Over the last few weeks, Under Armour (NYSE:UA, NYSE:UAA) took a hit due to the news that the SEC and DOJ were probing the accounting of the athletic apparel maker. The WSJ report makes the clear case the retailer made significant mistakes with sales practices that hurt the brand and damaged relationships with retail partners, but the report falls far short of claiming any accounting irregularities. Considering the details of the probe and the shift to a new CEO that joined the company in 2017, my investment thesis is even more bullish following this dip in the stock.
Bad Decisions, Not Accounting Fraud
As the Baltimore Sun reported a few weeks back, an SEC investigation into accounting fraud ends up half the time without the agency taking action. Considering the length of this probe, one can make the general prediction that the SEC hasn't uncovered a massive fraud.
Rather, the WSJ details a case of Under Armour executives engaging in sales practices that hurt the athletic apparel company in the long term. Former executives described scenarios where the company pushed product forward a month to meet quarterly sales targets to the detriment of heavy sales returns or via offering unnecessary discounts to the retail partner. On top of those bad outcomes, the retailer would dump new product on discount stores like TJX (TJX) in order to count the items as sales versus waiting for an actual sale at a company-owned Factory House store.
As the former executive stated in the interview, he questioned the sales practices the company undertook around 2016, but the company did nothing wrong:
"I never witnessed anything where we would just ship something unbeknownst to a customer. If the customer accepted and you have a conversation about it, that’s all good."
The WSJ interviewed Ethan Rouen, a
