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Under Armour Pays $9M to Settle SEC Probe

Under Armour Inc. resolved one of its biggest headaches when it settled a Securities and Exchange Commission investigation, and now management can focus on a long-term strategy for profitable growth.

In a Nutshell: In settling the SEC matter, the company agreed to pay a civil monetary penalty of $9.0 million, in addition to other non-monetary settlement terms. Under Armour neither admitted nor denied the SEC charges, and the settlement has resolved all outstanding SEC claims over alleged revenue recognition practices.

“The SEC Staff has confirmed that it does not intend to recommend that any enforcement action be taken against the company’s executive chairman, chief financial officer or any other member of management in connection with this investigation,” Under Armour said on Monday.

Company founder and former CEO Kevin Plank was at the helm when the SEC issue “Wells Notices” to him and chief financial officer David E. Bergman in July 2020, although the company had disclosed in 2019 that it was cooperating with federal regulators. The civil probe was connected to financial disclosures covering the third quarter of 2015 through the period ended Dec. 31, 2016. The probe was over whether the company used “pull forward sales” in its reporting, meaning that a sale was booked a quarter earlier than the one in which it was booked to help meet sales objectives.

Plank was succeeded by Patrik Frisk as president and CEO, formerly the company’s chief operating officer, on Jan. 1, 2020. The company founder now serves as executive chairman and brand chief. Bergman, who joined the company in 2004 and was named CFO in December 2017, continues to hold the CFO post.

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Under Armour, which was facing a criminal inquiry in coordination with civil investigators at the SEC, said it has not received any requests from the U.S. Department of Justice since the second quarter of 2020.

Separately, the company on Tuesday posted first-quarter results.

“Under Armour is off to an excellent start for the year. Our first-quarter results demonstrate that our improved operating model and investments we’re making to amplify our connection with consumers are enabling us to deliver against strong demand for our brand,” Frisk said.

BMO Capital Markets analysts Simeon Siegel said Under Armour should benefit from the “current trifecta of stimulus, vaccines and light industry-wide inventory,” adding that the company’s margin growth is “very real and sustainable.”

Telsey Advisory Group’s Cristina Fernández called the earnings report a “broad-based first quarter 2021 beat,” adding that inventory level seemed well managed.

Net Sales: Total net revenues for the first quarter ended March 31 rose 35.1 percent to $1.26 billion from $930.2 million. Included in the tally was a 41.2 percent gain in total net sales to $1.24 billion and an 8.6 percent  increase in licensing revenues to $21.7 million. The total revenue tally also reflects a category called Corporate Other that includes Connected Fitness, which saw a 102.7 percent drop in sales.

By product category, the quarter’s best performer was accessories, which saw sales jump 73.3 percent to $117.4 million. The largest sales category for Under Armour was footwear, which grew 47.4 percent to $309.0 million. Apparel sales rose 35.4 percent to $810.0 million.

By region, the bulk of Under Armour’s sales came from North America, which grew 32.3 percent to $805.7 million. Asia Pacific was next, at up 119.7 percent to $210.2 million. Europe, Middle East and Africa sales rose 40.6 percent to $19.9 million, while Latin America saw a 9 percent decline in sales to $48.3 million.

The company said inventory was down 9 percent to $852 million. Gross margin rose 370 basis points to 50 percent, thanks to pricing, supply chain initiatives and and a strong channel mix.

Earnings: Under Armour moved to the black for the first quarter, posting net income of $77.8 million, or 17 cents a diluted share, against a net loss of $589.7 million, or $1.30, in the year ago period. On an adjusted basis, the diluted earnings per share was 16 cents.

Wall Street was expecting adjusted diluted EPS of 4 cents on revenue of $1.12 billion.

For the full year, company is expecting a diluted loss per share of between 2 cents to 4 cents, versus prior guidance of a loss of per share of between 18 cents to 20 cents. The adjusted diluted EPS is forecasted in the range so 28 cents to 30 cents. Revenue was guided to be up at a high-teen percentage range versus prior guidance of a high-single-digit percentage rate increase, based on a high-teen percentage growth rate in North America and low thirties percentage growth rate in its international business.

Under Armour said it expects between $35 to $40 million in restructuring charges in the second quarter related to the restructuring announced in April last year. Of the estimated $550 million to $600 million restructuring plan range, the company so far has recognized $480 million of pre-tax charges, including $7 million in the first quarter.

CEO’s Take: “Additionally, with a solid balance sheet and well-managed inventory, we’re confident in our ability to drive well through 2021 as we get back on offense and make measured progress to returning to sustainable, profitable growth over the long-term,” Frisk said.