Inside Under Armour’s sales scramble: ‘Pulling Forward Every Quarter’

Sportswear brand pushed early shipments, dumped goods at off-price chains to stay on growth streak, former executives say

Under Armour leaned on retailers to take products early and redirected goods intended for the company’s factory stores to off-price chains, according to former executives

By Khadeeja Safdar and Aruna Viswanatha from Wall Street Journal

Former executives at Under Armour Inc., the sportswear company whose accounting is under federal investigation, said they scrambled to meet aggressive sales targets, borrowing business from future quarters to mask slowing demand in 2016 for its athletic apparel.

The Baltimore company frequently leaned on retailers to take products early and redirected goods intended for its factory stores to off-price chains to book sales in the final days of a quarter, according to former executives in sales, logistics, merchandising and finance.

They said the company repeatedly used these and other moves to help extend a 26-quarter streak of 20 % sales growth, a feat that came to an abrupt end in late 2016. Some of the executives said such end-of-quarter moves are common in the retail industry.

“It was all in the name of hitting the number, and it would happen out in the open,” said a former Under Armour merchandising executive. “They [the company] didn’t think there was anything improper about it.”

Federal investigators are conducting a probe into the company’s revenue recognition and whether there were improper tactics used to shift sales, the Journal has reported. Investigators are examining emails that show Under Armour’s founder and chief executive, Kevin Plank, knew about efforts to move revenue between quarters, according to a person familiar with the matter.

Among the issues investigators are examining, according to people familiar with the matter, are Under Armour’s results at the end of 2016 and the tenure of former finance chief Chip Molloy, who resigned in January 2017 on the same day the company said sales growth fell below 20 %. Under Armour shares tumbled 23 % that day.

A criminal probe is being led by the U.S. attorney’s office in Baltimore, which is coordinating with a civil securities-fraud investigation by the Securities and Exchange Commission, the people said. Mr. Molloy did not respond to requests for comment. The former executives who described efforts to meet quarterly targets said they had not been interviewed by investigators.

Under Armour said it has been cooperating with the investigations since July 2017.

“Our management and board of directors have extensively reviewed this matter over the past twoand a half years, and we continue to believe that our accounting practices and related disclosures have been appropriate,” the company said. Analysts and accounting experts agree the end-of-quarter manoeuvers described by these executives are generally permitted under accounting rules.

Under Armour said it is confident in its accounting practices, revenue recognition and investor disclosures. It said it operated within standard industry practices and in compliance with generally accepted accounting principles.

Former executives said pulling sales forward helped the sportswear company sustain its growth record, which employees knew was important to Mr. Plank. On several earnings calls, Mr. Plank boasted about the streak, including the third quarter of 2016.

“Our financial results are an incredible accomplishment for any brand and something that we believe separates us from others in our business,” Mr. Plank said on Oct. 25, 2016.

That day, the Baltimore company acknowledged it was seeing a slowdown in the North American apparel industry and feeling the impact of bankruptcies of retailers such as Sports Authority Inc. Executives said they needed to boost investments, hurting profits, but reiterated their goal of 20% sales growth in the fourth quarter of 2016, as well as in 2017 and 2018.

“We want to be clear, our demand is still there,” Mr. Plank said. Sales ended up rising 12 % in the fourth quarter and 3 % and 4 % in 2017 and 2018, respectively.

Former employees described efforts in 2016 to sustain the 20 % quarterly growth rate, even as retailers failed to sell some of the company’s sweatshirts, T-shirts and other apparel. “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 said.

When retailers declined to take products before their requested ship date, Under Armour sometimes adjusted the terms of the contract to offer a discount or extend the period in which retailers could pay for the products, this former executive and other employees said. “Problem is once this starts it doesn’t seem to stop,” the sales executive said. “We found ourselves pulling forward every quarter.”

Another former executive said Under Armour had negotiations with customers about shipping products earlier than planned, but always got their approval. “I never witnessed anything where we would just ship something unbeknownst to a customer,” the executive said. “If the customer accepted and you have a conversation about it, that’s all good.”

Shipping plans in the final days of the quarter sometimes contradicted the dates on the boxes, and truckloads of unopened boxes would come back to Under Armour, a former logistics executive said.

There is no rule prohibiting manufacturers from urging customers to accept early sales to meet quarterly expectations, said Ethan Rouen, a professor at Harvard Business School. “If there is an explicit or implied favour being involved, then that’s problematic,” he said.

Still, efforts to shift sales between quarters can hurt investors, said Mr. Rouen. “If you’re mortgaging the future, it’s eventually going to catch up,” he said.

The strains in Under Armour’s business were evident inside the company in 2016, several former executives said. Sports Authority, a major customer, filed for bankruptcy protection that spring and closed its remaining locations that summer. “The slowdown was occurring in more places than just there,” the former sales executive said. “They just amplified the issue.”

After it was clear Sports Authority was in trouble, Under Armour continued shipping products to the retailer, booking sales for those goods, according to former executives. Sports Authority’s collapse eventually left Under Armour looking for other outlets, they said.

In July 2016, Mr. Plank announced a deal with Kohl’s Corp., a department store, to carry Under Armour gear the following year. The move gave the company hundreds of new locations to stock its goods, including inventory meant for Sports Authority, the former executives said. Kohl’s did not immediately respond to a request for comment.

It also angered the company’s biggest customer, Dick’s Sporting Goods Inc., these executives said. As a result, Dick’s, which was holding unsold Under Armour goods, stopped taking products early, they said. Dick’s was Under Armour’s biggest customer in 2015 and 2016, accounting for about USD 400 million of annual sales, according to securities filings. A spokesman for Dick’s declined to comment.

While sales were slowing, the amount of money that Under Armour was setting aside for returns or markdowns was accelerating. In 2016, the company’s revenue rose 22 %, while its reserves for returns jumped 55 %. The next year, revenue rose about USD 150 million to nearly USD 5 billion, while its reserve for returns jumped USD 100 million to USD 247 million, the securities filings show.

To help meet its quarterly targets, Under Armour in 2016 shipped new inventory intended for its own factory stores to off-price seller TJX Co s., the former merchandise executive said. That allowed Under Armour to immediately book the goods as revenue instead of having to wait for a customer to buy the item at its own stores.

This executive and another former employee said Under Armour was careful to avoid shipping too much inventory to TJX so that it wouldn’t have to disclose that the discounter was among its major customers in its securities filings.

A spokeswoman for TJX, which operates the TJ Maxx and Marshalls chains, declined to comment.

Under Armour leaned on retailers to take products early and redirected goods intended for the company’s factory stores to off-price chains, according to former executives