Next’s share price slumped by more than 14% after the fashion and homewares retailer warned of lower-than-expected profits this year and a tough year ahead as a result of rising inflation and shoppers switching away from buying clothing.

Its chief executive, Simon Wolfson – a prominent Vote Leave campaigner, said consumers were buying less clothes and instead spending their money on leisure activities: “Clothing has had a good run. It had a soft landing during the credit crunch when things like car sales were hit harder but now there is a shift away from clothing to more experiential based spending like eating out, holidays and visitor attractions.”

Full price sales in Next’s stores dropped by a far-worse-than-expected 3.5% in the weeks leading up to Christmas even though the retailer has opened new stores. The annual winter sale – which starts at 5am each Boxing Day – was also disappointing, with sales down 7%. Directory sales were ahead of last year’s levels – but not enough to offset the high street downturn.

Lord Wolfson said there had been a big drop in sales of Next gift vouchers in the run-up to Christmas, suggesting clothing had become a less popular present, and that unseasonal weather had also hit sales.

Some analysts, however, thought the fashion chain’s problems could be more fundamental. “These recent results may mark the start of a difficult period for the retailer,” said Emily Stella at Verdict Retail.

“Next’s current shoppers aren’t buying into its proposition – perhaps an indication that Next is failing to identify with its target market. To avoid falling into the same trap as M&S, Next will need to carefully rethink who its customer is and how to best attract them.”.

Next predicted that sales might be further depressed this year by a squeeze on spending as inflation eroded earnings growth. It also repeated its warning that the devaluation of the pound after the Brexit vote would push up the price of clothing , by up to 5% in the coming months.

The retailer was the biggest faller on the FTSE 100, closing down 683p at £41.37. Just 13 months ago they were changing hands at nearly £82. Next’s gloomy update dragged down other fashion retailers, with Marks & Spencer and Debenhams closing down 6% and Primark owner Associated British Foods losing nearly 4%.

It will not be clear if Next has underperformed its rivals until next week when Debenhams, M&S and ABF are all due to report.

Tony Shiret, a retail analyst at Haitong Research, said Next may have missed out in the shift to spending online as the 5% rise in sales at the directory was modest given that it was boosted by international sales and an improvement in availability of product after a poor 2015.

But Wolfson said his sense was that clothing retail in general had found it tough. “There was a lot of distressed discounting in the run-up to Christmas,” he said.

Overall, Next’s sales were down 0.4% in the fourth quarter to 24 December against analysts’ expectation of a more than 2% rise. Next had expected sales to grow from the previous year as the final three months of 2015 were poor. In the third quarter sales were down 3.5% .

The retailer now expects to make a pre-tax profit of £792m for the year to January 2017, at the bottom end of its previous forecast of £785m to £825m.

For next year, the company is expecting profits to fall to between £680m and £780m, compared with previous City estimates of £784m. Next said it was facing additional pressure on profits from the national living wage, apprenticeship levy, business rates revaluation and increased energy taxes.

IThe company sweetened the bad news by announcing four quarterly special dividends of 45p-a-share each, assuming the outlook remains in line with its forecasts. The first one will be paid at the beginning of May.



