Delta Israel Brands Follow-up: Can the Franchise Engine Really Carry Group Margin
The franchise segment generated about 91% of Delta Israel Brands' 2025 sales growth, yet only 9.6% of group operating profit. This follow-up shows why rollout, online and category mix are building a real engine, but not yet one that can carry group margin.
The main article established that franchise is now Delta Israel Brands' growth engine, while the legacy network still decides earnings quality. This follow-up isolates one narrower question: is the franchise engine already mature enough to carry a meaningful part of group margin, or is it still mainly a volume engine.
The 2025 answer is fairly sharp. Franchise supplied about 90.8% of group sales growth, yet only 9.6% of group operating profit. Put differently, it is already changing the top line, but not the economics of margin at the same pace.
That does not mean the engine is weak. Quite the opposite. Segment revenue nearly doubled to NIS 209.2 million, the store base rose to 23 from 10, and the segment already has an almost even split between women's apparel and atmosphere and care. The problem is different: most of the growth still comes from rollout, online, and category mix, while the same-store base is still weakening and the cost layer is still too heavy for the segment to become a real margin carrier for the group.
That matters now because management's own forward view still describes a build phase rather than a harvest phase. The franchise roadmap is framed around continued store openings, stronger online activity, launch and establishment in Europe, and tighter inventory management. In other words, 2026 is still being described as an integration and absorption year, not as the year in which franchise is already supposed to carry group margin.
The Volume Is Already There, The Margin Carry Is Not
The first number to keep in mind is the gap between revenue share and profit share. In 2025 franchise represented 16.1% of revenue, but only 9.6% of operating profit. Owned brands still carried 83.9% of revenue and 90.4% of operating profit. So even after a strong expansion year, group margin is still read mainly through the mature network.
That gap becomes even clearer when the year-over-year change is broken down. Franchise added NIS 100.7 million of group revenue, while owned brands added only NIS 10.2 million. But on the operating-profit line, franchise added only NIS 8.0 million while owned brands lost NIS 19.3 million. In other words, franchise already carried almost all of the sales growth, but it was still not large or profitable enough to offset the margin erosion in the core engine.
| 2025 metric | Franchise brands | Owned brands | What it means |
|---|---|---|---|
| Revenue | NIS 209.2 million | NIS 1,089.9 million | Franchise is already large enough to move the sales line |
| Growth rate | 92.9% | 0.9% | Almost all growth came from franchise |
| Operating profit | NIS 19.7 million | NIS 185.7 million | The center of gravity of profit is still in the legacy network |
| Operating margin | 9.4% | 17.0% | Even after the expansion year, franchise remains far below the core engine's margin level |
This is the core point. Franchise already carries Delta's growth story, but not yet its margin story.
What Is Actually Driving The Growth
The near doubling in franchise is real, but it should not be read as clean proof of mature economics. The company explicitly says 2025 is not fully comparable with 2024 because, outside the Victoria's Secret e-commerce site, the activity started only in the second quarter of 2024 and then included 10 stores, versus 23 stores at the end of 2025. A large part of the jump is simply rollout math.
The fourth quarter shows that the engine still relies more on expansion than on stronger productivity from the established store base. At first glance the number looks good: same-store sales in franchise, including the organic online sites, rose 5.2% in the fourth quarter. But on the same base, store-only same-store sales fell 10.6%, and average monthly sales per square meter in the same-store base fell to NIS 3,561 from NIS 3,985. In other words, online and new openings are protecting the headline, but the older store base is not yet proving stronger unit economics.
The annual view points in the same direction through sales density. Average monthly sales per square meter in the segment fell to NIS 3,582 from NIS 3,986, a decline of 10.1%. That does not cancel the growth story, but it does clarify its quality: as of the end of 2025, franchise is growing mainly because there are more stores, more online activity, and more category breadth, not because the average existing store is already carrying stronger economics.
There is one encouraging sign inside the segment. Revenue is already split almost evenly between women's apparel at NIS 101.5 million and atmosphere and care at NIS 107.8 million. That suggests the engine is not being built only on a single apparel category, but on a broader platform. Still, that broader platform is not automatically the same thing as higher carried margin today.
Where The Margin Still Gets Stuck
The easy mistake is to look at the revenue line and assume margin will naturally arrive later through scale. 2025 shows that this does not happen automatically. In franchise, fourth-quarter gross margin actually improved to 58.4% from 55.9%, helped in part by tighter product mix and a stronger shekel net of hedging transactions. But for the full year gross margin was basically flat at 57.2% versus 57.3%, and operating margin fell to 9.4% from 10.8%.
That means even where mix helps, the operating layer is still absorbing most of the benefit. The segment data shows why. Cost of sales in franchise amounted to 42.8% of revenue versus 39.9% in owned brands. Selling and marketing expenses were 46.5% of revenue versus 41.7% in owned brands. Depreciation and amortization were also slightly heavier at 10.5% versus 9.3%. The operating-margin gap does not sit in one line. It is built across the cost structure.
Another important point is Europe. Franchise operating profit in 2025 includes about NIS 2.2 million of setup costs for the new Bath & Body Works activity in Europe, including about NIS 1 million in the fourth quarter. Adding that cost back would take annual franchise operating profit to about NIS 21.9 million and operating margin to about 10.5%. That is an improvement, but not a different story. Even excluding Europe setup, franchise still remains well below the 17.0% operating margin of owned brands.
The implication is that Europe is a drag, but not the whole explanation. Even without Europe, the 2025 franchise engine is still at a stage where scale is growing revenue faster than it is absorbing cost.
Europe Is A Setup Cost Today, Not Yet A Margin Layer
This is one of the most important points in reading the franchise engine. On one hand, management's forward slide explicitly highlights launch and establishment in Europe as part of the 2026 plan. On the other hand, the revenue note says all 2025 external-customer revenue was still generated in Israel. So the Europe layer at the end of 2025 and the start of 2026 is still mostly an infrastructure layer.
That matters because the question here is not whether Europe may become an interesting option. The question is whether franchise is already carrying group margin now. Based on 2025, the answer is still no, because part of the segment's current cost base is already funding a new geographic step while the revenue base is still domestic.
The sequence management uses in its forward framing also says something. Franchise is described through continued openings, stronger online, Europe, and tighter inventory control. This is not the language of a mature engine moving from occupancy to margin extraction. It is the language of a platform still under construction.
What Has To Happen Next
The first checkpoint is productivity in the existing stores. As long as store-only same-store sales are falling and online is the piece holding the same-store line together, it is hard to argue that franchise is already ready to carry group margin. The base itself needs to improve, not only the rollout.
The second checkpoint is cost absorption. Nearly doubling revenue did not lift the operating margin; it pushed it lower. For the read to change, franchise needs to show that selling, marketing, and operating expenses can grow more slowly than revenue instead of moving almost in parallel with it.
The third checkpoint is Europe. As of the end of 2025 it is already visible in expenses, not yet in revenue. If 2026 brings only more setup cost, franchise will remain a strategic-option story with a short-term earnings price. If a real revenue base starts to form without another round of margin dilution, the read will change quickly.
The fourth checkpoint is inventory discipline. Management explicitly places tighter inventory management among the three pillars of the franchise roadmap. That is not a minor operating footnote. In an engine still driven by openings and new categories, clean inventory is one of the central mechanisms that can help protect gross margin during expansion.
Bottom Line
As of the end of 2025, Delta Israel Brands' franchise engine is a real growth engine, but still not a group margin engine. It already explains almost all of the increase in sales, has built a segment above NIS 200 million, and has shown that this is a broader platform than one store format or one brand. But it still contributes only a small share of operating profit, relies more on openings and online than on strong same-store productivity, and already absorbs Europe setup costs inside the segment.
So the key 2026 question is not whether management still intends to expand franchise. It clearly does through openings, online, and Europe. The real question is whether that expansion will finally begin to lift margin quality as well. Until that happens, group margin will remain tied mainly to what happens in the legacy network, and franchise will remain a platform-expansion engine faster than it becomes an earnings-carry engine.
Disclosure: Deep TASE analyses are general informational, research, and commentary content only. They do not constitute investment advice, investment marketing, a recommendation, or an offer to buy, sell, or hold any security, and are not tailored to any reader's personal circumstances.
The author, site owner, or related parties may hold, buy, sell, or otherwise trade securities or financial instruments related to the companies discussed, before or after publication, without prior notice and without any obligation to update the analysis. Publication of an analysis should not be read as a statement that any position does or does not exist.
The analysis may contain errors, omissions, or information that changes after publication. Readers should review official filings and primary sources before making decisions.