MACKAYS Stores Group, the Scottish clothing retailer behind the M&Co brand, suffered its first operating loss in about 50 years of trading in its last financial period, but is projecting a return to profit and pursuing international expansion.

The family-owned company, which employs about 3500 people and is targeting expansion in the Middle East while eyeing opportunities in Russia, eastern Europe, and China, posted an underlying operating loss of £5 million for the year to February 24, 2012.

This represented a dramatic reverse from a corresponding profit of £14.8m for the prior 12 months.

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Turnover tumbled to £173m in the 52 weeks to February 24, from £187m in the prior year.

Mackays' directors say in their report on the company's accounts that sales were hit by a significant reduction in consumer demand because of continuing uncertainties in the economy, price rises across all sectors, and the higher rate of value-added tax.

They add that product profit margins also fell as disappointing sales and errors in product selection led to a higher level of discounts to clear seasonal ranges.

The directors declare that a major restructure of Mackays' buying operation was carried out in late 2011, and that trading has been much improved since July 2012, when the resultant new product ranges went on sale.

They also cite the impact on profit margins of the increased cost of cotton and other raw materials during the year to February 24.

However, they add that cotton prices have since reduced to a more normal level and say this has had a positive effect on profit margins in the current financial year.

Mackays made a pre-tax loss of £8.62m, after net interest payments, amortisation of goodwill, and a loss on the sale of fixed assets.

This contrasted with a pre-tax profit of £11.5m for the prior 12 months.

Major shareholder Iain McGeoch, who is chairman of the Renfrewshire-based company, said: "This year, we celebrate our 50th year trading, having faced some of the most challenging trading conditions we have ever experienced, uncertainty in the economy, and unseasonable summer weather, along with some internal errors in product selection.

"Our 2011/12 results to February 2012 were very disappointing. In our 50-year trading history, we have never before made an operating loss."

He noted that earnings before interest, tax, depreciation and amortisation (EBITDA) were positive at £4.6m in the year to February 2012. However, Mackays had made EBITDA of £24.8m in the prior financial year.

Commenting on more recent trading, Mr McGeoch said: "In the current financial year, favourable customer reaction to the new autumn-winter 2012 collection has seen a like-for-like lift in sales."

He added: "Current trading has been challenging but much better in the autumn-winter season, and we expect to see a return to profit despite the incredibly poor summer weather, which had a significant effect on sales."

Mackays has 72 stores in Scotland, about one-quarter of an overall UK portfolio of more than 280 outlets.

A spokesman for Mackays, who highlighted the company's plans for major expansion of its fledgling international operations, noted its recent opening of three franchise stores in the United Arab Emirates, and cited plans to have a total of about 30 outlets in the Middle East within five years, with openings also under consideration in Qatar, Kuwait, Bahrain and Saudi Arabia.

The spokesman said that about 9% of all orders made through Mackays' website were coming from Russia.

He revealed the company was considering opening in Russia, and in eastern Europe. He also cited potential for the company to move into China.