On Monday, founder and Kevin Plank and chief financial officer David E. Bergman were issued “Wells Notices” by the Securities and Exchange Commission (SEC) relating to a financial investigation at the Baltimore-based athletic company that first made headlines last year.
Under Armour said last year that it was cooperating with federal investigators. The SEC’s civil probe is looking at whether financial disclosures covering the third quarter of 2015 through the period ending Dec. 31, 2016, used reporting that “pull forward sales” for revenue achieved over that period. Pulling forward means a sale is attributed to a quarter earlier than the one in which it was actually booked, in order to help a company meet sales objectives.
Plank was the CEO during the financial reporting periods the SEC is probing, though he stepped down in October and was succeeded by then-chief operating officer Patrik Frisk on Jan. 1. Bergman, who joined the company in 2004 and had held different finance roles, was named CFO in December 2017 after roughly 10 months in an interim capacity. He assumed the role after Under Armour posted a sales miss for the final quarter of 2016, ending a 26-quarter streak of double-digit year-over-year revenue growth. Bergman became the third finance chief the company had between 2016 through 2017.
The matter remains under investigation, both by the SEC and the Department of Justice, which is conducting its own criminal inquiry. The SEC has not alleged any revenue recognition or other violations of generally accepted accounting principles, and a Wells Notice is neither a formal charge of wrongdoing nor a determination that the recipient has violated any law. A Wells Notice informs Under Armour and the executives in question that SEC investigators recommend the SEC file an enforcement action against the company and each of the executives, and that the action would allege certain violations of the federal securities laws.
Under Armour maintains neither the company nor its executives engaged in any wrongdoing, describing their actions as “appropriate” in a regulatory filing Monday. The company intends 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 towards a resolution of this matter,” it added.
Jefferies retail analyst Randal Konik is confident “the issues at hand are not dire.”
“Mostly likely, we believe the outcome could be a restatement of financials and a possible fine,” said Konik, who has a “buy” rating on Under Armour shares. “However, while a potential restatement is backward-looking, we are focused on the future, and our data suggests [the company] is looking better” under Frisk’s leadership, which has steered product improvements while bolstering supply-chain efficiencies.