Under Armour settles disclosure enforcement
Under Armour has settled SEC allegations regarding aspects of disclosures relating to its revenue.
Specifically, the SEC in its administrative proceeding alleges that Under Armour failed to disclose material information about its revenue management practices, which meant statements it made were misleading. The Baltimore, Maryland-based sportswear company has agreed to pay $9 mn to settle the civil action, without admitting or denying wrongdoing.
As a public company, Under Armour has emphasized its consistent revenue growth and has regularly reported revenue and revenue growth in excess of analysts’ consensus estimates, the SEC says. For 26 consecutive quarters, beginning in Q2 2010, the company’s reported year-over-year revenue growth of more than 20 percent and highlighted this in earnings calls and earnings releases, according to the agency.
But the SEC says that by the second half of 2015 Under Armour’s internal revenue and revenue growth forecasts for Q3 and Q4 of the year began to indicate shortfalls below analysts’ revenue estimates.
‘Concerned about the possible negative impact on the company’s stock price that could result from missing these estimates, Under Armour sought to accelerate or ‘pull forward’ existing orders that customers had requested be shipped in future quarters that could be completed in the current quarter to close the gap between its internal forecasts and analysts’ revenue estimates,’ the agency states.
Under Armour did so typically by asking customers to accept shipment of certain products in the current quarter that they had already ordered for delivery in the following quarter, the SEC alleges, adding that for six consecutive quarters from Q3 2015 through Q4 2016 the company used pull-forwards to help it meet analysts’ revenue estimates.
Under Armour pulled forward roughly $408 mn in orders during that period, according to the SEC, which says the failure to disclose the impact of its pull-forward practices was misleading. Without these pull-forwards, Under Armour would have missed analysts’ revenue estimates throughout the period at issue and would have missed its better-than-20 percent revenue growth streak in Q4 2015 and Q3 2016, the SEC says.
On January 31, 2017, the day Under Armour announced that it had missed analysts’ revenue estimates for the fourth quarter and full-year 2016, the company’s stock price dropped by around 23 percent and the company’s year-over-year growth rate for each quarter has remained in the single digits or negative since then, according to the agency.
‘As a result of Under Armour’s failure to disclose the impact of its pull-forward practice on revenue growth, Under Armour’s public statements were materially misleading,’ the SEC says. ‘In particular, throughout the relevant period, Under Armour made positive statements regarding its revenue growth rate and the factors contributing to the revenue growth rate without disclosing the significant impact on revenue from its use of pull-forwards.
‘Under Armour also failed to disclose that the sales that had been pulled forward were no longer available in the future quarter. This practice raised significant uncertainty that Under Armour would meet its revenue guidance in future quarters.’
‘When public companies describe how they achieved financial results, they must not misstate any information that is material to investors,’ says Kurt Gottschall, director of the SEC’s Denver regional office, in a statement. ‘By using pull-forwards for several consecutive quarters to meet analysts’ revenue targets while attributing its revenue growth to other factors, Under Armour created a misleading picture of the drivers of its financial results and concealed known uncertainties concerning its business.’
Under Armour says in a statement: ‘This settlement relates to the company’s disclosures and does not include any allegations from the SEC that sales during these periods did not comply with [Gaap]. The company neither admitted nor denied the SEC’s charges. The settlement resolves all outstanding SEC claims. The SEC staff has confirmed that it does not intend to recommend that any enforcement action be taken against the company’s executive chairman, [CFO] or any other member of management in connection with this investigation.’