I Want' Women's Campaign, New York, America - 31 Jul 2014(CEO and founder of Under Armour, Inc)

Under Armour Inc.’s stock fell Monday on an uncertain future.

Shares of Under Armour dropped 18.4 percent $15.44 a share as investors weighed stronger third-quarter earnings and a weaker outlook against the impact of a federal accounting probe.

Under Armour acknowledged in a regulatory statement that its accounting practices were being investigated by the U.S. Securities and Exchange Commission and the Justice Department. The company said in a statement that it has been “responding to requests for documents and information from the SEC and DOJ regarding certain of the company’s accounting practices and related disclosures, beginning with submissions to the SEC in July 2017.”

Under Armour said it “continues to believe its accounting practices and related disclosures were appropriate.”

Such investigations rattle investors — who suddenly have to gauge how much to trust a company’s numbers.

“While the matter in question seemingly happened years ago, this news does create uncertainty, which is likely a negative in our view,” UBS analyst Jay Sole wrote in an analysis.

Ken Joseph, managing director and global leader of the disputes and consulting practice at Duff & Phelps, a consulting firm in New York, added that the charge — improper revenue recognition — or accelerating sales volumes to meet quarterly earnings expectations, is “indeed extremely significant.” The Department of Justice’s involvement means there is the possibility of both criminal and civil charges, Joseph said, whereas the SEC does not have any criminal authority.

That means, if the claims are proven true, both Under Armour the company would be at risk of heavy fines, while individuals “exposed” to the accounting process could be at risk of jail time, Joseph said. 

“But I caution, it’s very early in the game,” Joseph said. “It’s a mere investigation at this point. Nothing has been proven just yet.”

He added that improper revenue recognition is one of the most frequently cited violations in accounting fraud cases.

The incident also happened largely behind closed doors, leaving a number of unanswered questions. The company said it would not comment further.

Instead, Kevin Plank, chairman and chief executive officer, said of Under Armour that “building our long-term brand strength remains at the center of everything we do. Our ongoing transformation across the business continues to make us smarter, faster and more operationally excellent. As we make the turn into 2020, we are confident in our ability to deliver our fourth-quarter targets while proactively supporting higher levels of strategic marketing investments that will further fuel the Under Armour brand.”

The company’s third-quarter net earnings expanded by 36 percent to $102.3 million, or 23 cents a share, from $75.3 million, or 17 cents, a year earlier.

Revenues for the quarter ended Sept. 30 slipped 1 percent to $1.43 billion from $1.44 billion. Wholesale revenue dropped 2 percent to $892 million while direct-to-consumer sales fell 1 percent to $463 million.

In North America, the company’s biggest market, revenues fell 4 percent. President and chief operating officer Patrick Frisk said this was driven by “traffic challenges.”

The firm said fewer people were going to its North American outlet stores, but that those who do make it into the stores are spending more money. The opposite was true online where traffic is up, but fewer consumers are actually buying looks.

Under Armour’s footwear business was also down for the quarter — 12 percent — falling to $251 million in sales, a slightly higher decline than expected.

Even so, Frisk, who will take over the reins as ceo on Jan. 1, said these results are only indicative of the short term.

We are playing the long game, and the work we have done to recalibrate the business, reduce inefficient volume and improving segmentation across price points are enabling us to drive greater focus and prioritization into the categories where we believe we can win,” Frisk said on a conference call with analysts. 

He added that there were a few bright spots in the business last quarter.

Apparel was one of them, with sales rising 1 percent to $986 million. The international business was another one. Revenues rose 4 percent in the Asia Pacific region last quarter. Sales in Latin America, with the exception of Brazil, also increased. 

But the company also said sales this year are expected to be up about 2 percent instead of the 3 to 4 percent previously projected.

Plank will transition into his new role of executive chairman and brand chief on Jan. 1. He said the move is voluntary and for the greater good of the company.

“Our goal is to build an eternal brand and we’re not going to stop until that happens, which obviously that’s a long time,” Plank said on the call. “You’ve got to get the flywheel going. And I believe that we have started that, but it’s also thinking about something that we can do with a brand as I say great brands do endure. But setting this up truly for the long term.

The professionalization of the company wasn’t meaning that we weren’t professional before,” he said. “It’s just taking our company from 5 to 10 billion is really a different step. I’m simplifying my job to just obsessing on product.” 

That includes things like the space uniforms Under Armour unveiled last month. Still, some critics say the company is focusing on the wrong products.

“[Patrick] Frisk will be an asset running the day-to-day,” read a note from Jane Hail & Associates, which rated Under Armour’s stock neutral. “However, the product is the real problem, so nothing has really changed.

Ath-leisure and casual styles have converged to become a lifestyle trend,” Jane Hail & Associates said. “This is the big growth category in the athletic apparel space because it extends the market to include everyone who wants to look athletic and wear stylish clothes. Nike, Adidas and Lululemon jumped on the trend by moving their product to be lifestyle focused….[Under Armour] will continue to turn a blind eye toward this lifestyle trend. Ceo Kevin Plank said his company is doubling down on performance and not pivoting into lifestyle. The company needs higher sales growth and it is not going to happen with their non-consumer-centric policy.”

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