Dunelm's shares fell significantly after the company warned of potential profit declines, with the share price dropping as much as 7.9% on Thursday to 789p. The homeware retailer said its pre-tax profit for the full year will be at the lower end of analyst expectations, with the consensus forecast among brokers at £213 million within a range of £210 million to £217 million. According to City AM, Peel Hunt analysts described the slowdown as more fundamental than just geopolitical uncertainty. Dunelm reported 2.1% sales growth to £472 million in the three months to the end of March, but the stock is down more than 26% year-to-date, having fallen by more than a fifth at the start of the year after missing its Christmas sales target despite strong sales in the six months to the end of January.
The U.S.-Israeli war on Iran and Tehran's retaliatory strikes have upended global financial and energy markets, raising concerns of a global economic crisis or recession. Since the U.S.-Israeli strikes on Iran began on February 28, Tehran has launched ballistic missiles targeting Israel, U.S. military bases, oil depots, and other infrastructure across the Gulf region. As of Monday morning, Brent crude was priced at $106 per barrel, up more than 40% from $72 per barrel on February 27, while LNG prices have risen almost 60% since the start of the war. Iranian attacks on vessels in the Strait of Hormuz have dramatically reduced traffic in the channel, through which about 20% of global oil and gas supplies transit, with Iran attacking fuel tankers in Iraqi waters on Thursday.
Energy market disruptions have been particularly severe in the Strait of Hormuz, where about 84% of crude oil and 83% of LNG that passed through in 2024 was bound for Asia. China, India, Japan, and South Korea accounted for nearly 70% of oil shipments through the strait, with about 15% bound for the rest of Asia. On March 2, QatarEnergy suspended its LNG production after an Iranian drone attack, straining the global LNG market. Prices of refined products have seen significant increases and are expected to continue rising if energy flows through the Strait of Hormuz remain largely shut.
Global events have resulted in a more uncertain external environment, and we are not assuming any immediate improvement to consumer confidence.
Conflicting oil price projections have emerged, with Capital Economics reporting that if the conflict is short-lived and Iranian attacks cease, oil and LNG prices would fall sharply with Brent crude reaching $65 per barrel by year-end. In case of a longer war, oil prices would rise to around $130 per barrel in the second quarter. However, assuming the Middle East conflict does not intensify, the annual average price of Brent crude is expected to fall to a four-year low of $73 in 2025, down from $80 a barrel in 2024. Next year, global oil supply is expected to exceed demand by an average of 1.2 million barrels per day, a glut exceeded only twice before in 2020 and 1998.
The broader commodity outlook shows global commodity prices are set to tumble to a five-year low in 2025 amid an oil glut, though overall commodity prices will remain 30% higher than in the five years before the COVID-19 pandemic. Global food prices are set to fall 9% in 2024 and an additional 4% in 2025 before leveling off, leaving them nearly 25% above the 2015-2019 average. Energy prices are expected to drop by 6% in 2025 and an additional 2% in 2026. OPEC+ maintains significant spare capacity of 7 million barrels per day, almost double the amount in 2019.
China's demand slowdown is affecting global supply dynamics, with China's oil demand having essentially flatlined since 2023 amid industrial slowdown and increased sales of electric vehicles and LNG-powered trucks. If the conflict escalates and reduces global oil supply by 2 million barrels per day by end-2024, prices could rise significantly.
We remain very confident in our ability to control the controllables, and in our long-term growth prospects; we have a strong set of assets, all of which present further opportunities.
European corporate impacts are becoming evident, with the U.S.-Israel war with Iran clouding the outlook for European firms as higher energy prices, supply-chain disruption, and slower growth weigh on forecasts. Tesco warned the conflict could result in profit falling this year, while Pernod Ricard warned a decline in tourism due to the war would hurt its sales. EasyJet warned of a bigger first-half loss on Thursday, and Dunelm said customers were tightening spending due to uncertainty linked to the conflict.
Mixed European earnings have emerged despite these headwinds, with European companies expected to report relatively solid earnings for the first quarter of 2024. European stocks dropped in the first weeks of the war but have since recovered as sentiment improved. ASML reported better-than-expected quarterly earnings and raised its annual outlook, while Aixtron posted strong orders and hiked its revenue guidance for 2026. Companies on Europe's STOXX 600 index are expected to report 4.2% growth in first-quarter earnings, mostly due to the energy sector, with European energy majors expected to deliver 24% higher first-quarter profits compared to last year.
Consumer confidence has collapsed after the Middle East war raised prospects of higher inflation, with consumer expectations for the economy over the next three months worsening to -53 in March from -30 in February. Industry experts warned that falling food inflation data was the calm before the storm ahead of looming price rises, though food and soft drink prices rose by 3.3% in the year to February, down from 3.6% in January. Karen Betts of the Food and Drink Federation expressed concern that the conflict's impact on food prices will grow if it continues.
While bulls may point to the conflict in Iran and the broader uncertain trading environment, we suspect the slowdown is more fundamental.
Dunelm's financial performance details show the company holds a 7.9% market share and is eyeing expansions under new boss Clo Moriarty.
Analyst reactions to Dunelm's warning included Deutsche Bank lowering its price target for Dunelm from 1,360p to 1,200p but reiterating its 'buy' rating. Analyst Benjamin Yokyong-Zoega said the reaction was overdone given it was just a 3% downgrade to consensus earnings. Stock broker Peel Hunt said Thursday's results point toward fundamental issues at Dunelm.
Pernod Ricard posted mixed results with like-for-like net sales of €1.9 billion in the third quarter, up 0.1% and above expectations. Sales in India spiked 11%, offsetting weakness in the U.S. and China where sales slid 12% and 7% respectively. Global travel retail sales were up 11% in the third quarter, but Pernod Ricard expects global travel retail sales to be in slight decline for the year due to travel disruption from the Iran war. The company warned group organic net sales are likely to decline by 3-4%.
In particular, the commentary around gross margin softness is concerning.
Broader retail warnings and economic uncertainty have intensified, with the Iran war spiking fears that inflation could ravage the UK's economy. Multiple retailers have warned that concerns about the Iran war could dampen consumer spending.
Key unknowns remain about whether the Strait of Hormuz will remain partially or fully closed, and for how long, which would significantly affect global energy supplies.
Further uncertainties exist about what specific measures Dunelm is taking to address margin pressures and consumer spending tightening, and how the conflict will evolve and if it will escalate further, impacting broader economic stability and inflation. The extent to which other European companies beyond those mentioned will be affected by the war also remains unclear.
Long-term commodity market uncertainties persist amid conflicting projections, with the World Bank forecasting price declines while immediate conflict dynamics push prices upward.