'Significant Risk': Under Armour Analysts On Federal Investigation Of Apparel Company's Accounting

Under Armour Inc UAA reported a solid third-quarter earnings beat Monday, but was any upside was drowned out by the news that the company's accounting is the subject of a probe by the SEC and Justice Department.

The sportswear company is being investigated for its revenue-recognition practices. Such investigations typically focus on whether the company recorded revenue before it was earned or deferred the dating of expenses to make its earnings appear stronger, according to The Wall Street Journal.

The timing of the investigation also puts company founder Kevin Plank's sudden resignation as CEO just two weeks prior into question as well. 

4 Analyst Takes 

Baird analyst Jonathan Komp said he is somewhat concerned by an active federal investigation into Under Armour’s accounting and said it could represent a meaningful drag on internal bandwidth, “raising near-term execution risk and representing a sentiment overhang.”

Ivan Feinseth of Tigress Financial Partners said Under Armour had three CFOs at the helm between 2016 and 2017. The investigation began in July 2017, according to Under Armour. 

“Under Armour’s strong brand equity and rapid growth have helped it sustain an earnings multiple of over 50x, which now puts the stock in a vulnerable position if revenue and earnings are forced to be restated,” Feinseth said. 

“I don’t view the recent weakness as a buying opportunity and believe significant risk and downside exists.”

Wedbush analyst Christopher Svezia said that while the outcome of the investigation is unknown, the notion that it was underway since 2017 could continue to unnerve investors.

“In the end, 3Q results contribute to doubt over the company’s long-term plan and North American concerns have deepened as brand and execution risks remain heightened, while shares continue to trade at elevated levels.”

KeyBanc Capital Markets analyst Edward Yruma said investors don't know what they don't know — and the SEC investigation could be a headwind.   

“Revenue recognition remains an area of great consternation, particularly with wholesale companies, and a dialogue with the SEC is not uncommon,” the analyst said. 

Under Armour’s management was adamant that discussions with auditors and outside consultants indicate that there is no material issue, and the company continues to actively provide documents that are requested, Yruma said. 

Yet the analyst said he is not dismissive of the news and, until a resolution occurs, he cannot definitively speak to the materiality of the issue.

Price Action 

Under Armour shares were up 5.8% at $18.12 at the time of publication. 

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Photo courtesy of Under Armour.