Macnaughton Holdings, Scotland's biggest kilt maker, is planning to invest heavily and increase production to capitalise on a 20% rise in sales of upmarket Scottish fabrics to Americans.

The fall in the dollar against the pound has left the company's products more expensive at a time when competition from rivals in low-cost economies has brought many Scottish textiles players to their knees. However, Macnaughton is flourishing by focusing on niches such as tartans, supplying customers which have enough money to take price increases in their stride.

With US sales on course to increase (pounds) 250,000 to around (pounds) 1.5m this year, directors of the family-owned firm have sanctioned a (pounds) 250,000 upgrade for its fabric production facility in Keith.

This will allow Macnaughton, which raised substantial expansion funding for the core fabric business by selling-off a historic retail operation in Pitlochry last year, to extend its range of products for use in clothing and home furnishings.

Following its recent successful integration of the trade of Dare, a business producing fabric for soft furnishings, the 221-year-old company is ready to make another, more ''significant'' acquisition soon to help increase its offering.

Blair Macnaughton, managing director, said the company was looking to buy a profitable operation with production that could be shifted to Keith, allowing the firm to unlock cost and revenue savings. Macnaughton had already held talks with potential targets including businesses in England, he said, without giving details.

Latest accounts for the group show that although growth was held back in the year to January 31 by sluggish economic conditions in other important export markets such as France, it continues to be a very profitable operation for members of the controlling Macnaughton family.

The group, which produces around 4500 kilts annually at a factory in Paisley and is also a leading supplier of neckerchiefs for scouts and guides, made pre-tax profits of (pounds) 404,000, up from (pounds) 208,000.

The surplus included a (pounds) 226,000 gain on the disposal of the venerable Macnaughton of Pitlochry shop. Although a famous institution, with Queen Victoria once a satisfied customer, Macnaughton decided it could not continue to operate just this one retail outlet.

Directors preferred to raise funds to grow the fabrics operation and pay down (pounds) 400,000 bank debt taken on to fund a 1980s buy-out from trustees.

Turnover from continuing operations edged up from (pounds) 3,864,201 to (pounds) 3,891,633 in the latest period.