Next surges on Christmas recovery

Next provided some late Christmas cheer yesterday when it revealed its profits would top City forecasts after a strong end to its financial year.

Shares in the retailer, which have lagged the sector amid fears it was losing out to a resurgent Marks & Spencer, topped the FTSE 100 leaderboard with a 10 per cent surge to 1680p.

The group said its profits before tax would be between £435m and £450m, rather than the £420m the market had pencilled in. Although its underlying sales fell, the decline was smaller than analysts had expected and marked an improving trend.

Simon Wolfson, the chief executive, was quick to caution that he is no more upbeat about the group's prospects for 2006 or the wider retail market. "It is wrong to characterise this as a fundamental change in the consumer economy. It is not the case that the consumer is back on track," he said.

Analysts were also careful not to read too much into Next's figures, arguing they were unlikely to be representative. Philip Dorgan, at Panmure Gordon, said: "The outlook remains tough and we believe that valuations are beginning to discount growth that will not materialise."

On Next's own like-for-like measure, which strips out the cannibalisation effect of store openings, sales fell 3.2 per cent in the five months to 24 December. This was better than the 5 per cent fall it had feared and the 6 per cent decline it reported in September. It followed a 3 per cent comparable gain last Christmas. On the more conventional underlying sales metric, used by the rest of the market, sales slid about 6 per cent.

New Look, the value-for-money fashion chain, also emerged as one of the Christmas retail winners, managing a 0.1 per cent rise in like-for-like sales over the period. Phil Wrigley, the chief executive, said the question of when the group would return to the stock market would be "part of the conversation in the new year".

Next's trading update confirmed expectations that the internet was a major retail force this Christmas as it reported a sharp rise in sales for its Directory business. The mail-order division added 10 per cent to its 2 million-customer base, which was all driven by the internet.

Mr Wolfson said the Directory, which increased its sales by 13.7 per cent, took more sales over the internet than the previous year. Total group sales, including the retail chain and the Directory, rose 9.8 per cent against the previous year from 1 August to 24 December. Panmure Gordon upgraded its profit forecast for the year to 28 January to £441m from £416m and for the following year to £491m from £436m.

Next said it thought underlying sales would continue to fall by about 3 per cent during the next six months. "There is nothing fundamental about the UK economy that should make retailers more comfortable now than going into Christmas," Mr Wolfson said.