Red flags at Under Armour (NYSE: UA)
Under Armour Inc. shares
plunged recently after the company disclosed that SEC and DOJ are probing its
accounting practices for more than two years.
However, as early as 2009,
there were red flags that should have drawn attention.
Red flag no. 1:
Book, collect and uncollect
The company used to book
majority of its revenues in the Sept quarter, show collections in Dec and in
the Mar quarter again pump up the Accounts Receivables (AR). Actual sales would
show an increase in revenues too, but here the AR would increase without corresponding
increase in revenues.
Our analysis from 2009 finds
this to be a repeated practice year after year.
For instance, the Days Sales
outstanding (used to estimate the size of outstanding accounts receivable)
figure would rise to 193 in Sept. 2010 from 171 in June 2010. In December 2010,
the figure would plunge to 123 (showing collections) and again rise back to 190
in Mar 2011. i.e. almost the same level as in Sept 2010. This trend is repeated
year after year showing revenue booking, AR collections and then pumping up of
AR quarter after quarter.
Also when we compare the
growth in revenues to the growth in Account Receivables, we find that in the
March quarter, the growth in AR far outstrips the growth in revenues.
For instance, in 2012 the revenue
growth in the March quarter is -5% and AR growth is 46%. The same trend is
repeated year after year except for 2017. (One possible reason for 2017 being
an exception could be that Under Armour was under investigation for its 2016
sales practices)
Red flag no. 2: Purchase of
property from CEO for $70.3 million
The financial statements for
June 2016 contained a curious bit of information, “In June 2016, the Company
entered into a purchase agreement with Sagamore Development Holdings, LLC, an
entity controlled by the Company’s CEO, to purchase parcels of land to be
utilized to expand the Company’s corporate headquarters to accommodate its
growth needs. The purchase price for these parcels totaled $70.3 million.”
It is not the usual practice
of CEOs to sell their personal property to the company. Even though this was
disclosed as a separate item in the cash flow statement, this certainly raises
questions. Was there an independent value arrived at by a certified
professional? No independent expert’s opinion is provided to support the price
mentioned. What was the market price? Was it essential for the company to enter
into such an agreement?
Red flag no. 3: Strip-club
visits on company’s dime
Longstanding practice of
allowing employees, including CEO, to charge strip-club visits to the corporate
cards. This is another red flag that investors should not have ignored and
speaks of the highly toxic environment.
