Argus Says Despite L Brands Solid Q2, Category Exits Could Hinder Growth Near-Term

Argus maintained its Hold rating on L Brands Inc LB saying that the company's exit from certain categories in the Victoria's Secret direct and beauty businesses will hinder near-term growth.

The brokerage also noted the company will face difficult comparisons going forward following better-than-expected sales over the past two years. In addition, Argus said though L Brand's international operations are likely to grow rapidly, they are still relatively small and unlikely to contribute much to the earnings in the near term.

"As such, we believe that positive earnings surprises will be difficult to attain and that the current share price adequately reflects the company's muted prospects," analyst John Staszak wrote in a note.

Following the better-than-expected second quarter earnings, the company raised its FY17 EPS guidance to $3.70-$3.85 from $3.60-$3.80; the pre reporting consensus estimate was $3.73. The company now projects flat to slightly higher same-store sales in FY17, up from its previous forecast of flat.

"We now expect revenue to increase from $12.2 billion in FY16 to nearly $12.6 billion in FY17 (down from a prior estimate of $13.0 billion)," the analyst continued.

Staszak's forecast assumes, among others, a 1 percent growth in same-store sales (down from a prior 5 percent), and a 2 percent increase in selling space.

The analyst also expects higher sales of athletic apparel and swimwear at Victoria's Secret's Pink stores. That said, the analyst now expects the operating margin to decline 30 basis points (versus 10 basis points previously) as a result of promotional costs and expenses related to store remodeling.

However, in line with management's revised guidance, Staszak still sees FY17 EPS of $3.80.