Delta Galil: Why The Brands Segment Almost Lost Its Profit Despite Revenue Growth

What This Follow-Up Isolates

The main article identified Brands as the weakest link inside Delta Galil's proof-year story. This continuation narrows the frame even further. Not the whole group, not leverage, and not tariffs at the company level, but one specific question: why did a segment that sold more, added new brands, and pushed further into direct-to-consumer still almost lose all of its profit?

The headline numbers are unusually sharp. Brands segment revenue rose to $696.8 million in 2025 from $667.8 million in 2024. But EBIT fell to just $4.8 million from $23.8 million. In other words, the segment added roughly $29 million of revenue and still finished with only a 0.7% EBIT margin, down from 3.6% a year earlier.

That is not just a tariff problem. It is an earnings-quality problem. In Brands, 2025 looked like growth but behaved like a more expensive version of growth: more stores, more DTC, more inventory, more operating friction, and also a customer-credit event in the U.S. Daily Drills softened the headline, but it did not repair the structure.

That chart captures the paradox. The segment did not lose demand in the simple sense. It lost the ability to hold on to profit while growing.

Tariffs Explained A Lot, But Not All Of It

Delta's own presentation frames 2025 in Brands as a year in which tariffs and retail-expansion costs hurt both sales and profitability. According to that presentation, tariff impact on the Brands segment was about $27 million on sales and about $13 million on EBIT in full-year 2025, and about $13 million on sales and about $6 million on EBIT in the fourth quarter.

That matters, but it is also incomplete if you stop there. Even after adding back the full tariff effect exactly as management presents it, EBIT of $4.8 million only rises to roughly $17.8 million. That is still below the $23.8 million generated in 2024. So tariffs explain a large part of the hit, but not the whole story.

The annual report says that directly. The decline in segment operating profit was driven not only by tariffs, but also by higher selling and marketing expense and by bad-debt expense tied to a U.S. customer. That is a critical distinction, because it means the segment did not just absorb an external shock. It also entered 2025 with a more expensive operating model and with a real quality issue inside the revenue base.

This is the key chart in the article. Even on the friendlier read of the segment, after restoring the full tariff impact shown in the presentation, 2025 still does not get back to 2024 profitability. Anyone who explains the entire deterioration only through U.S. trade policy is missing what happened inside the model itself.

The Real Problem Was A More Expensive Version Of DTC Growth

The most important line in the segment note is not sales and not EBIT. It is the gap between gross profit and selling cost. Gross profit in Brands rose by $10.5 million in 2025, reaching $284.7 million. Selling and marketing expense rose by $22.8 million, to $239.4 million. In other words, the full gross-profit improvement was not merely absorbed. It was more than offset by a heavier expense layer.

That fits the structure of the segment. In 2025 about 71% of Brands sales still came through wholesale, while only about 29% came through company stores and websites. But the retail layer is precisely the part that requires stores, marketing, logistics, and inventory. During the year the segment opened 13 stores and closed 8. It ended 2025 with 108 Schiesser stores, 10 stores in the Eminence group, and 19 Splendid stores in the U.S. At the same time, the company explicitly says it aims to keep growing end-customer sales through brand websites.

Strategically, that all makes sense. The problem is that 2025 still did not show that this more expensive layer is already producing cleaner profit. On the contrary, it looks like an engine that can move revenue forward, but only while pulling too much rent, marketing, distribution, and working capital with it.

Inventory confirms the same read. Average inventory in the segment rose to $200.0 million from $168.4 million, and inventory days increased to 177 from 156. That is an 18.8% rise in average inventory, far above the pace of revenue growth. The company attributes the increase mainly to euro strength against the dollar and to the impact of higher U.S. tariffs. This is exactly the kind of data point that shows growth was not cheap here. It was built on more inventory, more time on the shelf, and more cash trapped inside the system.

Daily Drills Improved The Optics, But Delayed The Real Proof

Daily Drills fits very well into Delta's strategic narrative. In October 2025 the company acquired the brand in a deal priced at $65.4 million in cash, with an earn-out that can reach up to $37 million based on EBITDA targets in 2026 through 2029. The brand operates in U.S. digital commerce in loungewear and activewear, exactly the space Delta wants to deepen.

But in 2025 that acquisition needs to be read carefully. The company says segment sales increased by about $8.3 million because of Daily Drills, and that the decline in segment operating profit was partly offset by the consolidation of Daily Drills from the fourth quarter onward. In other words, even the $4.8 million EBIT headline already includes a first contribution from a newly acquired business, so it does not represent a clean recovery in the legacy brand base.

This also intersects with receivables quality. The company says the rise in general and administrative expense partly reflected higher bad-debt expense tied to a U.S. customer, and total group loss from customer impairment rose to $2.77 million from $1.34 million. The report does not allocate the full amount to Brands, but it does say the relevant customer issue sat inside the segment story. When annual EBIT is only $4.8 million, even a modest credit event becomes material.

That is the core continuation point: Daily Drills did not create the problem, but it did partially soften the reported 2025 outcome. Instead of the year ending as a pure test of existing profitability, it ended with a fresh acquisition that still has not had enough time to prove return.

What Has To Change In 2026

If there is one constructive sign, it is that the fourth quarter looked less broken than the full year. Segment sales in Q4 rose to $222.7 million from $216.4 million, and EBIT fell to $9.4 million from $13.3 million. That is still weak, but less dramatic than the full-year collapse. The question is whether that was the beginning of a repair, or just a quarter helped by Daily Drills and by seasonal timing.

The presentation is fairly clear on what the company itself has to prove next. Schiesser DTC is supposed to move toward a double-digit EBIT target. Eminence and Passionata are expected to increase both sales and margins in Europe. U.S. brands are expected to improve profitability through optimized sourcing. All of these are reasonable goals, but after 2025 they no longer read like brand messaging. They now read like margin tests.

What does the market need to see in practice?

Bottom Line

The Brands problem in 2025 was not lack of growth. The problem was that growth came on terms that were too expensive. Tariffs hurt, but even after neutralizing them the segment still sits below 2024 profit. Store and DTC expansion lifted the expense layer faster than gross profit. Inventory became heavier and tied up more working capital. Daily Drills added revenue and offset part of the damage, but also pushed the real test of the underlying business into 2026.

That is why Brands remains the weak link in the Delta Galil thesis. If 2026 shows that the segment can once again turn growth into profit, the whole-group reading can improve quickly. If not, even a company with good factories, a global platform, and decent segment diversity will keep trading with an embedded question mark around earnings quality.