Case UA Q+A 20240410

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1 Answers CASE = UNDER ARMOUR INC. (UA) Version: 4/10/24 This case has you analyze the financial statements of, and disclosures made by, Under Armour (UA), especially with regard to UA’s revenues during the period Q3:2015-Q4:2016. At the top of the ocean, you’ll need to critically appraise the motives, decisions and actions of the key players in the case. Down in the krill, you ’ll need to take the information in the Case and other documents on Canvas plus the incomplete data in the case Excel file on Canvas, find missing P&L data from SEC.gov and then do a number of calculations, analyses and evaluations. Balance the two perspectives well, and good luck! Q0. Who is the key FSAV-oriented decision maker in the UA case? What business decision is he faced with? How could high-quality FSAV improve his decision? (1.5 pts) DM = Scott Baxter, a recent MBA from the Ivey Business School at the University of Western Ontario. It’s May 2021 and Baxter is monitoring his personal investment portfolio, part of which is long in UA. He sees the news headline “UA to Pay $9 million to Settle SEC Charges” and is surprised to see only a slight drop in UA’s share price in response to this announcement. The business decision that Baxter faces is: What should he do with his long position in UA? Should he sell some or all of his shares? Or none? Should he buy more? Or go short? High- quality FSAV could improve his decision by giving him a sophisticated investor’s understanding of the “what/when/why/how/who/past -present- future” behind the SEC’s charges against UA + settlement. A sophisticated investor will be one who understands what happened, when it happened, why it happened, how it happened, who made it happen, and what the implications are for UA’s future. A sophisticated investor will also differentiate out economic aspects from accounting aspects; within economic aspects, fundamental from capital market; within accounting aspects, recognition from disclosure. Lastly, a sophisticated investor will also appreciate the viewpoints on the “what/when/why/how/who/past -present- future” that an unsophisticated investor has, since the probability that the marginal investor setting UA’s stock price is sophisticated is less than one, not only now but in the future. ___________________________________________________________________________________ Q1. Who else might do FSAV on UA over the 5 years leading up to May 2021, and why? (1 pt) Here are the most likely candidates and reasons: Equity analysts What do I forecast UA’s REV, EPS etc. will be over the next Qs/Ys? What do I forecast UA’s stock price will be over the next Qs/Ys? Individual investors like Baxter For same reasons as Baxter in Q0. Specialized/fraud researchers Is fraud going on given how fast REV are growing? Competitors (Nike, Adidas) How is UA achieving such consistently high REV growth? How big of a competitive threat is UA to us? How do we respond? UA CEO Plank + UA CFO What do I forecast UA’s REV, EPS etc. will be over the next Qs/Ys? Hedge funds Is UA overvalued or undervalued? SEC, Justice Dept. Is there fire in UA REV smoke concerns that have been brought to us? Class-action lawyers Has UA or key individuals at UA acted illegally? Big customers of UA Why is UA asking us to push more & more REV forward? WSJ, Bloomberg, Jim Cramer Is there a story here that our readers would be interested in? Credit rating agencies Is UA creating credit risks because of its rapid REV growth strategy? Politicians like Sen. Warren Are execs abusing 10b5-1 Should there be more Govt. regulation?

2 Q2. Using the horizontal timeline below, visually depict around and connecting to the timeline the major events in the case. You may draw freehand or use software. Your timeline does n’ t need to be linear — so 1 cm can separate 2 events that are one week apart or one year apart. You may use abbrevs. I recommend that you use [1] arrows, [2] boxes or circles with text in them, [3] coloring them differently based on what type of event it is. NOTE: I ’ ll grade generously because I’m not looking for you to get exactly the same timeline as I do – just some of the key events. (2 pts) FYI: I ’ ve added 2 relevant events that are not in the case. The first is the 10/15/15 announcement that CFO Brad Dickerson was leaving, and ex-Navy Top Gun fighter pilot Chip Molloy was replacing him. Maybe Brad decided to bail from UA’s hyper -aggressive REV approach, but per the associated press release, Top Gun Molloy was eager to take on the risks. Then after the SEC REV debacle, Molloy decided to leave for “personal reasons” and was replaced by someone who, from the associated press release, sounds like “just a regular normal guy”.  “Over next decade (06 -15), UA continued → to see strong financial performance, primarily driven by nearly 20% quarterly REV growth” (p.2)  High competition, pessimism → + Sports Authority liquidates (p.2) Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017  Plank 1 st 10b5-1 → stock sales ($458 mil) First ever Q loss Oct 2019 Plank to step down from CEO on 1/1/20 Plank boasts of 20%+ Q-over-Q REV growth past 5 years  Plank 2 nd 10b5-1 → stock sales ($138 mil) 1 st CAL filed 1 st CAL dismissed 1 st CAL reopened WSJ: UA is being probed by DoJ & SEC for pulling REV forward 2020 11/4 2019 UA reveals it has a Wells Notice from SEC 7/27 2020 5/3 2021 SEC press release: UA charged with failing to disclose $408 mil of RPF + case settled for $9 mil. + no restatements UA stock hits all-time high ≈ $50 and mkt cap ≈ $50 bn UA stock falls 58% 2017 COVID + lower REV guidance + restructuring  SEC’s “Relevant Period” per Wells Notice → 6 Quarters during which SEC alleged UA [1] pulled forward $408 million of REV to help meet-or- beat analysts’ REV estimates, but [2] materially misled investors by failing to disclose to them the impacts of the RPFs on future REV. UA IPO; 1 st day pop = 92% 11/18 2005 Sept 1996 Plank founds UA CFO Brad Dickerson announces he’s leaving. New CFO is Chip Molloy, an ex-Navy Top Gun fighter pilot 2011 10/15 2015 CFO Chip Molloy announces he’s leaving “for personal reasons”. David Bergman . Previously SVP + with UA since 2004. 1/31 2017

3 Q3. Right from its founding, Plank emphasized that UA achieve a high REV growth rate above all else, even more than maximizing its Net Income. Why, do you think? What might be the economic costs vs. benefits, risks vs. returns to a REV-growth-maximizing strategy? What non-economic human factors might have come into play in deciding this approach? (2 pts) The raw/simple economic answer to “Why?” = Plank thought that the strategy would maximize his wealth. The High-REV-growth-rate-above-all-else strategy would likely encompass benefits & costs such as: Economic benefits of / returns to adopting a high REV growth business strategy include: • Increasing the probability of dominating an already existing market. • Increasing the probability of dominating a brand- new market via “winner -takes- all” strategy. • Domination → market power → increases firm’s ability to set prices and earn profits above those in perfect competition. Thus, sacrificing near-term profits for high REV growth can lead to higher profits in the long-term as compared to taking a lower REV growth approach. Economic costs of / risks to adopting a high REV growth business strategy can include: • High REV growth strategies need more capital to implement because REV typically only comes after spending big $ out on PP&E, inventory, personnel. This creates cash flow / default risks. • Given the above, high REV growth strategies → higher cost of equity and debt capital to the firm. • Increasing the probability of shareholders being completely wiped out and earning nothing. • All in all, high REV growth → potential for high NI but such high NI comes with high RISK. Potential human factors at play might include aspects beyond just economic wealth: • Plank is an entrepreneur whose idea has been remarkable successful — whether by skill, luck or both , we don’t know. Regardless, such success is likely to make Plank overconfident in his own abilities, including being able to keep UA’s high REV growth going a long time into the future. • Plank gets to hobnob and be on first-name terms with lots of famous athletes. Who no doubt face incentives to tell him what a wonderful and successful person he is (so he’ll pay them lots of $$). • Plank is very passionate. Fine, but high passion can lead to exaggeration and blindness. For example, on p.3 of UA’s Q3:2015 earnings call, Plank says “What I knew back then [10 years ago at UA’s IPO] and still believe today is that anything is possible because of the ever -evolving power of sports.” O n p.4, “We are not just clothing athletes, we are telling stories. We are tapping into the emotion that is tied to the power of sport and we are giving them an authentic way to display their passion.” Yes, but passion can and often does lead to exaggeration and blindness! • Plank’s holdings of UA’s Class B common stock mean that he controls UA. He does not have to hear voices that disagree with him or rein in his overconfidence, not even at the Board level. ___________________________________________________________________________________ Q4. Using Excel, create a graph of the time- series of UA’s annual REV 2000 -21, and a separate graph of UA’s quarterly REV Q1:2005 -Q4:2021. In each graph, overlay the “best fit” trendline. What aspects of REV are similar vs. dissimilar across the two graphs? (2 pts) Creating these kinds of graphs is a useful step towards seeing what’s at the top of the ocean for REV. Graphs provide a visual alternative to numbers and can reveal patterns such as seasonality. To create the two graphs, you’ll first need to have realized that there are some years and quarters in the raw UA data Excel file on Canvas that were missing data on UA’s annual and quarterly P&Ls. While there are online databases such as Capital IQ that you can access here at KFBS (see this link ),

4 in my experience, the safest place to find missing P&L data, and where Baxter would most likely go given that he’s no longer enrolled at Ivey B. School, is www.sec.gov . There, follow these steps: > FILINGS / Company Filing Search / “Under Armour” / [+] 10 -K (annual reports) and 10-Q (quarterly reports) / View all 10-Ks and 10-s / pull_down_appropriate_10-K_or10-Q in Form description column / scroll thru until you find the correct annual or quarterly P&L / fill missing data into Excel One wrinkle is that separate Q4 data is not reported in a firm’s 10 -K. But you can calculate say Q4 REV from the full year’s REV less the sum of quarterly Q1+Q2+Q3 REV. Once you have all the annual and quarterly REV data nailed down, it’s straightforward in Excel to create the graphs. It’s also straightforward to fit a trendline by right-clicking on (here the orange) line / Add trendline . You can then choose from a variety of Trendline Options = Exponential / Linear / Logarithmic / Polynomial / Power / Moving Average. For both REV series, my eyeball-test suggests that a 3 rd -Order Polynomial provides “the best fit” trendline, as it captures the key feature that REV is increasing but at a decreasing rate . Importantly, a linear fit is NOT the or a “best fit” because even by eyeball, neither UA’s annual nor quarterly REV is linear in time. Instead, it is non-linear. A linear fit will be mis specified in several ways, including but not limited to the differences between actual and fitted REV being autocorrelated. Also importantly, it is not just the Statistics angle that speaks to and declares that a 3 rd -order polynomial is the best fit for UA’s REVs. Economics predicts a 3 rd -order polynomial because the 1 st derivative of a 3 rd -order polynomial is a 2 nd -order polynomial, and a 2 nd -order polynomial nearly captures the economic reality that for UA, “REV is increasing but at a decreasing rate” . What’s SIMILAR What’s DISSIMILAR • Rapid growth end of 2016. Then growth markedly slows down. • Seasonality in Quarterly REV: Q4 > Q3 > Q1 > Q2 (due to many sports really taking off in the Fall) • You see COVID nailing both quarterly and annual REV in 2020. • More hints of REV growth having entirely flattened out / stopped as of about Q3:2016 in quarterly REV than in annual REV? • Best Excel trendline is 3 rd -order polynomial. $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020` 2021 UA reported annual REV ($000s) Annual REV Poly. (Annual REV) $- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 Q1:2005 Q3:2005 Q1:2006 Q3:2006 Q1:2007 Q3:2007 Q1:2008 Q3:2008 Q1:2009 Q3:2009 Q1:2010 Q3:2010 Q1:2011 Q3:2011 Q1:2012 Q3:2012 Q1:2013 Q3:2013 Q1:2014 Q3:2014 Q1:2015 Q3:2015 Q1:2016 Q3:2016 Q1:2017 Q3:2017 Q1:2018 Q3:2018 Q1:2019 Q3:2019 Q1:2020 Q3:2020 Q1:2021 Q3:2021 UA reported quarterly REV ($000s) Quarterly Net Revenues Poly. (Quarterly Net Revenues)

5 Q5a. The case + the SEC’s AAER use these three ambiguous phrases to describe UA’s REV growth: “quarter -over- quarter REV growth” (case p.2), “quarterly REV growth” (case p.2), “year -over- year REV growth” (SEC p.1). Provide 3 different algebraic definitions of % REV growth D1, D2 and D3 that taken together as a set cover/span what could plausibly be meant by these ambiguous phrases, denoting REV t-k = $ revenue in quarter t-k. (1.5 pts) D1. (REV t – REV t-4 ) / REV t-4 D2. (REV t – REV t-1 ) / REV t-1 D3. ( ∑ REV 𝑡−𝑘 3 𝑘=0 – ∑ REV 𝑡−𝑘 7 𝑘=4 ) / ∑ REV 𝑡−𝑘 7 𝑘=4 ) [based on trailing 4 quarters of REV; 1 st best] or (AREV t – AREV t-1 ) / AREV t-1 [2 nd best], where AREV t {AREV t-1 } = REV over the most recent fiscal year {the fiscal year immediately before the most recent fiscal year}. I ’ ll also accept D4 = a continuously compounded measure of quarterly or annual REV growth. ___________________________________________________________________________________ Q5b. About UA’s REV growth, p.2 of the case states that “Over the next decade, UA continued to see strong financial performance, driven by nearly 20% quarterly REV growth.” By doing your own calculations, determine if the case writer’s statement is True or False. (1 pt) False. Assuming that at its Nov. 2005 IPO, “ the next decade ” means the 40 quarters Q1:2006 → Q4:2015, then my calculations show that none of D1, D2 nor D3 yields an average close to 20%. D1. (REV t – REV t-4 ) / REV t-4 = 31% D2. (REV t – REV t-1 ) / REV t-1 = 10% D3. ( ∑ REV 𝑡−𝑘 3 𝑘=0 – ∑ REV 𝑡−𝑘 7 𝑘=4 ) / ∑ REV 𝑡−𝑘 7 𝑘=4 ) = 30% Q5c. On p.2 of the case, the case writer states “In October 2015, CEO Plank had boasted about the performance of UA on an earnings call with Wall Street investors and analysts. Plank focused on UA’s 20% quarter -over-quarter REV growth for the past five ye ars …” By doing your own calculations, determine if the case writer’s statement is True or False. (1 pt) False. Assuming that as of Oct. 22, 2015 (the date of Q3:2015 earnings call per the call transcript) the "past 5 years" means the 20 quarters Q4:2010 → Q3:2015, then my calculations indicate that none of D1, D2 nor D3 yields an average close to 20%. D1. (REV t – REV t-4 ) / REV t-4 = 30% D2. (REV t – REV t-1 ) / REV t-1 = 10% D3. ( ∑ REV 𝑡−𝑘 3 𝑘=0 – ∑ REV 𝑡−𝑘 7 𝑘=4 ) / ∑ REV 𝑡−𝑘 7 𝑘=4 ) = 30% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Q1:2006 Q2: 2006 Q3:2006 Q4:2006 Q1:2007 Q2: 2007 Q3:2007 Q4:2007 Q1:2008 Q2: 2008 Q3:2008 Q4:2008 Q1:2009 Q2: 2009 Q3:2009 Q4:2009 Q1:2010 Q2: 2010 Q3:2010 Q4:2010 Q1:2011 Q2: 2011 Q3:2011 Q4:2011 Q1:2012 Q2: 2012 Q3:2012 Q4:2012 Q1:2013 Q2: 2013 Q3:2013 Q4:2013 Q1:2014 Q2: 2014 Q3:2014 Q4:2014 Q1:2015 Q2: 2015 Q3:2015 Q4: 2015 Q5b: UA Reported REV growth (40Qs Q1:2006 - Q4:2015) D1 D2 D3

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