Next warns 2017 profits could fall up to 14% as costs grow

Next (Frankfurt: 779551 - news) has warned its shoppers they face price rises of up to 5% in the year ahead, with a series of cost pressures potentially knocking annual profits by as much as 14%.

The retailer confirmed a story by Sky News hours earlier by admitting further "challenging" times were ahead while updating the City on its Christmas trading performance, which missed forecasts.

Its share price fell by 14% on the FTSE 100 - following on from a 4% loss in the previous session - while other retail stocks also came under pressure.

Next reported that its branded full price sales over the 54 days to Christmas Eve were down -0.4% on the same period last year, though total sales over the year to date were 0.4% up - aided by discounting.

As a result, Next cut its central profit guidance for its current financial year, the 12 months to January 2017, to £792m from £805m.

It warned that both sales and profits would come under pressure in the following year, as the devaluation of the pound forced up its import costs.

It also cited household budgets facing a squeeze from wider inflationary pressures such as higher grocery and fuel prices.

:: Next warning prompts fears for high street fashion rivals

A separate retail report on Wednesday warned that clothing and footwear costs, while still down on a year ago, were starting to rise for the first time in nearly two years as a result of sterling's collapse after the vote to leave the EU.

Next's chief executive, Lord Wolfson, was a prominent Leave campaigner though he has argued for a so-called soft Brexit which maintains EU trade arrangements.

The company said it expected profits to fall in its 2017/18 financial year by between 2% and 14% because of the "tougher times" ahead though it expected its price rises, which it had previously flagged, would only depress revenue by 0.5%.

Its statement insisted it was "well placed to weather a downturn in consumer demand" and added it would maintain its policy of returning surplus cash to shareholders through a series of special dividends.

The retailer's performance is closely watched because it has been one of the most consistent performers in UK retail over the past two decades.

Primark's owner Associated British Foods (LSE: ABF.L - news) fell nearly 4% while, M&S closed 6% lower.

Emily Stella, retail analyst at Verdict, said of Next's performance: "These recent results may mark the start of a difficult period for the retailer.

"As it stands, Next's current shoppers aren't buying into its proposition - perhaps an indication that Next is failing to identify with its target market.

"To avoid falling into the same trap as M&S, Next will need to carefully rethink who its customer is and how to best attract them."