Under Armour founder and CEO Kevin Plank and former CFO Chip Molloy have been named in a shareholder lawsuit alleging that the athletic apparel company “made false and/or misleading statements as well as failed to disclose material adverse facts about the company’s business, operations and prospects,” according to a court filing.
The securities fraud class action lawsuit claims that UA failed to disclose that its revenue and profit margins couldn’t withstand the heavy promotions, high inventory levels and “ripple effects of numerous department store closures and bankruptcy of [retail partner] Sports Authority,” and, despite those realities, nevertheless “purported itself as a growth company that would continue to develop and market game-changing products.”
The suit, which names UA shareholder Brian Breece as plaintiff, also alleges that Plank himself “saw the writing on the wall” and began selling more of his stake in Under Armour to prevent individual losses while maintaining maintain control of the company. "We are aware of the plaintiff’s claims and find them without merit," an Under Armour spokesperson told Retail Dive via email. "Under Armour will vigorously defend the case."
Not long ago, Under Armour seemed unstoppable, passing Adidas on U.S. sales and inching closer to athletic apparel market leader Nike. Kevin Plank’s signature swagger was on full display in 2015 when he told investors “The time has come for us to build a better house, not just a bad-ass house, which you can count on."
But Plank is decidedly more subdued of late. Last month, Under Armour plummeted when Q4 North American net sales rose just 5.9%, a shadow of the average quarterly growth of 24% the retailer has maintained since 2013. Its 12% revenue increase to $1.31 billion was the narrowest increase in eight years, missing consensus analyst expectations for $1.41 billion. At that time Under Armour also announced that Molloy, who took over as CFO about a year ago, would leave the company “due to personal reasons.”
This lawsuit — filed Friday in U.S. District Court for Maryland and representing Under Armour investors who purchased the firm's Class A and Class C common stock between April 21, 2016 and Jan. 30. — alleges that there was much about UA’s reports and outlook that could not be counted on, and that shareholders have suffered as a result.
“Under Armour has historically touted its aspirations to continue growing 20% annually, having set a goal of $7.5 billion in annual revenue by 2018; however overall sales grew just 12% in the fourth quarter of 2016, with revenues in North American only growing 6%, the weakest increase in the past eight years,” according to the lawsuit. “Despite continued guidance … that [UA] would maintain its trend of greater than 20% sales growth, none of these statements had any basis in fact and were false when made.”
Analysts have warned in recent months that Under Armour, which last fall ceded its number two spot in the sports gear space back to Adidas, needed to make significant changes to get back on a strong growth trajectory.
“Under Armour’s long run of stellar performance has come to an end this quarter,” Håkon Helgesen, retail analyst at research firm GlobalData, wrote last month. “Although the company remains in growth, the pace has slackened considerably, with uplifts now a pale imitation of where they were a few quarters ago." Helgesen also warned that UA is losing market share to the likes of Lululemon thanks to “more innovative collections and ranges” and that number one Nike not only has a heavier emphasis on innovation, but also higher priced footwear and apparel.
Under Armour is also in danger of missing out on style trends in the space, warns Jane Hali & Associates, which also said that the fact that the company’s physical stores are mostly outlets hurts.
“As we continue to see the athleisure trend evolve and elevate to a cleaner style, UA does lag in having trending athletic items that suit the current fashion cycle,” according to a note from Jane Hali emailed to Retail Dive last month. “The launch of UAS [its new made-in-America line] we believe is a foot in the right direction; however, they need to ramp up on more fashion styles in their regular line. In addition the Under Armour brick-and-mortar business is mostly an outlet one, where business is generally off.”