Under Armour defends accounting

Move comes amid federal probes and media reports

Under Armour again Friday defended its accounting practices that have come under scrutiny amid a federal investigation and media reports that the brand manipulated sales numbers to mask weakening demand for its athletic apparel.

The Baltimore-based athletic apparel company confirmed earlier this month that its accounting methods are being investigated by the U.S. Securities and Exchange Commission and the Justice Department.

Under Armour reiterated Friday that it believes its practices have been “entirely appropriate,” saying management and the board have “reviewed this matter extensively over the past two and a half years and stand by the company’s financial reporting.”

Under Armour’s latest response followed a report Thursday evening that said managers felt pressured to make quarterly sales goals to fuel a nearly seven-year run of quarterly sales gains in excess of 20 percent, a streak that ended in 2016.

The report by the Wall Street Journal quoted unnamed former executives who said they would shift business from future quarters, ask retailers to take delivery of merchandise early and reroute products meant for outlet stores to discount chains to count those sales at the end of a quarter.

The former executives said such practices, which some called common in retail, were used to maintain the record growth, which they said was important to founder and CEO Kevin Plank, the story said.

The Journal first reported news of the federal probe into revenue recognition earlier this month and said federal officials are looking into whether the company manipulated its sales numbers to make them appear stronger.

Under Armour’s stock took a beating, plunging nearly 19% on that initial news. Its shares closed up nearly 4% Friday at $17.79 each.

Plank sent a letter Friday to Under Armour employees defending the integrity of a brand approaching its 15th year as a publicly traded company, one he said has grown into one of the world’s biggest athletic apparel sellers.

“Given recent events that have entered the realm of public opinion without full context, it is disappointing to have our integrity and reputation called into question,” Plank said in the letter.

He said officials are constrained by the ongoing investigation and therefore cannot address “media allegations raised by anonymous sources.”

“We’ve certainly never claimed to be perfect, but our team has earned and deserves more respect than this reporting currently affords us,” Plank said.

Plank’s letter said sportsmanship is central to the brand’s mission, adding, “Win or lose, we play with honor, fairness and respect for the game.”

As to the inquiries by the SEC and Justice Department, “we respect the government’s process and will continue to cooperate with thoughtful and proper resolve, ” Plank said in the letter.

As a general rule, businesses recognize revenue once a sale is final.

If it turns out that Under Armour was selling goods at a discounted price, either by offering merchandise at a lower price to retailers that agreed to take goods early, or by redirecting shipments to off-price stores, those would be accepted accounting practices, said J.P. Krahel, an associate professor of accounting at Loyola University Maryland’s Sellinger School of Business.

“The question is, even if it’s legal, is it helping the company in the short term, but … damaging the reputation or prospects in the longer term,” and causing concern among investors, Krahel said. “The idea is to give the stuff to you even if you pay less, but we just need to make the sale right now.”

Even when companies use legitimate methods to pull revenue forward, it can cause problems, said Eric Beste, a former federal prosecutor who specialized in accounting fraud cases.

“When you do it once, it’s hard to stop if the problems continue in the next quarter,” said Beste, now a partner with Barnes & Thornburg, a San Diego business law firm. “You had counted on it in Q2 and now you have to fill that in. Once you’re pulling revenue from future quarters you’re robbing Peter to pay Paul.”

It can cross the line into criminal conduct, he said, if documents or the timing of shipments are fabricated or books kept open beyond the end of the month. And though discounting goods toward the end of a quarter is standard industry practice, he said, that can become a problem too if the discounting is not disclosed to investors.

Investigators are looking into financial results for the end of 2016 and also into former chief financial officer Chip Molloy’s time with the company, the Journal story said.

Under Armour has had turnover in the CFO job. Longtime executive and former CFO Brad Dickerson left the firm in 2015, not long after being promoted to chief operating officer, to join meal delivery startup Blue Apron in early 2016. He was replaced by Molloy, who had served as CFO of PetSmart. Molloy lasted just over a year, resigning in January 2017.

Molloy declined comment on the inquiry. Dickerson could not be reached for comment.