Next warns of slowdown on the high street

Two of the UK's biggest retail chains warned of faltering consumer demand in the second half of the year, as the Government's austerity measures start to take their toll.

Next, the fashion and homewares chain, said there had been a "noticeable cooling in retail demand" since early May. These comments contributed to 7.7 per cent being wiped off Next's market capitalisation yesterday, but shares in retailers including Marks & Spencer and Home Retail Group, the owner of Argos were also hit. The flooring firm Carpetright added it remained "cautious" about the outlook for consumer spending.

The comments from two of the sector's biggest chains will darken the mood in retail boardrooms, particularly as many of the measures, notably an increase in VAT to 20 per cent in January, unveiled by the Government in June, are yet to be felt by consumers.

Simon Wolfson, the chief executive of Next, said: "I think people are preparing for, and to some extent experiencing, tax rises or spending cuts from Government which are going to have a moderating effect on the economy. We are not looking at retail sales falling off a cliff, but it will moderate growth over the next two years."

Despite his warning, Next delivered like-for-like retail sales, including online, up by 1.7 per cent for the 26 weeks to 31 July. "Good cost control" led to its forecasting that group operating profit would be higher by 15 per cent in the first half.

The retailer's total sales rose by 3.1 per cent, which was boosted by sales at its 24 standalone Next Home stores being "significantly ahead of their target". Mr Wolfson added: "A lot of companies have exited the market, such as MFI, and there is an opportunity to pick up market share."

Sales at the Next Directory jumped by a better-than-expected 7.8 per cent. However, Next forecast that retail like-for-like sales would be down by between 1.5 per cent and 4.5 per cent for the second half.

In a further warning shot across the bows of consumers, the fashion retailer said it estimated raising the price of its spring and summer clothing ranges by between 5 per cent and 8 per cent next year.

Next and other fashion retailers face cost-price inflation from a combination of higher cotton prices, tightening capacity at factories overseas, and a lower dollar costing rate.

Mr Wolfson said: "The biggest single factor is the increase in the cost of fabric, driven by cotton prices. The capacity at factories in some regions is becoming constrained, which will make it harder for retailers to force through or expect manufacturers to swallow cotton prices. Capacity constraints will definitely help push price up a little." Shares in Next fell by 170p to 2,029p yesterday.

In the floor-covering sector, Carpetright, which also has stores in the Netherlands and Belgium, said that group sales were lower by 2.5 per cent for the 13 weeks to 31 July. However, the group's closure of its Polish operation accounted for about 0.6 per cent of this decline.

Lord Harris, the chairman and chief executive of Carpetright, which has 704 stores, said: "We remain cautious about the outlook for consumer spending for the balance of the year and, as a consequence, continue to manage the business by exerting tight cost control over all costs, capital expenditure, stock and cashflow."

In the UK and Republic of Ireland, Carpetright's underlying sales fell by 3.4 per cent.