Next warns of damage from plunging pound

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Shops will soon have to start buying in goods from China — whose currency closely follows the dollar — at much higher costs, probably leading to rising prices for consumers in the UK.

Most large shops bought the stock they sold over Christmas well in advance, before sterling slumped in value against rival currencies including the US dollar and the euro.

When those goods finally sell out retailers will have to buy in new stock with a massively weakened hand placing yet more pressure on margins.

Next said the impact in the second half of the year could be major.

"We anticipate that in autumn/winter there will be significant upward pressure on prices and downward pressure on margins as a result of sterling weakness. The extent of these pressures will become more apparent as we negotiate and re-source our stock," it said in a statement.

The warning came as Next unveiled a 7% fall in like-for-like sales for the period from 29 July to 24 December.

This was at the bottom end of City forecasts — but the shares rallied as investors breathed a sigh of relief that the company had avoided a profit warning.

It still expects to make a profit for the year of between £415 million and £435 million. That's around 10% down on 2007, but creditable given the economy, say analysts.

Next didn't follow the example of rivals such as M&S, refusing to slash prices in the run up to Christmas. That leaves it with greater leeway now.

"After a good start to the sale period we now expect clearance rates to be ahead of last year," said chief executive Simon Wolfson. Next shares added 81/2p to 37p.

Other retailers are also showing signs of life.

New Look, the self-styled "fast fashion" group, said Christmas was strong with sales up 2.8% in the 14 weeks to January 3. Debenhams also had reasonably good news for the City. Sales fell 3.3% in the 18 weeks to 3 January, but it seems to be taking market share from rivals. Its shares soared 69p to 1160p.