Trouble is mounting at Under Armour.
The Baltimore-based maker of athletic footwear, apparel and equipment is facing a federal accounting probe though sluggish sales—which forced the firm to lower its FY 2019 revenue guidance—could be an even bigger concern.
In a Nutshell: Better-than-expected sales and profits were overshadowed by the third quarter’s slowing sales, particularly in footwear, coupled by e-commerce issues and weak foreign currencies, resulting in a revision to full-year 2019 guidance.
Now, Under Armour management is grappling with how to reverse the slowdown while dealing with the feds looking into its finances.
On Sunday evening, the Wall Street Journal first reported on the two separate probes, a criminal inquiry by the Department of Justice in coordination with civil investigators at the Securities and Exchange Commission. The probes, which began in 2017, are said to be focused on revenue recognition, or a review of when Under Armour actually logged sales onto its books.
Recording sales at a time other than when they took place is illegal, but the timing of the probe suggests that it began at some point after Under Armour began to see a deterioration in sales in 2017.
During Monday’s conference call with Wall Street analysts, chief financial officer and principal accounting officer David E. Bergman said: “We have been fully cooperating with these inquiries for nearly two-and-a-half years. To this effect, we have been corresponding since July of 2017 to their requests for documents and information. We firmly believe that our accounting practices and disclosures were appropriate.”
Late last month, Under Armour said that founder Kevin Plank would step down from the CEO post on Jan. 1, 2020, to be succeeded by Patrik Frisk, currently chief operating officer. Plank will stay on as chairman, and become brand chief. In his new role, Plank will focus on long-term vision and product.” On the Monday conference call, Plank described the move as “my decision,” adding it was also reflective of the company’s strategic “shift from defensive to offensive.”
Analysts generally believe making Frisk the head of day-to-day operations is good for Under Armour, Jessica Ramirez at investment research firm Jane Hali & Assocs. said that product is the real problem at the sportwear company. And with Plank retaining oversight of both product and brand strategy, Ramirez concluded that “nothing has really changed.”
According to Ramirez, “We believe Under Armour is losing share at wholesale and with consumers as a premium brand. Management has indicated it is working to differentiate by focusing exclusively on high-performance sportswear, as opposed to following its competitors into the athleisure space.”
With athleisure and casual styles converging to become a lifestyle trend, Ramirez said ignoring the trend–which competitors Nike, Adidas and Lululemon have embraced to great success–is a big miss for Under Armour.
Jane Hali & Assocs. believes Under Armour will continue to turn a blind eye towards the trend. “The company, therefore, will continue to launch non-fashion performance-based products, which will continue to drive the business downward,” she concluded, adding that the company “needs higher sales growth, and it is not going to happen with their non-consumer-centric policy.”
Ramirez also noted that the company continued its e-commerce markdown cadence in the third quarter in the U.S. market.
Net Sales: Net revenues at the company for the quarter ended Sept. 30 slipped 0.9 percent to $1.43 billion from $1.44 billion a year ago.
For the quarter, apparel sales were up 0.7 percent to $985.6 million from $978.5 million, while accessories gained 1.7 percent to $118.2 million from $116.2 million. Footwear sales fell 12 percent to $250.6 million from $284.9 million.
By region, sales in North America declined 4.1 percent to $1.02 billion, while Latin America also saw a decrease of 3.9 percent to $52.2 million. The Asia-Pacific region saw in increase of 3.7 percent to $154.9 million, while Under Armour’s best-performing segment was in Europe, the Middle East and Africa, which collectively jumped 9 percent to $161 million.
The company decreased inventory levels by 23 percent to $907 million for the quarter.
Traffic in the quarter was mixed, Frisk said during the call. Outlet stores saw weak traffic and online, higher traffic resulted in a lower conversion rate with flat average unit retail. Under Armour also experience softer demand in footwear sales, which was lower than planned.
Frisk said the company is working to “recalibrate” its footwear business.
Earnings: Net income jumped 35.9 percent to $102.3 million, or 23 cents a diluted share, from $75.3 million, or 17 cents, in the year-ago quarter.
Wall Street was expecting earnings per diluted share of 18 cents on sales of $1.41 billion.
Shares of Under Armour dropped 18.4 percent to $15.44 by the end of Monday’s trading session on the New York Stock Exchange.
Under Armour said it now expects revenue for fiscal 2019 to be up 2 percent, down from prior guidance of up 3 percent to 4 percent. That’s mostly due to e-commerce issues and weak foreign currencies. The company maintained its prior EPS forecast of 33 cents to 34 cents.
CEO’s Take: According to Plank, “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 confidence 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.”