Next fashions rise in profits despite a dip in store sales

The improvement to 213m in the six months to the end of July came despite a 1.5 per cent drop in like-for-like sales at its core high street business.

Next repeated its warning that selling prices were likely to rise by between five per cent to eight per cent next spring due to higher VAT and cost price pressures, including this year's 45 per cent rise in the price of cotton.

It is also expecting little in the way of growth in consumer spending in the foreseeable future but said it still expected profits for this financial year to be between six per cent and 11 per cent higher – to between 535m to 560m.

"Next does not expect a double dip recession nor do we anticipate a meltdown in consumer spending, not least because overall employment levels are holding steady," the company said in its interim results statement.

While high street sales were towards the lower end of Next's previous guidance, the Next Directory home shopping business has produced a better-than-expected performance after a 7.8 per cent rise in first half sales.

Next, which employs 50,000 people in the UK and has more than 500 stores, said its store payroll, warehousing and distribution costs were managed so that any inflationary cost rises were offset by efficiency gains. This meant that annual staff pay rises were limited to one per cent for the second year running. The company said it was looking to offset product cost pressures through "alternative sourcing, robust negotiation and some product engineering".

As well as higher fabric prices, it is seeing wage cost inflation in some overseas territories, while manufacturing capacity is also an issue in countries where factories were closed at the height of the credit crunch.

The company added that it would focus its store expansion programme on opening more Home stores after the new format outperformed expectations.

It plans to open seven Home shops in the second half of the financial year, taking the portfolio to 30.

Next said its market had not got any worse since early August and appeared to be stabilising.

"Nothing that we've seen in our performance (since an August 4 update) has changed our outlook," chief executive Simon Wolfson said. "In our August statement, we said that we'd seen a cooling of demand. We haven't seen any further deterioration. The retail environment seems to be relatively stable."

Although retailers' results have generally started to improve, many experts think the sector faces a harsh winter as the Government cuts spending and raises taxes to reduce the record public deficit. Mr Wolfson, who was named as a Conservative working peer in May, said he believed shoppers' psyche had already adapted to more austere times.

He added: "I don't think there's going to be a sudden moment of truth. I think that everyone is very well aware of what's going on."

Worry over interest rates

Simon Wolfson, Next's chief executive, said he was concerned about rises in interest rates, because many of the retailer's customers have mortgages.

He said: "I think it would hit everyone quite hard. A one per cent rise in mortgage rates is probably going to take about 1bn out of the economy."

Mr Wolfson said Next would seek growth by increasing retail space, especially for home products, expanding its Next Directory home shopping business and investing overseas. These opportunities could raise sales by 2 to 5 per cent per annum over three to five years, and increase operating profit by 2 to 7 per cent per annum, he said.

Kate Calvert, an analyst at Seymour Pierce, said of Next's results: "The success of its brands revitalisation and continued investment in the business will deliver ongoing growth and improving returns despite lacklustre consumer demand."