Fashion chain Next has delivered another gloomy profit and sales forecast, highlighting tough trading conditions for UK retailers as rising inflation pushes up prices and consumer spending weakens.

The retailer, run by Lord Wolfson, cut its sales and profit guidance for 2017 in a trading update on Thursday, citing challenging trading conditions.

Next posted a 2.5% drop in total sales in the 13 weeks to 29 April. Store sales slumped by 8.1% – a performance described as “dismal” by analysts. Directory sales, made up of online and catalogue sales, have fared better than retail sales for some time, and were up 3.3% in the latest quarter.Some of Next’s problems are of its own making. In March, the retailer reported its first fall in annual profits for eight years and said it had failed to stock enough wardrobe staples while chasing a more fashionable image.

Next said: “The UK consumer environment remains challenging, particularly in the clothing and homeware markets, and real wage growth is now close to zero.”

As investors took fright, Next was the biggest faller in early trading on the FTSE 100, before the share price rallied to around the £42 mark, a decline of about 4.5%. The company’s share price has fallen nearly 50% since briefly touching £80 during October 2015.

Wolfson has admitted mistakes were made during a push to speed up the time it takes to get clothes from the design stage to the stores, in an effort to compete with rivals such as Zara, H&M and Primark. This led to some of Next’s bestselling “heartland products” missing from its ranges.

It relies on selling large volumes of easy-to-wear basics for families with young children, but was more focused on getting trend-led items to its stores last year.

The firm reiterated it would not be able to plug the gaps in its collections until September. “We said we expected some improvements from May onwards, but that our ranges would not be where we wanted them to be until the autumn season in September,” Next said. “We still believe this to be the case.”

Analysts at UBS estimated Next’s first-quarter retail sales dropped more than 10% on a like-for-like basis, and were down about 20% over the past three years. “We assume retail like-for-like sales are less negative in the second half as ranges improve, and with weak comparative figures from the hot weather in the third quarter,” they said.

The Office for National Statistics reported that UK retail sales fell 1.4% in the first three months of 2017, the biggest quarterly fall since 2010. Analysts have said consumers were less willing to spend now the impact of weaker sterling was translating into higher shop prices. The pound is 14% lower against the dollar than it was on the day of the referendum in June when the UK voted to leave the European Union.

Next has been hit hard by the collapse in the pound, which has pushed up the cost of imported materials. It raised its prices on the spring and summer ranges by 4%, on average. Prices on the autumn and winter ranges are set to be 4% to 5% higher than last year.

Emily Stella, a senior analyst at consultancy GlobalData, described 2017 as a “pivotal year” for Next as it tackles an “extremely tough clothing market” and strengthening online competition.

George Salmon, an equity analyst at Hargreaves Lansdown, said: “Whichever way it turns, Next just can’t seem to catch a break at the moment. Online competition is ratcheting up, weaker sterling is increasing costs, and conditions on the UK high street are far from favourable.

“The positive to hold on to is that Next has historically been an exceptionally well-run business, and many of those who have contributed to its success are still on board. Investors will be hoping this raft of experience will help chief executive Lord Wolfson steer the ship through these choppy waters.”

The company cut its pre-tax profit forecast to £680m to £740m for the year to January 2018, from a previous estimate of £680m to £780m. The mid point would mean a 10% drop in profits, following a 5.5% fall to £790m in the last financial year.

Next also reduced its sales estimates. At the upper end, sales are only expected to grow by 0.5% rather than the previously estimated 2.5%, while the bottom estimate, a drop of 3.5%, is unchanged.

Ernesto Bisagno, senior analyst at Moody’s and lead analyst for Next, said the figures were weaker than he had expected, “especially in light of the strong retail sales growth in March for the UK textile industry as a whole”.

As well as bringing back more wardrobe staples, Next is experimenting with ways of making its stores more attractive places to shop. It rented out space in its largest store, in Manchester’s Arndale centre, to a prosecco bar, a hair salon and a florist.

The company has also scaled back planned pay rises for some senior staff. Wolfson’s salary will rise 1% to £773,000 this year.