The jolt to the City was made worse by Next being seen as the strongest player in the retail sector in the past decade, and as its shares slid 15 per cent to their lowest level in two years other stocks were affected.
Marks & Spencer, Primark-owner Associated British Foods and Debenhams fell 4.9 per cent, 5.6 per cent and 3 per cent respectively.
Next said it was braced for a fall in consumer spending as growth in real earnings had “slowed markedly” from September last year.
The company forecast profits this year to potentially slide 4.5 per cent in the face of the UK and global economic headwinds.
It came as the group reported underlying pre-tax profits up 5 per cent to £821.3 million in the financial year to end-January 2016, with Next brand sales rising 3.7 per cent.
Chief executive Lord Wolfson said: “The year ahead may well be the toughest we have faced since 2008. There’s going to be a consumer slowdown this year, but we’re not going as far as predicting a recession.”
He said the company was also concerned that consumers were shifting spending away from clothing towards other areas such as eating out and travel.
“The outlook for consumer spending does not look as benign as it was at this time last year,” Wolfson added.
Retail analysts at Peel Hunt said it was “not unusual” for Next to be overly cautious, but it appeared “this time they mean it”. Another analyst commented: “This is definitely a bit of a shock.”
The group had warned over its results in January after unusually warm weather in December led to a disappointing Christmas performance, where sales fell 0.5 per cent. Next yesterday forecast profits for the year to end‑January 2017 of between £784m and £858m – ranging from a fall of 4.5 per cent to growth of 4.5 per cent.
Next’s annual results showed sales across its 540 stores rose 1.1 per cent. It posted growth of 7.7 per cent across its Next Directory online and catalogue arm – a sharp slowdown on the 12.1 per cent rise the previous year as stock shortages and tougher online competition also had an impact.
The company said that it would respond to the tougher conditions by revamping its Directory arm and introducing two-hour delivery slots towards the end of the financial year.
Wolfson said: “It may well feel like walking up the down escalator, with a great deal of effort required to stand still.
“It will not be the first time we have felt this way, and our experience is that the effort put into improving the business in tough times can pay handsome rewards when conditions improve.”
Next’s shares closed down just more than £10 at £56.55p.