Next has reported a slide in annual earnings after what chief executive Lord Wolfson described as the “most challenging year” in more than two decades.

Next’s pre-tax profits fell 8.1% to £726.1m on total sales down 0.5% to £4.11bn.

Next’s retail sales – those through shops – fell 7.9% to £2.12bn. However, online sales climbed 9.2% to £1.89bn in the year to January.

The performance was in line with City expectations

Next chief executive Lord Wolfson said that despite its tough year, Next was starting its new financial year in good financial health and saw opportunity as well as challenges ahead.

Wolfson said: “In many ways 2017 was the most challenging year we have faced for 25 years. A difficult clothing market coincided with self-inflicted product ranging errors and omissions.

“At the same time, the business has had to manage the costs, systems requirements and opportunities of an accelerating structural shift in spending from retail stores to online.

“Whilst it has been an uncomfortable year it has also prompted us to take a fresh look at almost everything we do: from the structure of our store portfolio, the in-store experience and the generation of alternative retail revenue streams, the management of our cost base, our sourcing and buying methods, stock management and, most importantly, our online systems, marketing and fulfilment platform.

“As a result of these endeavours, many challenges and opportunities have emerged.”

Next reported that last year it confronted unusually high cost price inflation, pressure on shoppers’ disposable spending power and a shift in what they did spend on, from products such as clothing to leisure activities.

The retailer said: “We believe that all of these factors are essentially cyclical and are likely, at some point, to reverse.”

In the current year Next said it will “continue to improve and develop product ranges, defend retail sales and profitability, attack costs” and “maximise the potential for profitable growth online”.

Next expects sales this year to be up about 1%. Profits are likely to fall by 2.9% as costs rise faster than sales.