LONDON (Reuters) - Britain’s economic recovery is being driven by an unsustainable pick up in consumer borrowing which could be derailed by higher interest rates, according to the head of retailer Next, a prominent supporter of the prime minister’s Conservative Party.
Simon Wolfson made his comments as Next (NXT.L), Britain’s second-biggest clothing retailer, reported a 12 percent rise in annual profit to 695.2 million pounds ($1.2 billion), driven by booming sales at its online business - a figure likely to top that of rival Marks & Spencer (MKS.L) for the first time.
Data and surveys have shown an improving outlook for UK consumer spending, which generates about two thirds of gross domestic product. But some retailers remain wary.
“Whilst the economy is getting better, we need to recognize that last year’s growth was driven very much by credit and that that can’t go on forever,” Wolfson told Reuters on Thursday.
“Until we see significant increase in the supply side of the economy - profitable investment and improved productivity - we cannot bank on a return to sustained growth,” he said.
Wolfson, who sits in Britain’s upper house of Parliament, said he was encouraged by recent data showing little or no decline in real earnings. But he was concerned by the prospect of an interest rate rise later this year dampening the consumer economy as well as house price inflation getting out of control.
“My big concern is, particularly in the south east (of England) where people have borrowed a lot of money on their homes, is that people have got used to very low interest rates and any rise in interest rates will come as something of a shock,” he said, adding: “Asset bubbles are never productive.”
Espirito Santo Investment Bank analyst Tony Shiret reckons Next, which also sells homewares, is the UK clothing retailer most exposed to customers with mortgages.
“This is clearly a risk that should be discounted in some way. Yet we get no sense that this is on the investment watch-list for this company,” he said.
On Wednesday, UK finance minister George Osborne delivered his annual budget, courting voters ahead of a national election in 2015 with promises of help for savers, tax breaks for manufacturers and lower beer and bingo levies.
Shares in Next, which have risen 61 percent over the last year, were up 2 percent to 6,705.25 pence at 1045 GMT, valuing the company at about 10.4 billion pounds.
The firm trades from over 500 stores in Britain and Ireland and almost 200 stores in more than 30 countries overseas, as well as via the Directory internet and catalogue business.
Its pretax profit of 695.2 million pounds for the year ended January 2014 compares with Next’s own guidance of between 684 and 700 million pounds, analysts’ consensus forecast of 695 million and 621.6 million made in the 2012-13 year.
Sales, excluding VAT sales tax, rose 5.4 percent to 3.74 billion pounds, driven by new space and online growth. Directory sales grew 12.4 percent, while store sales rose 1.7 percent.
Analysts expect Marks & Spencer, Britain’s biggest clothing retailer, to make a pretax profit of 628 million pounds in its 2013-14 financial year.
Next’s underlying earnings per share (EPS) rose 23 percent to 366 pence, boosted by share buy-backs and its dividend was increased 23 percent to 129 pence - a fifth straight year that EPS and dividend have grown by over 15 percent.
The firm forecast sales growth of 4-8 percent in its 2014-15 year, with pretax profit rising 5-11 percent to 730-770 million pounds and total shareholder returns of 10-16 percent.
Next paid a 50 pence a share special dividend in January and will pay another of the same amount in May. It has pledged to distribute surplus cash through special dividends as long as its share price remains above 6,245 pence. If it falls below that figure the firm may revert to a share buyback program.
Editing by Kate Holton and Mark Potter