Five things to know this morning: stock prices, UK inflation, Dunelm, Redrow, Inditex

It's another bad day for equities as inflation puts more aggressive interest rate hikes on the agenda. Our head of investment picks out stocks to watch.

GLOBAL MARKETS 

European markets have opened lower, caught up in the negative sentiment that has taken hold across global markets. Oil & gas and basic resources are at the bottom of the Stoxx 600 while autos and retail are the only gainers after Zara’s parent company Inditex - Industria De Diseno Textil SA (XMAD:ITX) - surged on the back of impressive first half earnings. The FTSE 100 is underperforming other European bourses and is heading towards support at 7,300.

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Hotter-than-expected US inflation figures out yesterday prompted heavy selling on Wall Street, which suffered its biggest decline since June 2020 at the height of the pandemic. The S&P 500 slumped 4.3% while the tech-heavy interest rate sensitive Nasdaq Composite plunged 5.2%. Among the biggest losers on the day were Meta Platforms Inc Class A (NASDAQ:META) and NVIDIA Corp (NASDAQ:NVDA) which fall by more than 9%, while Netflix Inc (NASDAQ:NFLX) shed 7.8%. Negative momentum carried forward into the overnight session with a sea of red across Asian markets.

UK INFLATION 

UK inflation unexpectedly dipped in August to 9.9% versus expectations for 10.2% and down from July’s reading of 10.1%. The largest downward contribution came from a drop in motor fuels partially offset by rising food prices. The annual inflation rate for motor fuels eased from 43.7% in July to 32.1% in August because of petrol prices which fell by 14.3 pence per litre between these months.

Underlying that movement has been a 25% fall in oil prices since the June highs amid concerns about a weaker demand outlook as the global economy cools.

Grocery inflation continues to accelerate, with food and non-alcoholic beverage prices up 13.1% in the 12 months to August, the highest rate since 2008 with 13 consecutive months of increases.

DUNELM 

Dunelm Group (LSE:DNLM) reported full-year pre-tax profit up 34.9% to £212.8 million on sales up 18.4% to £1.58 billion. It declared a final dividend of 26p versus 23p last year, lifting the ordinary dividend to 40p, an increase of 14.3%.

In terms of the current year, Dunelm says it is on track to deliver full-year 2023 results in line with analysts’ expectations and said sales had been ‘robust’ in the first 10 weeks of the year. 

Given the uncertain macroeconomic backdrop with the cost-of-living crisis, cost inflation, labour shortages and a potentially looming recession, Dunelm has done well to navigate these headwinds and deliver an impressive 35% surge in pre-tax profit by focusing on efficiency improvements.

The home furnishings retailer said its gross margin in 2023 is likely to fall only very slightly from 51.2% in 2022 to 50% in 2023. With its attractive low price point product offering, as households substitute away from more expensive items, Dunelm is well positioned to serve the growing number of increasingly price-sensitive customers who may be looking to trade down to cheaper household products, including Dunelm’s wide range of discounted offers. 

Shares in Dunelm have opened sharply higher, defying the broader market’s declines, lifting other stocks in the sector like Kingfisher (LSE:KGF), Next (LSE:NXT) and B&M European Value Retail SA (LSE:BME) with it.

Longer-term, investors have shunned UK retail this year amid concerns about the cost-of-living crisis and squeezed household budgets, with Dunelm caught up in the bearishness, slumping more than 50% over the last year.

REDROW 

Redrow (LSE:RDW) delivered full-year underlying gross profit up 25% to £516 million on revenues up 10% to £2.14 billion. It raised the final dividend by 19% to 22p, lifting the full year dividend to 32p versus 24.5p in 2021. Redrow said so far 2023’s order book represents an ‘excellent starting position.’ 

This is a mixed bag from Redrow, with strong gross profit and revenue growth offset by concerns about a peaking housing market and an increasingly cumbersome cocktail of macroeconomic pressures.

Although demand continues to outstrip supply, rising mortgage rates, a cooling economy, the cost-of-living crisis and rampant build cost inflation are creating major headwinds for the housebuilders. As a result, Redrow has been subject to a series of price target cuts lately from the analyst community including HSBC which downgraded the stock to a hold from a buy this month.

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Shares in Redrow have shed a third of their value year-to-date which is better than some of its rivals like Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) which are down by 50% and 45% respectively. Redrow is trading modestly higher so far today, with shares pricing in the mixed report as well as the wider bearishness gripping global indices.

INDITEX 

Shares in Spanish retailer Inditex are trading sharply higher after net income rose 41% to 1.8 billion euros on sales up 24.5% to 14.8 billion euros. EBITDA rose 30% to 4 billion euros with gross margin hitting 57.9%, the highest in seven years.

In May, Inditex announced plans to charge customers for online returns in 30 countries. Zara’s parent company today said it saw no significant impact from this policy change. To combat concerns about supply chain issues, Inditex has temporarily accelerated its autumn/winter inventory to offset any potential problems.  

This is an impressive half-year scorecard from the world’s biggest clothing retailer with revenue and earnings both topping analysts’ forecasts as Inditex manages to successfully navigate the challenges of inflation. It has successfully passed through some of its cost increases to customers via higher prices at Zara in particular, without having a negative impact on demand. On top of that Inditex is nimbly preparing for any potential supply chain issues by stocking up early on inventory for the season ahead. 

Shares in Inditex have been caught up in the broader retail market sell-off, although it is nursing more manageable losses than some of its rivals with the stock down just under 20% so far this year. This morning, the stock is up by nearly 5% so far in today’s trade.