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 without corresponding increase in revenues.
Our analysis from 2009 finds this 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, collections and then reversals 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 certainly not in the usual practice of CEOs to sell
property to their 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.
