Value retailer Home Bargains has reported another record year but warned that the value sector is heading for tough times as margins are squeezed in the face of rising costs, and competition hots up.

Home Bargains’ pre-tax profits edged up from £43.5m last year to £46.6m in the year to June 30.

While profit growth has slowed, revenue growth has strengthened, up 23% to £590m. Operating profit came in at £46.6m.

Home Bargains operations director Joe Morris said the retailer had achieved “good strong like-for-likes, but the sector’s getting tougher”.

He added: “We’re pleased with the results. There’s obviously been good growth but the competition is getting strong and is going to get stronger. It affects profitability. Next year will get tougher.”

The value sector has been one of the few retail sectors to show consistent growth since the beginning of the downturn as shoppers sought out bargains, but Morris’s warning highlights the likely slowdown in profit growth of retailers operating in the discount market.

He said increasing costs of transport and raw materials, reduced margins and fierce competition on the high street were likely to hit profits across the value sector. He also cited volatile exchange rates. “It’s a perfect storm coming in some ways,” he said. “The value sector is attractive [for retailers] to go after,” said Morris. “It’s getting more crowded. If you’re a weaker competitor you will find it tough.

“Profitability will drop among value retailers. It wouldn’t surprise me if profit margins dropped further,” he said.

January’s VAT increase will “have a big impact”, not only on shoppers’ propensity to buy but also on value retailers’ bottom lines.

Morris said at this stage it was “too difficult to say” whether Home Bargains would pass on the VAT rise to customers who expect low-priced goods.

Home Bargains aims to grow the business between 20% to 25% a year and is still on target to achieve sales of £1bn by 2013.

It has 230 stores at present, and will open 20 to 50 more stores by the end of this financial year.