On May 3, 2021, the Securities Exchange Commission ("S.E.C.") announced that sports apparel heavyweight Under Armour, Inc. (“Under Armour”) will pay a $9 million dollar penalty to the S.E.C. to settle an enforcement action for alleged antifraud violations of the Securities Act of 1933 as well as reporting violations under federal securities laws following charges that Under Armour misled investors regarding its annual revenue growth and failed to disclose uncertainties in its future revenue projections to investors.

Specifically, the S.E.C. alleged that in the last quarter of 2015, after determining that revenue numbers would be below projected estimates and out of concern for how this information would impact Under Armour’s stock, Under Armour deliberately concealed its true revenues from investors by accelerating existing orders sales.  According to the resolution, Under Armour “pulled forward” sales—where customers had ordered items to be shipped in future quarters—and reported those sales earlier, allowing Under Armour to conceal the gap between analysts’ projections and the actual revenues per quarter. 

The practice of pulling forward generally results in a company booking revenue sooner than permissible under the accounting standards for revenue recognition or recording sales before meeting the Uniform Commercial Code definition of sale.  Companies usually need to offer incentives, such as price rebates, discounted prices, extended payment terms, etc. to entice customers to take products in the current quarter that are not truly needed until a future quarter.  Public companies might do this to smooth out earnings or meet analyst projections for sales and volume growth.  Typically, at some point, however, there are no more sales to pull into the quarter and the company misses the projections.    

The S.E.C. alleged that Under Armour engaged in this practice for six consecutive quarters, pulling forward approximately $408 million in orders.  Significantly, the S.E.C. noted that Under Armour would have seen its streak of better than 20% revenue growth, which at one point was at 26 consecutive quarters, end in the fourth quarter of 2015.  When the streak did end in the fourth quarter of 2016, the company’s stock price dropped by approximately 23%.

By failing to report this practice of pulling sales forward and attributing the reported growth to other factors, Under Armour allegedly deprived investors of evaluating the full context of Under Armour’s financial results.  In addition, the S.E.C. alleged several public statements concerning projected future growth were materially misleading, as were Under Armour’s representations about year-over-year growth without disclosing its reliance on pulling sales forward.  The S.E.C. also alleged that Under Armour knew or should have known the risks the pull forward practice had on future revenues and growth rate. 

Without admitting or denying the findings in the S.E.C.'s order, Under Armour agreed to cease and desist from further violations and to pay a $9 million penalty.

This follows the S.E.C.’s settlement with Marvell Technology Group, Ltd. in September 2019 where Marvell paid $5.5 million to settle charges that it misled investors by pulling forward sales as well.