Next warns of price rises as profits fall for first time in eight years

Next has reported its first fall in annual profits for eight years. Photograph: Paul Faith/PA

Next has warned consumers they face price rises of up to 5% in the coming months due to the weak pound, as it reported its first drop in annual profits in eight years and forecast another “tough” year ahead.

The clothing retailer posted a 5.5% fall in pre-tax profits to £790.2m for the year to 28 January. Total retail sales fell by 2.9% to £2.3bn. Next is expecting a further drop in profits to between £680m and £780m this year.

Chief executive Lord Wolfson said he was “extremely cautious” about the outlook for the year ahead, identifying three key threats: shoppers spending less on clothes and more on eating out and holidays; price rises as a result of the drop in sterling; and weaker growth in consumers’ incomes.

He said: “The year ahead looks like it will be tough with a combination of economic, cyclical and internal factors working against us.”

Wolfson said the company was going back to basics, after chasing new trends in fashion, although this would take time. “In the process of making our ranges more responsive, we have omitted some bestselling, heartland product ... Our ranges will not be exactly where we want them to be until we get into the third quarter.”

As a result, sales in the first quarter are likely to be at lower end of the firm’s expectations, before improving into the second half of the year.

Next said it had raised prices on the current spring and summer ranges by 4% on average, and warned that prices on the autumn and winter ranges would rise by a further 4% to 5%. It blamed the collapse in the pound, which has pushed up the cost of imported goods.

If sterling does not fall further next year, pricing pressure should ease into the second half of 2018, the company said. “By the same logic, the pressure on real wages from rising inflation may also work its way through the system by the middle of 2018.”

Official figures this week showed that inflation, which was close to zero a year ago, has picked up sharply to hit an annual rate of 2.3% last month. Coupled with slow wage growth, this is restricting households’ ability to spend.

Next shares were up 6% in flat markets, the biggest riser on the FTSE 100 index this morning. The company had previous warned that profits would fall. Neil Wilson at ETX Capital said: “[This is] not a pretty set of figures from Next but no worse than expected after warning on profits in January ... Investors seem to be reassured that it’s taking steps to turn things around with a focus on core products.

“If Next is a bellwether for UK retail then the results fit the picture: online doing well, the old high street presence suffering badly.”