Next has said it will be reducing prices for shoppers as it brushed off Red Sea shipping disruption and notched up a better-than-expected annual profit haul.

The retail giant reported a 5% rise in underlying pre-tax profits to £918 million for the year to January, helping shares lift 5% in Thursday morning trading.

This was better than the £905 million it had recently guided for, thanks to better-than-forecast stock clearance in the January sales, and comes after it had already upgraded its earnings guidance five times over the past year.

It said it is cutting prices for customers by 2% thanks to lower buying costs for clothing and goods, with price tags set to fall by another 0.5% in the six months to next January.

Higher freight costs have been factored into our prices going forward, but we still anticipate that our prices will fall

This comes despite the group taking a hit of just under £20 million from the Red Sea disruption, as ships are having to take a lengthy detour to avoid the vital Suez Canal trade route amid attacks by Houthi rebels on cargo containers.

It revealed the shipping woes are leading to delays of between seven and 10 days on some goods from the Far East, but said it is not seeing any “any material adverse impact” on its spring/summer ranges.

The group said: “Our product teams have adjusted the timing of their contract bookings to account for this delay.

“In addition, higher freight costs have been factored into our prices going forward, but we still anticipate that our prices will fall.”

Next kept its forecast for sales and profit in the current year, with the group expecting a 4.6% rise in underlying pre-tax profits to £960 million and full price sales up 2.5%.

The sales growth will mark a pullback on the 4% increase seen in the financial year just gone, with the group noting concerns over the jobs market in the year ahead as higher wages put businesses under pressure.

Outgoing finance director Amanda James, who is retiring from the group in July after 28 years with the business, told the PA news agency: “We’re mindful that there could be a weakening in the employment market, while mortgages are also coming to the end and need refinancing.

“With that in mind, it makes sense to plan for a budget that we can achieve.”

But higher wages – in particular the near-10% rise in the National Living Wage due on April 1 – are also set to boost consumer spending.

“On the face of it, the consumer environment looks more benign than it has for a number of years, albeit there are some significant uncertainties,” Next said.

Ms James declined to comment on recent reports that Next is considering a deal to rescue parts of The Body Shop after the cosmetic and skincare chain’s UK operation was placed into administration last month.

It comes as fashion chain Ted Baker is also to set to appoint administrators, putting close to a 1,000 jobs at risk.

Ms James said Next will consider further deals to boost is burgeoning stable of brands following an acquisition spree in recent years that has seen it snap up the likes of Reiss, FatFace and Joules.

“For the right business, we would absolutely take a look at it, but we have a strict criteria,” she said.