Next adds to high street fears over rocketing clothes prices

The group, second to Marks & Spencer on the UK high street, had previously said that retail prices are likely to increase by between five and eight per cent during the first three months of 2011.

But yesterday it revised that figure upwards, saying increases are likely to be at the top end of the range and could go even higher in the spring.

"We're planning very conservatively for 2011, but not for a disaster," said Next's chief executive Simon Wolfson.

"Because we've bought most of the stock for the first-quarter of next year, we can be fairly confident that our number at the top end of that range is right," said Mr Wolfson.

"We still haven't contracted for the second quarter and if cotton prices continue to go up then that may nudge that range up. The price of cotton seems to be moving very rapidly and somewhat irrationally and it's very difficult to make a call."

Next first cautioned over prices in August when it said that the cotton rally and the New Year VAT hike to 20 per cent were likely to lead to more expensive clothing for customers.

Fashion retailers across the sector have raised the alarm over prices in recent months, including budget clothing giant Primark.

Cotton prices are running at record highs as global supplies have tightened after the devastating floods in Pakistan – one of the world's largest cotton growers – and wet weather in China, which is another major exporter.

Mr Wolfson, who has just returned from a visit to factories in Bangladesh and India, said: "The longevity of what appears to be a speculative bubble in cotton prices will be critical in determining prices for the second quarter."

Next's comments coincided with the latest survey from the British Retail Consortium, which showed that October shop price inflation rose to its highest annual rate since January.

The BRC said shop price inflation rose to 2.1 per cent in October from 1.9 per cent in September.

Britain's official CPI rate held steady at 3.1 per cent in September, well above the Bank's target.

Next also released sales figures for the three months to October 30 yesterday, revealing a deteriorating performance at its high street stores. High street like-for-like sales fell by 3.3 per cent – worse than the 1.5 per cent fall during the first half.

The group said that a strong showing from its online arm Next Directory and sales from new high street space "more than made up" for the retail disappointment.

Directory sales rose 7.9 cent, helping overall sales rise by 2.2 per cent over the three months as Next confirmed expectations for annual profits of between 535m and 560m.

It maintained its forecast for earnings per share of 212p to 224p, a rise of between 14 and 19 per cent.

Next said it is sticking with its forecast for underlying retail sales to fall by 1.5 to 4.5 per cent in its second half, with Directory sales up four to eight per cent.

Many retailers fear the 81bn of spending cuts announced by the Government last month, as well as tax rises and a slowing housing market, will hit consumer demand.

Matthew McEachran, retail analyst at Singer Capital Markets, said the update showed Next "performed reasonably well".

"But sales were not quite as good as hoped. With tougher comparatives to come, sales will probably fade down the guided second half range over the course of the final quarter."

Andrew Wade at Numis Securities cut his recommendation on the retailer's shares from buy to hold.

He said: "Sales comparatives get considerably tougher through the remainder of the year, a fact Next alluded to, with retail like-for-likes in the region of four to five per cent through Christmas last year."

Shares in Next, which prior to yesterday's update had increased by a quarter over the last year, outperforming a seven per cent rise in the UK general retailers index, closed down 2.2 per cent, a fall of 49p to 21.80.

Analysts at Credit Suisse said: "The third-quarter statement was generally OK from a profit point of view, but has added another layer of uncertainty on pricing in 2011 that is not very helpful."

Last week Stuart Rose, the chairman of Marks & Spencer, said the Christmas trading period would be "hard fought, but OK", while earlier this week John Lewis, the UK's biggest department store retailer, raised its forecast for second-half sales growth.

BOOTS TO PUT THE FUN INTO SHOPPING

Alliance Boots believes that fun and innovative products such as its 'Strictly Come Dancing' cosmetics range will help attract wary shoppers this Christmas.

The group said it expects strong full year results after revenues rose 6.6 per cent at constant exchange rates to 8.9bn in the six months to September 30.

Growth was driven by market share gains in its health and beauty stores, as well as a strong performance from the international drugs wholesale business.

The company has fended off cut-price competition from supermarkets with innovative products such as its No7 Protect & Perfect skincare range and better customer service.