Under Armour stock unaffected by ‘Wells Notice’

Shares of Under Armour Inc (NYSE: UAA) were trading higher by more than 1% Monday afternoon despite what some may consider being an alarming legal warning from the U.S. Securities and Exchange Commission.

The ‘Wells Notice’

A “Wells Notice” notifies a company or senior executives they are subject to an investigation that could result in some form of legal action being taken. Under Armour confirmed Monday morning its founder, ex-CEO and current Executive Chairman Kevin Plank and current CFO David Bergman received such a notice.

It is important to emphasize that a “Wells Notice in no way constitutes a guilty verdict has been or will be established. As noted by Under Armour in its regulatory release, the “Wells Notice” notifies the company that SEC staff members “made a preliminary determination to recommend that the SEC file an enforcement action.”

The SEC is investigating allegations of improper accounting practices from the third quarter of 2015 through the end of 2016. Under Armour is given an opportunity to explain why the SEC’s claims are without merit and it has done nothing wrong.

Channel stuffing

Under Armour is alleged to have engaged in a “channel stuffing” strategy for more than one year. This isn’t necessarily anything new to investors as news of the SEC’s interest in Armour Under dates back to an early November report from The Wall Street Journal.

The company said at the time it has been cooperating with authorities since July 2017. Under Armour’s claimed years ago, as it does now, its accounting practices and disclosures were within the scope of the law.

A company would typically engage in “channel stuffing” by knowingly sending a retail partner more supplies than they can handle for a given period by changing terms of the contract, including discounts. This essentially pulls forward future revenue into the current quarter.

By itself, this practice isn’t necessarily illegal. But it becomes a potential legal problem when there are explicit or implied favors involved between Under Armour and a retailer.

Some explaining needed

Under Armour may have some explaining to do. The WSJ report was based on comments from former executives in sales, logistics, merchandising, and finances. Some of the alleged wrongdoings include Under Armour redirecting supplies intended for its factory stores to off-price retailers in the final days of a quarter. This would have booked sales in the quarter, something that was important to then-CEO Plank. The executive often boasted strong growth metrics to investors and analysts on conference calls.

“It was a pretty common practice to pull forward orders from the month after the quarter to ship within the quarter in order to hit the number or close the gap,” a former sales executive told WSJ.