By Kristy Dorsey

Shares in Next surged yesterday as the retailer upgraded its profit forecast for the fourth time in five months following much better Christmas sales than previously anticipated.

The FTSE 100 group said it also expects profits for the coming year to recover to near pre-pandemic levels even though the latest national lockdown will close all of its 500 stores for the first part of the new financial year that begins at the end of January. The forecast from Next assumes that its retail stores will remain closed until the end of March.

During the nine weeks to December 26, full-price sales were just 1.1 per cent lower than during the same period a year earlier, soundly outperforming the 8% decline previously anticipated.

Sales in UK stores tumbled by 43% as health restrictions forced many to close during the run-up to Christmas, but the fashion retailer’s well-established online operation saw an increase of 36%. Next said homeware, children’s clothing, lounge and sportswear all performed well, contrasting with poor demand for adult clothing for work, parties and events.

READ MORE: Scotland’s post-Christmas lockdown may cost shops £135m per week, SRC says

“We were surprised that the business did as well as it did despite the November lockdown,” chief executive Simon Wolfson said, referring to the lockdown in England. “Our operations kept up with demand, which was something we were anxious about in October.”

For the current financial year, the company expects a pre-tax profit of £370 million before exceptional items, up slightly from the £365m predicted at its last update in October.

That includes an estimated 14% loss of full-price retail sales in January due to the new lockdown across the four UK nations, which will hit profits by an estimated £18m. Next said it will also incur £5m of additional costs from the shift of its traditional Boxing Day sale from retail outlets to online, as the marginal cost of clearing stock online is higher than through stores.

Among the exceptional items for the current year will be a £40m provision against the value of its bricks and mortar stores as their sales are expected to continue falling for the foreseeable future. Taking this and other one-offs into account, pre-tax profit is expected to settle in at approximately £342m.

READ MORE: Lockdown heaps pressure on retailers as sales drop accelerates

About half of store sales lost under the current lockdown are expected to migrate online.

“That may be ambitious,” Mr Wolfson said, though he added that the group’s warehouses are now Covid secure: “We are better positioned to deal with this lockdown than the first one.”

Despite these disruptions, central guidance for the year to January 2022 is for a pre-tax profit of £670m. That compares to a profit of £729m in the year to January 2020, before coronavirus hit the UK.

Mr Wolfson said a shortage of freight containers caused by disruption linked to the pandemic meant that many of Next’s deliveries are running two to three weeks late, with stock levels 10% lower than two years ago. All departments are being affected, though it would be a much bigger problem if shops were open. Stock is expected to return to more normal levels by the end of March.

At the start of the crisis, Next predicted the pandemic would have a disastrous impact on its finances. In April, the company cancelled its dividend and share buyback programme to save £480m as it warned that losses for the current year could reach £150m.

READ MORE: High street footfall ‘paltry’ as Scottish coronavirus lockdowns bite, say retailers

However, sales have held up better than anticipated as Next has reaped the rewards from years of investment in its home shopping business. Richard Lim of Retail Economics said the results from Next will likely “set the tone for a polarised view of the retail sector” which favours those with impressive online capabilities.

"Next continued to defy expectations against a hugely challenging backdrop of pre-Christmas lockdowns," he said. "It was able to leverage its slick online channel during this vital trading period and offer customers convenient ways to pick up orders through an expansive click-and-collect footprint.

“The retailer is benefiting from years of investment in its online channel and has proved once again its versatility in dealing with the ongoing disruption caused by the pandemic. It is far better positioned to deal with the demanding trading conditions than many of its competitors in the coming months.”

Shares in Next closed yesterday’s trading more than 8% higher at 7,468p.