Recovery won't arrive before 2010, Next warns

Profits at Next fell 12 per cent in the first half as the economic downturn and rising cost of living weighed on the retailer's customers, with senior managers predicting there will be no recovery for at least 18 months.

The clothing retailer yesterday posted pre-tax profits of £173.5m in the six months to July, down from £198.2m in 2007, blaming the deteriorating UK economy for its woes.

Simon Wolfson, the group's chief executive, predicted that a return to growth in spending was not only unlikely in the short term but probably would nor arrive until at least 2010.

"Next year there is very little we can see that will reduce the financial pressure on our customers," he said. "Food and energy prices continue to be well ahead of last year and our customer base is particularly exposed to higher refinancing costs of mortgages."

Next believes the consumer should not look for relief from the Government. "Tax cuts seem unlikely given the current budget deficit and spending commitments. Interest rates are likely to be constrained by strong inflationary pressure," it said. The weakening pound and growing overseas inflation will only heap further pressure, it added.

While sales suffered in its core Next Retail business – falling 3.1 per cent – the internet operation Next Directory came in slightly ahead, posting a 2.2 per cent bump in sales. The internet now accounts for 60 per cent of the group's orders.

The group's Ventura call centres business has been hit especially hard, with sales falling from £104.6m to £87.5m. This followed the loss of two crucial clients, including Northern Rock, the UK bank that was nationalised to avoid collapse earlier this year.

The group said that while it was "much happier" with its fashion lines, especially in womenswear with a strong initial response to its autumn ranges, sales remain volatile. "However, we do not believe that these improvements are capable of compensating for the increasing financial pressure on the UK consumer," it added.

The group also warned that the slowdown in the housing market would probably affect the sales of home furnishings as fewer people do up their property.

Next is seen as a bellwether for the retail industry and investors are now waiting especially keenly for the trading update due from Marks & Spencer early next month.

Chocolate sales continue to defy the downturn

Not all retailers are suffering at the hands of the downturn.

At Thorntons, the British chocolate company established in 1911, profits are up by nearly a fifth, further support for the theory of "choconomics" that posits that the gloomier the economy, the more consumers will spend on sweets. In contrast to the poor showing from many of its retail rivals, Thorntons said yesterday that its profits rose 19.6 per cent to £8.5m for the year to the end of June, on revenues up by 11.9 per cent to £208m.

New products and revamped stores are the key to its success, says the company, which has plans for two more shops before Christmas.

The aftermath of the credit crunch is not the first time chocolate sales have soared as the rest of economy tanked. The Great Depression, called the "Hungry Thirties" by gleeful chocolatiers, was a golden age when many of today's big names became established. Cheaper than alcohol, and morally preferable for the teetotal Quakers who founded Rowntree's, Cadbury and Fry's, sweets proved remarkably resilient as all other luxury spending plummeted. History appears to be repeating itself.

Sarah Arnott

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