The chief executive of Next, Lord Wolfson, warned that rising shop prices were the "big unknown" for consumer spending this year as he presented a mixed trading update which showed that the clothing retailer lost £22m of Christmas sales to the heavy snowfalls during December.
The chain's underlying sales at shops fell by more than 6 per cent between 1 August and 24 December, but its Next Directory catalogue business delivered strong growth.
Despite this mixed trading and disruption caused by bad weather, Next predicted that full-year profits would be in line with current expectations of between £540m and £555m. The news sent Next's shares up by 88p, or 4.4 per cent, to 2,103p last night.
Lord Wolfson said the outlook for 2011 was "uncertain" because of the impact of government cuts on consumer spending, and how shoppers will respond to rising prices. Next expects clothing costs to jump by about 8 per cent this year, driven by the rise in VAT to 20 per cent and higher input costs in the supply chain, such as raw materials. He said: "The general economic environment is going to remain subdued in terms of consumers. The big unknown is what impact price rises will have. Clothing prices have not gone up in about 20 years."
From August to Christmas Eve, like-for-like sales at Next stores fell by 6.1 per cent, which was at the bottom end of City expectations. In addition to the severe weather, Next said retail sales were "significantly affected" by increased discounting on the high street before Christmas.
Next, which has more than 500 branches in the UK and Republic of Ireland, said the snow cost it £22m of full-price sales, representing 2.2 per cent of the season's total sales and up to £10m of profits.
Lord Wolfson said parts of the country were temporarily "unpassable" and some stores in Scotland suffered one-day sales falls of 60 per cent. Retail volumes were also affected by limited stocks of some best-selling women's clothing lines in the run-up to Christmas, the company added.
It said its star performer was Next Directory, which achieved a 8.7 per cent jump in sales. While the division initially benefited from people shopping from home to avoid the bad weather, the "fear of failed deliveries reduced demand" later.
Tom Gadsby, an analyst at Matrix, estimated that Next's retail like-for-like sales had tumbled by 10 per cent in the eight weeks to 24 December. He said: "Poor weather did not help, but the company admitted to poor choices in terms of buying and stocking, [which] exacerbated the situation."
Lord Wolfson said Next's clearance sale, which began on 27 December, had been "good" and in line with last year's.