Next, Britain's second largest clothing retailer, beat forecasts with a 6.5% rise in annual profit on Thursday and said it expected its falling like-for-like sales to improve this year.
Next, which also runs a catalogue business, said it made a profit before tax of 478 million pounds ($936 million) in the year ended January, which compared with analysts' average forecast of 469 million pounds, according to Reuters Estimates.
Group Finance Director David Keens said it would be spending 100 million pounds ($196 million) this year in shop refits and introducing new more fashionable ranges in an attempt to stem falling sales in the face of competition from Marks & Spencer and Tesco.
"The quality of retailers is better than it has ever been and that competition will continue", Keens told Reuters.
"In the year ahead we hope to see the sales increase and the profit increase as well."
Britain's retailers are battling against higher interest rates, but consumer spending has so far held up fairly well. Official data on Thursday showed U.K. retail sales volumes rose 1.4% in February, bouncing back more strongly than expected from a 1.5% decline in January.
Next shares were up 5.2% at 2,205 pence a share, the biggest gainer in the U.K.'s FTSE 100 index, having risen to a record high of 2,221 pence after the official sales data and valuing the business at about 5 billion pounds.
Next said it expected full-price like-for-like sales at its shops to fall between 1% and 4% in the first half of its new financial year, compared with a 7.2% fall in the year ended January.
In the seven weeks to March 17, it said like-for-like sales in 320 stores that were unaffected by new openings were down 0.3%. However, it said this figure was flattered by the timing of Mothers Day.
It proposed a total dividend of 49 pence a share, up 11.4% on the year.
Tesco Threat
However, analysts cautioned a resurgent Marks & Spencer and New Look together with moves by retail giant Tesco to expand into fashion would challenge Next.
"In the second half we are concerned that intensifying competition poses a real threat to Next Retail," Kaupthing Singer & Friedlander said in a note.
Numis brokers added the slowdown in Directory sales to an increase of 5.3% was more worrying given they have powered the group's growth in the last couple of years.
"Next Directory has had limited competition for the last few years, but this is changing and it will be virtually impossible for it to replicate the rapid sales and margin gains of recent years," Numis analyst Steve Davies said in a note.
To combat increased competition in the middle market, Next said it would be refitting its stores and introducing stronger fashion lines and some higher priced ranges. New range tailored jackets could cost 70-90 pounds compared with 50 pounds today.
Keens said Next would be fitting or refitting 1.1 million square feet equal to 21% of total portfolio at a cost of 97 million pounds. Its would launch its new-styled store in May.
However, he cautioned the consumer outlook was tough with an improvement not expected until the second half of the year when the effect of high energy prices would have lessened.
"It is a very difficult market. I think the consumers are being careful ... the inflation figures are very uncomfortable and we don't see that improving in the short term," Keens said.