Fashion retailer Next is confident of beating profit forecasts but warns of tough times during 2008.

Next is the first major high street retailer to report on Christmas trading.

Despite having an upbeat trading statement with a 0.3% annual rise in sales from July 30 to December 24, its weaker outlook sets a cautious tone for the retail sector.

Mail order catalogue sales – rising 2.2% - boosted the group's fortunes during the trading period, masking a 0.3% drop in retail takings.

Next believes it will achieve pre-tax profit for the year to January 26 of £492 to £502 million. Operating profit is forecast to be up 4-6% on the past year, with earnings per share up 14-17% following share buybacks and a lower tax rate.

'Our like-for-like sales performance was in line with the guidance we gave in September and is an improvement on our performance in spring summer,' the company said.

'This was despite a worsening consumer environment and significant markdown activity on the high street. Next maintained its policy of trading full price in the run up to Christmas and stocks were well controlled going into the end of season sale. So far clearance in the sale has been in line with our forecasts.'

Next is not forecasting a return to like-for-like growth in the UK in 2008 for its retail operations.

It will seek growth through overseas expansion and online sales.

Shares in Next slipped 5% to £15.90 in early trade on Thursday.