Brean Reiterates Hold On L Brands

In a report published Friday, Brean Capital analysts reiterated their Hold rating on

. The analysts expressed their concern regarding the stock valuation, despite the strong 1Q results. "Although LB's reported a solid quarter and raised its annual guidance, valuation remains a concern as we believe it already reflects the growth opportunities from category and geographic expansion," the analysts explained. The company reported its 1Q results with the adjusted EPS marginally beating the estimates and the consensus. Total sales rose 5 percent during the quarter, driven by a 5 percentage consolidated comp increase. The company was able to drive this sales increase without a rise in inventory levels. Inventory levels actually declined on a year on year basis. L Brands' gross margin rose 42 percent in Q1, driven by an increased merchandize margin. On the other hand SG&A rose 27.2 percent, driving a 70 bps rise in operating margins. According to the Brean Capital report, "We expect the magnitude of the margin pressure to decline in Q2 and Q3 and become almost immaterial in Q4 upon the anniversary of the exit of non-core categories." Although the company is open to operating a few global stores, the analysts believe that expanding into the international markets via the franchise route could fuel growth for L Brands. The analysts believe that "the performance of the international segment validates the (franchise) strategy of having local expertise on the ground."