Shares of sportswear manufacturer Under Armor (NYSE: UAA) were down after the company disclosed that it had received a Wells Notice from the Securities and Exchange Commission naming two top executives as part of an investigation into the company's practices. The SEC has been actively investigating the company for over two years at the time of the notice.
The reception of a Wells Notice by a publicly-traded company is the first indication that the SEC is planning to bring an enforcement action against them. Wells Notices are typically issued by SEC officials after an investigation when enough evidence of securities law violations is gathered but are not a formal charge or judgment of any kind. Wells Notices allow companies to respond to the SEC to explain their actions before any substantial action is taken.
The Wells Notice issued to Under Armour, according to the SEC, "relate[s] to the Company's disclosures covering the third quarter of 2015 through the period ending December 31, 2016, regarding the use of 'pull-forward' sales in connection with revenue during those quarters." The SEC investigation into Under Armour was first confirmed in November of last year when the company confirmed that it was under investigation for accounting practices. The company has been under investigation since 2017.
The use of pull-forward sales by Under Armour is nothing overtly illegal. A pull forward sale is the practice of a company trying to convince a customer to place their order sooner than they had planned to let the company count the revenue earlier, allowing it to boost sales figures for a specific quarter. The use of pull-forward sales is a cause for concern, however, because it can be easily abused. For example, pull-forward sales are often used for "channel stuffing", where a customer places an order to be recorded that quarter before canceling the sale the next quarter. The practice can also deceive investors, as the altered sales figures don't reflect the actual performance of the company and give shareholders a false sense of security.
CEO and Founder Kevin Plank and CFO David Bergman, in an 8K filing with the SEC, have claimed that Under Armour's actions were appropriate and that the company intends to open a dialog with the SEC to try and resolve the issue.
News of the Wells Notice shook Under Armour's stock on Monday. Under Armour's Class A stock was down 1.5% in pre-market trading, slipping slightly from $10.92 to $10.76, though the stock rebounded and ended trading for Monday at $11.20. The company's Class C stock (NYSE: UA) made a more substantial slip, falling 2.2% during pre-market trading from $9.83 to $9.61, but ended the day at $9.95. At the time of writing, both Under Armour's Class A and Class C shares seem to have shrugged off the bad news, starting trading on Thursday at $11.45 and $10.19, respectively.
The Wells Notice is only the latest bad news for the athletic wear brand, which has struggled with rapid leadership changes over the last few years and a considerable sales slump amid the coronavirus pandemic. Kevin Plank, who founded the company in his grandmother's basement in 1996, is expected to step down this year in the latest shakeup at the company.