(Bloomberg Opinion) -- The last 24 hours have been trying for Under Armour Inc. On Sunday the company acknowledged it is the subject of a federal investigation into its accounting practices. This morning it cut its annual sales forecast in its latest quarterly earnings report. By mid-afternoon, investors had driven down its shares by almost 17%.
Sometimes the best response to a series of setbacks is to step back and take a longer view. Unfortunately, focusing on where Under Armour will be a year from now is hardly reassuring. In fact, that question has gotten a good bit more difficult to answer since Sunday night.
On Sunday, the Wall Street Journal reported the federal investigation is looking into whether the company shifted sales in a way that made its results look stronger. Executives say they believe the company has acted appropriately and that it has been cooperating with investigators for 2 ½ years.
But the sharp decline in its shares Monday morning suggests the investigation has cast a serious cloud of uncertainty over the company. Investors are rightly wondering what a worst-case outcome of such an investigation could look like. Even if Under Armour is not found to have committed any wrongdoing, it is reasonable to wonder whether this has been a distraction or has pulled resources and attention from other corporate matters.
News of the probe came just hours before the company reported quarterly earnings that failed to show unambiguous progress on its more routine business challenges. There were some bright spots, including $1.4 billion in third-quarter revenue and earnings per share of 23 cents, both of which beat analysts’ expectations. Gross margin expanded significantly from a year ago as the company continues to improve its supply chain. But the company also reduced its full-year sales outlook, with annual revenue now expected to be up 2%, compared to previous guidance of a 3% to 4% increase.
One of the main reasons for the revised view was that the company is facing ongoing challenges with traffic and conversion, or the rate at which shoppers go from browsing to buying, at its stores and website. In the third quarter, the retailer saw much the same confusing story as the second quarter. Its outlet stores, which comprise the major share of its North America brick-and-mortar portfolio, saw lower traffic but higher conversion. In its online store, it was the opposite: Higher traffic, lower conversion.
These results offer reason for skepticism that Under Armour has identified and implemented the right strategies to durably fix its North America business. Strengthening this division is crucial to a companywide turnaround.
These new bits of information landed less than two weeks after the company added another question mark to its future, when it announced that founder Kevin Plank will soon cede the CEO role to Patrik Frisk, the company’s current president and COO. Plank will stay on as chairman and brand chief, a test of the brand founder’s ability to relinquish some control of the company he started in his grandmother’s basement.
All of this leaves deep uncertainty about where Under Armour will be one year from now. You can reasonably imagine a scenario where the investigation has been resolved, new products have spurred North America sales, and Frisk appears to be an empowered CEO steering the business toward a bright future. You can just as easily imagine a far darker version of events in which its North America business looks extremely fragile, the investigation hangs as a looming cloud, and C-suite changes have resulted in an unproductive power struggle.
Which scenario will come to pass is hard to say, of course. But some investors are clearly not interested in sticking around to see.
To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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