May 4, 2017 / 6:35 AM / 3 months ago

UPDATE 3-Product gaps compound Next's problems in tough UK market

4 Min Read

* Sales in stores fall 8.1 pct, Directory sales up 3.3 pct

* Top end of profit guidance cut to 740 million pounds

* Company says gaps in some of its product ranges (Adds CEO comments, analyst reaction, updates shares)

By Paul Sandle and Kate Holton

LONDON, May 4 (Reuters) - British fashion chain Next lowered its annual profit forecast on Thursday, counting the cost of tough trading conditions and self-inflicted problems with its product ranges.

Next, Britain's most successful clothing chain in recent years, is one of a number of companies to feel the impact of a squeeze on consumer spending as inflation bites.

"The UK consumer environment remains challenging, particularly in the clothing and homeware markets, and real wage growth is now close to zero," the group said.

Next also said that "omissions" in some of its product ranges would not be fully rectified until the launch of its Autumn season in September, a rare misstep for a retailer that has been in tune with the British mid-market since it was founded in the 1980s.

The company said in March that it had overlooked some of its "easy to wear" styles that it sells in large volumes while focusing more on newer trends.

"We expected numbers in the first quarter to be towards the bottom of the range and that's exactly where they panned out," Chief Executive Simon Wolfson said on Thursday.

Wolfson said conditions on the high street would not improve until the middle of next year, by which time a jump in inflation caused by the drop in the value of the pound would ease.

"Whilst consumers are experiencing year-on-year price increases at the moment, those will have pretty much disappeared by the time we get to halfway through 2018," he said.

Next said it now expected pretax profit for the year to come in between 680 million pounds and 740 million pounds ($876-953 million). Previously the upper end was 780 million pounds.

Shares Fall

Next shares, which have fallen 16 percent in the last year, were down 5 percent by 1045 GMT.

"Whichever way it turns, Next just can't seem to catch a break at the moment," said Hargreaves Lansdown analyst George Salmon, noting increased online competition, rising costs and tough conditions for consumers.

"That's not to say that Next is purely a victim of circumstance. The fact that current ranges are described as 'not where they need to be' isn't doing the group any favours," he added. The disappointing numbers weighed on the sector, with shares in Marks & Spencer down 2.2 percent, Primark owner AB Foods down 1.6 percent and Debenhams falling 1 percent.

The retailer, which recorded its first fall in annual profit since 2009 in March, said sales of full-priced goods in its stores in the 13 weeks to April 29 fell 8.1 percent.

While online sales rose 3.3 percent, it was not enough to offset the downward pressure and total sales were down 3 percent in the period.

Analysts at RBC Capital Markets estimated that like-for-like sales in Next's stores were down by more than 10 percent in the quarter, compared to its forecast for a seven percent decline.

They calculated that volumes fell in the mid-teens, given price rises of at least 4 percent.

"We expect some improvement in Q2 and a stronger second half (...) however the risks now look more to the downside, given the recent volume trend," they said. ($1 = 0.7765 pounds) (Editing by William Schomberg and Keith Weir)

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