The Ratings Game: Under Armour stock down 18% after federal accounting probe, North America sales decline

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Under Armour Inc. stock plummeted 18% in Monday trading after the athletic gear company reported a third-quarter decline in North America sales and cut its outlook. It was also revealed that the company is under federal investigation for its accounting practices.

Third-quarter net income totaled $102.3 million, or 23 cents per share, up from $75.3 million, or 17 cents per share, last year. Revenue totaled $1.43 billion, down from $1.44 billion in 2018. The FactSet consensus was for earnings 18 cents per share and revenue of $1.41 billion.

Revenue in North America fell 4% to $1 billion, and wholesale revenue fell 2% to $892 million. Direct-to-consumer revenue was down 1% to $463 million.

Footwear revenue was down 12% to $251 million.

“The reasons for reduced volume are very similar to second quarter with our outlet stores experiencing lower traffic yet slightly higher conversion AUR [average unit revenue],” said Patrik Frisk, the company’s newly appointed chief executive officer, on the earnings call, according to a FactSet transcript.

See: Under Armour’s accounting is under federal investigation

Frisk will succeed Kevin Plank, who’s also Under Armour’s UA, -18.19% UAA, -19.77%  founder, on Jan. 1, 2020.

“In our e-commerce business, we continued to see higher traffic but lower conversion with relatively flat AUR,” he said.

Under Armour now expects fiscal 2019 revenue to be up 2%, down from previous guidance for 3% to 4% growth. EPS is expected to be on the high end of its previous range of 33 cents to 34 cents. The FactSet outlook is for revenue of $5.36 billion, up 3.1% from last year, and EPS of 34 cents.

David Bergman, the company’s chief financial officer, discussed the federal investigation into the company’s accounting practices briefly on the call, a break from company policy, he said. Still, there were no details offered.

“We have been fully cooperating with these inquiries for nearly two and a half years,” he said on the call. “To this effect, we began responding back in July of 2017 to their request for documents and information. We firmly believe that our accounting practices and disclosures were appropriate.”

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Under Armour’s comments about weakness in its outlet business also creates uncertainty for Ralph Lauren Inc. RL, +1.41%   and PVH Inc. PVH, +3.42%   , analysts led by Jay Sole said. PVH brands include Calvin Klein and Tommy Hilfiger.

“Under Armour has many North America outlet stores,” UBS said. “If traffic was slow in this channel in Q3, it does not bode well for Ralph Lauren and PVH’s upcoming reports.”

UBS, which said the federal accounting probe creates “uncertainty,” rates Under Armour stock neutral with a $21 price target.

“Under Armour continues to struggle to right the ship in North America, as new product fails to impress, and increased marketing will not make that product better,” wrote Susquehanna Financial Group analysts led by Sam Poser. “Failure of management, on the earnings call to address why the investigation was not disclosed prior to last night is disconcerting.”

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Susquehanna rates Under Armour stock negative with a $14 price target.

“We expect the overhand of the federal investigations, Steph Curry’s injury, and Kawhi Leonard’s emergence with New Balance to cast shadows over Under Armour’s results and stock performance for quite some time,” the note said.

Under Armour stock has tumbled 27.4% over the past year while the S&P 500 index SPX, +0.36%   is up 13.1% for the period.