Under Armour receives SEC notice following accounting probe

Under Armour has received a notice from the US Securities and Exchange Commission indicating the regulator intends to bring enforcement action against the sportswear maker for alleged potential violations of federal securities law, according to a regulatory filing.

It stems from a continuing investigation by the SEC into Under Armour’s accounting and sales practices during 2015 and 2016, which was publicly disclosed by the company last year.

The SEC issues a Wells notice when it is planning to bring action after a recommendation from its staff, but it does not necessarily mean the recipients have violated the law.

Shares of Under Armour slid almost 4 per cent to $10.91 in pre-market trading on Monday morning but opened slightly higher.

The disclosure marks the latest development in a difficult three-year period for the sportswear maker, once an upstart keen to overtake industry leader Nike but now grappling with broad retail shifts in the US and a protracted management change.

At issue in the investigation, according to the filing, is Under Armour’s “disclosures regarding the use of pull forward sales in order to meet sales objectives” during the specified period.

Pull-forward sales occur when a company records a customer sale earlier than scheduled, with the revenue reflected in its accounts in an earlier financial period.

The notices were sent to Under Armour, its executive chairman and company founder Kevin Plank, and chief financial officer David Bergman. The company and the two executives “maintain that their actions were appropriate” and intend to respond to the SEC about the regulator’s preliminary determination to take action.

Before and during the period at issue in the investigation, Under Armour was recording quarter after quarter of revenue growth by 20 per cent or more, a streak which made it a darling of Wall Street before it abruptly ended in the last quarter of 2016. 

Since then, Under Armour has undergone extensive restructuring and brought in Patrik Frisk, the former chief executive of shoe chain Aldo Group, to manage the company’s operations. Mr Frisk was appointed chief executive of Under Armour in October, a position which took effect at the beginning of this year.

More recently, Under Armour has indicated it wished to sever expensive outfitting agreements with top US college athletic departments, widely considered an indication it is retrenching from ambitious plans to compete with Nike and Adidas in the lucrative university sports industry. 

The contracts with University of California, Los Angeles and the University of California, Berkeley are worth more than $360m combined. Both colleges have said they are contesting Under Armour’s move to exit the deals.