Kent-based Hornby plunged into the red after reporting annual pre-tax losses of £3.4 million.

Hit by disappointing sales of Olympic merchandise, the Broadstairs company that owns model railways, Scalextric slot car racing, Corgi, Humbrol paints and Airfix models, saw a steep drop in revenues to £57.4m in the 12 months to March 31, down from £64.4 million in 2012.

A £4m pre-tax profit in 2012 turned into a £3.4m loss. Underlying profit fell from £4.5m in 2012 to just £150,000. Gross profit margin fell from 48.3% in 2012 to 42.6%.

The company said it had been a year of “challenging economic conditions in all of our major markets that were exacerbated by continuing disruptions to the model railway supply chain and the distractions of what was a disappointing venture into London 2012 branded products.”

Hornby estimates that across the Group, more than 10% of products was not delivered during the year, with European subsidiaries faring worse than the UK business. It added that the UK business lost £1.3m on sales of £5m from London 2012 merchandise.

The company is trying to diversify its supply chain and switching some manufacturing from China to India, while one of Hornby’s award-winning new products Airfix Quickbuild is to be made in Sussex.

Hornby chairman Roger Canham said the market was changing. “The shape of the high street is changing rapidly, our traditional wholesale customers are changing their retailing models, and we in turn are seeing the routes through which consumers purchase our products become increasingly digital and multichannel.”

Coupled to this, consumer confidence remained weak. “There is no doubt that there will continue to be pressure on consumer confidence for some time to come. However we continue to innovate and to seek new commercial opportunities in order to counter the effects of the macro-economic climate in which we are operating.” Hornby was in a strong position to face the future, he added.

Meanwhile chief executive Frank Martin is to step down as soon as a “suitable replacement” can be found.