Web growth saves Next from a bleak Christmas

Next has vowed to tackle its disappointing sales performance after a Christmas that was salvaged by its strict promotional policy and strong growth from its website.

Simon Wolfson, the chief executive, admitted for the first time that Next faced problems unless it could stabilise its like-for-like sales, which have been in freefall for the past two years.

Its retail division, by far the bulk of its business, saw underlying sales in the 308 stores that were unaffected by new openings slump by 6.9 per cent from 31 July to 24 December. And that excluded those stores in towns where it has recently opened large new ones. Even total group sales only grew 2.8 per cent.

Despite missing internal sales targets, the group said its pre-tax profits would be "slightly ahead" of the consensus forecast because its margins improved due to tight stock and cost controls, better buying and its refusal to discount before Christmas. It put 13 per cent less stock into its sale, which started on 27 December.

Its Directory arm - which includes mail order and internet sales - profited from more people shopping online: over the festive period, it took more orders over the internet than over the telephone for the first time. Its internet sales rose by 30 per cent, ahead of the 9.3 per cent overall increase in sales at the Directory arm.

Mr Wolfson said the group opted to "defend our bottom line rather than go for the glory of the top line", adding: "Ultimately we are in business in order to deliver increasing profit and that is what we've achieved."

But he was blunt about the challenges facing Next, saying he would be "worried" if its sales tailspin continued. This was a volte-face for Mr Wolfson, who normally bemoans the City's obsession with like-for-like sales.

"Do I think we can carry on having negative like-for-likes and always be successful? No, I don't. This year we have to stabilise like-for-likes and the next year we have to move them forward. I would be worried if at this time next year I am reporting the same like-for-likes as the year just gone."

He intends to stem Next's sales decline by selling a higher proportion of fashionable clothes to basic items; by investing £40m on refitting 800,000 sq ft, or 20 per cent, of its store estate; and by embarking on a £10m advertising campaign in print and on billboards.

Next has been hit hard by the revival of Marks & Spencer. Mr Wolfson, who seldom comments on his rivals, admitted: "If you put that to me, I wouldn't argue with you. They are our biggest competitor."

Philip Dorgan, retail analyst at Panmure Gordon, believes Next's problems are deeper rooted. "Something is not right and it could be the brand is not stretching sufficiently across the expanded product range and that the format is not appealing to new customers and is growing old with its customer base," he said.

M&S will add to Next's woes this year when it turns its attention to growing its internet business. Stuart Rose, M&S's chief executive, wants to increase internet sales from £100m to £500m by overhauling its website.

In its trading update, Next said annual profit before tax would be between £463m and £473m. Before Christmas, some analysts had cut annual forecasts to as low as £430m. Operating profits are expected to rise by up to 7.2 per cent, pushing earnings per share up by as much as 13.4 per cent.

"I'm not worried [about the past year] because we always said it would be a tough year and we have respectable profit growth and good growth in earnings per share," Mr Wolfson said.