Shares of Under Armour (UAA) were under pressure on Monday morning after the company reduced its revenue outlook for the fiscal year, citing "traffic challenges." The lowered guidance comes amid Under Armour’s confirmation of a federal probe of its accounting practices.
EARNINGS AND GUIDANCE: On Monday before the market open, Under Armour reported third quarter earnings per share of 23c, beating the 18c consensus. Revenue for the quarter of $1.43B also exceeded the $1.41B consensus. "Building our long-term brand strength remains at the center of everything we do," said Under Armour Chairman and CEO Kevin Plank. "Our ongoing transformation across the business continues to make us smarter, faster and more operationally excellent. As we make the turn into 2020, we are confident in our ability to deliver our fourth quarter targets while proactively supporting higher levels of strategic marketing investments that will further fuel the Under Armour brand."
Looking ahead, Under Armour forecast fiscal 2019 EPS at the high end of its previously given range of 33c-34c, in line with analysts' 34c consensus, while the company lowered its revenue growth guidance to about 2% from 3%-4%. Analysts currently expect the company to report revenue for the year of $5.35B. Under Armour cited lower than planned excess inventory to service the off-price channel, ongoing traffic and conversion challenges in direct-to-consumer, and negative impacts from changes in foreign currency for the reduced guidance.
ACCOUNTING PROBE: On Sunday, The Wall Street Journal reported that both the Justice Department and the Securities and Exchange Commission are examining Under Armour's accounting practices, specifically looking at "whether the sportswear maker shifted sales from quarter to quarter to appear healthier." According to one source, the Justice Department is conducting a criminal inquiry into the matter, and coordinating with civil investigators at the SEC.
Under Armour responded to the probes, telling CNBC in a statement: "Under Armour is cooperating with the U.S. Securities and Exchange Commission and the U.S. Department of Justice investigations. The company began responding in July 2017 to requests for documents and information relating primarily to its accounting practices and related disclosures, and the company firmly believes that its accounting practices and disclosures were appropriate."
During its earnings conference call on Monday, Under Armour reiterated its previous statement regarding the probe, with CFO David Bergman stating that “We have been fully cooperating with these inquiries for nearly two and a half years." "We firmly believe that our accounting practices and disclosures were appropriate," he added.
WHAT'S NOTABLE: On October 22, Under Armour announced that president and COO Patrik Frisk will become CEO, effective January 1, while current Chairman and CEO Kevin Plank will become executive chairman and brand chief. "Our multi-year, transition approach has ensured purposeful leadership continuity. Patrik is the right person to serve as Under Armour's next CEO," said Plank. On Monday's earnings conference call, Plank said stepping away from the CEO position was "my decision."
ANALYST COMMENTARY: Stifel analyst Jim Duffy told investors in a research note that Monday's share price decline is "more of a reflection of concerns" around SEC investigations into 2017 revenue recognition than reported fundamentals. Duffy added that while the accounting probe may continue to weigh on shares, he sees 2017 practices under a prior CFO as "unfortunate history" that doesn't impact potential value for shares in the next 12 months and views the pullback in shares as an opportunity for investors who can look beyond year-end. Duffy has a Buy rating and $30 price target on the stock.
PRICE ACTION: In morning trading, Under Armour Class A shares are down 14.5% to $18.10.
Keywords: earnings, results, quarterly results, guidance, analyst commentary, probe, DOJ, SEC