Shares in Next fell by more than 4 per cent yesterday with investors taking fright as the clothing and homeware retailer warned that sales and profits will weaken in the current year.

The muted outlook overshadowed a record-breaking performance for the 12 months to the end of January, with the retail bellwether posting a 5.7% increase to generate its biggest-ever pre-tax profit on sales which were 8.4% higher.

The group said it now expects to raise shop prices by less than previously projected as its own inflationary pressures are easing. This includes a "significant" reduction in shipping costs and an improvement in how much it pays for goods from factories.

Like other retailers, Next has been raising what it charges customers in an effort to offset some of these costs. The more benign environment has led it to estimate that shop prices will rise on average by 7% in the spring/summer season - down from 8% previously forecast - and by 3% in the autumn and winter months, half of what it predicted as recently as January.

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The group's comments will raise hopes among the public and economic policymakers that surging inflation stoked by the Russian invasion of Ukraine will begin to ease later this year. Earlier this month the Office for National Statistics (ONS) revealed Consumer Prices Index (CPI) inflation rose unexpectedly to 10.4% in February, driven by the highest rate of increases in food prices in more than 45 years.

Led by chief executive Lord Simon Wolfson, Next’s annual profit of £870 million during the 12 months to the end of January outstripped even its own guidance that was lifted by £20m after better-than-expected sales during the festive season.

All told, annual sales of £5.1 billion were 8.4% higher than in the same period a year earlier. Full-price sales were 6.9% higher year-on-year.

The Herald: Lord Simon WolfsonLord Simon Wolfson (Image: Next)

Russell Pointon, director of consumer at Edison Group, said higher operational costs and the impact of the cost-of-living crisis had "inevitably" put pressure on Next during the past year. However, the strength of the company's latest results "reflect the impact of the company’s well-managed inventory and brand recognition".

Despite these advantages, Next remained cautious in its outlook on the year ahead, predicting a drop in profits to £795m due to soaring wage and utility bills. Sales are expected to decline by 1.5%.

"While historically the clothing brand has tended towards conservatism in its forward guidance and subsequently overdelivered, Next has suggested such outperformance might not be possible in the coming year," Mr Pointon said.

"Yet improved factory gate prices, reductions in freight costs, and a more benign price inflation for the coming months will be more helpful in the coming year.”

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Next said sales in the first eight weeks of the new financial year were down 2% and forecast an overall drop of 3% in the first half when compared to the boom in trade a year earlier. Sales in the second quarter beginning in May are expected to fall by 4%, with declines in the final six months of the financial year falling back to around 0.2%.

Despite the uncertainty, Next has been using its financial strength to snap up smaller, struggling brands. On Tuesday the group bought the Cath Kidston brand name for £8.5m, having already snapped up the likes of Joules, and JoJo Maman Bebe.

Shares in Next closed yesterday's trading 292p lower at 6,434p, a decline of 4.3%.