Castro in 2025: Urbanica Refilled the Cash Box, but Store Margins Are Still Under Pressure

Understanding the Company

Castro Hodies is no longer just the Castro fashion brand. It is a multi-brand retail platform with 355 stores in Israel at the end of 2025, seven active brands, and a smaller overseas layer through Carolina Lemke and Radixis. That means the right way to read the year is not to ask whether Castro itself looks better, but to ask which parts of the group are still producing real profit, which parts are producing mostly volume, and which parts are still consuming cash or management attention.

What is working now? The group still carries a large sales base, NIS 2.124 billion in 2025. Cash flow from operations rose to NIS 301.9 million. The accessories segment still produced NIS 78.4 million of operating profit. Hoodies and Urbanica remained important engines of both volume and profit, even if they were less sharp than a year earlier. On top of that, the capital market gave the group real breathing room through Urbanica's IPO, which added NIS 399.9 million net and lifted cash and cash equivalents to NIS 426.2 million.

But this is not a clean story. The balance-sheet relief came first from the IPO, not from the stores returning to a higher-margin footing. Operating profit fell 22.2% to NIS 183.8 million, net profit fell 52.3% to NIS 63.9 million, and selling and marketing expenses climbed 9.0%, much faster than revenue. The group managed to hold revenue and even grow slightly, but it did so with more selling space, more advertising, more logistics complexity, and less profit per shekel of sales.

That is also where a superficial read can go wrong. The presentation highlights NIS 362.6 million of cash in excess of bank debt, and that is true if one looks only at bank borrowings. At the same time, the group carries NIS 1.372 billion of lease liabilities. So Castro's active bottleneck is not a bank that looks ready to pull the brake tomorrow morning. It is whether a store base that is heavy in leases and inventory can rebuild margin without recurring help from the capital market.

The question for 2026 is already clear. What has to happen for the read to improve? Same-store sales in apparel need to stabilize. Urbanica's logistics transition needs to stop dragging on costs and return to creating operating leverage. Beauty and cosmetics need to move back above breakeven. Inventory needs to clear without another round of deep discounts. If that does not happen, 2025 will look in hindsight like a year with an easier balance sheet, but not a year with stronger business quality.

The group's economic map looks like this:

That second chart already captures the core story. 2024 looked like a peak year for operating profit. 2025 kept the revenue base almost intact, but no longer held the same quality of earnings.

Events and Triggers

Urbanica's IPO changed the balance sheet, not the store economics

Urbanica published its IPO prospectus in April 2025, and its shares started trading in May. After the offering, Castro remained with 70.8% of Urbanica's equity and voting rights. At the same time, Hoodies was moved under Urbanica's full ownership. In the consolidated statements, the immediate effect was a NIS 399.9 million net financing inflow and an increase in non-controlling interests to NIS 235.1 million.

This was a material event because it bought the group time. But it also needs to be framed correctly. An IPO can improve the cash cushion. It cannot by itself restore the operating margin of the stores. So 2025 looks stronger on liquidity, but not cleaner on the underlying retail economics.

Cash came in, but a lot also went out

In 2025 the group also paid out an unusually large dividend, NIS 260.4 million. That means the consolidated picture improved even though the company distributed a very large amount of cash to shareholders, and the gap was closed mainly through Urbanica's IPO and a NIS 29.8 million private placement in Castro shares.

This matters analytically because it separates two different things. The existing business still generated cash, but not enough to fund capex, leases, and a dividend of that size all at once without external capital.

The war already hit 2025, and Q1 2026 is already marked

During Operation Rising Lion in June 2025, almost all group activity was shut down except for the online sites, and the company estimates that revenue was hit by about NIS 76 million, while potential operating profit was reduced by about NIS 35 million. After the balance-sheet date, between February 28 and March 5, 2026, all group stores and logistics centers were again shut under Operation Roaring Lion, and the company now says explicitly that this will have a material effect on first-quarter 2026 revenue versus the comparable period.

So 2026 is not opening from a clean slate. It is opening after a year of weaker profitability, with a hit to the start of the new year already disclosed in advance.

Rollout and logistics are a growth engine and a source of friction at the same time

During 2025 and up to the report date, the group added 22 stores in Israel: 8 Urbanica, 7 Kiko Milano, 4 Top Ten, 2 Carolina Lemke, and 1 Hoodies. In parallel, 3 Castro stores were closed. That helps explain how the group kept slight revenue growth even as same-store sales in apparel weakened.

But that rollout came with a price. In August 2025 Urbanica signed an outsourced logistics agreement for about 14,500 square meters in Moshav Hafetz Haim, and the company itself estimates the annual service cost at about NIS 40 million as long as activity volumes do not change materially. So the same expansion that supports the top line also weighs on margins during the transition.

Radixis is still not a thesis on its own, but it is no longer a side note

In March 2026, an external investment agreement in Radixis was approved for a total of about $4.5 million. As a result, outside investors received about 29% of the equity and voting rights, a 4% fully diluted option pool was created for TenenGroup personnel and affiliates, Castro remained with about 54% of Radixis before full dilution, and Ron Rotter remained with 9.9%.

This is still not a profit engine for the group. Right now Radixis sits inside the "other unallocated activities" bucket, which is loss-making. But the entry of outside investors, together with Ron Rotter's appointment as CEO of the foreign arm and the approval to accelerate his adaptation grant, turns this business into a capital-allocation and management issue that can no longer be ignored.

That chart sharpens the end-of-year problem. Full-year 2025 still looks tolerable at the group level, but the fourth quarter already shows clear weakness in apparel and beauty.

Efficiency, Profitability, and Competition

The main point is that the group is not facing a uniform demand collapse. It is facing a mix of softer pricing, transition costs, and expanding formats that now generate less profit per shekel of sales. That matters because it means the 2025 problem is not falling traffic alone. It is the quality of growth.

Apparel is not only a Castro problem, it is a group margin problem

The apparel segment generated NIS 1.442 billion of revenue, almost unchanged versus 2024, but operating profit fell 19.9% to NIS 115.7 million. Same-store sales in the segment fell 1.1% for the year and 12.7% in the fourth quarter. That already shows that some of the revenue stability came from store openings and larger selling space, not from better underlying demand.

The non-obvious part is that the weakness is not limited to the legacy Castro brand. Castro itself did fall in revenue to NIS 600.3 million from NIS 630.6 million, and in Q4 it dropped to NIS 163.1 million from NIS 184.6 million. But at the same time, Hoodies' operating profit fell to NIS 60.8 million from NIS 74.8 million, and Urbanica Apparel fell to NIS 44.4 million from NIS 69.4 million even though its revenue kept growing to NIS 496.1 million.

So even the growth engines are no longer showing the same unit economics. Hoodies still posts a 17.6% operating margin, which is still good. Urbanica Apparel is still profitable. But margins weakened exactly where investors were supposed to expect operating leverage.

To Castro's credit, one more thing should be said. The brand's annual operating profit rose to NIS 10.5 million from almost zero in 2024 after years of store rationalization and assortment cleanup. But that is still only a 1.7% operating margin, and in Q4 the brand was back to just 2.1% operating margin. So the thesis cannot rest on a Castro comeback. At most, it can rest on a very partial stabilization.

Accessories are still growing, but at the price of more discounting and more cost

Accessories in Israel remain the healthiest part of the group. Revenue rose 7.1% to NIS 578.6 million, and same-store sales rose 5.7% for the year and 4.8% in the fourth quarter. But even here operating profit fell 14.1% to NIS 78.4 million. The company itself ties that to a higher average discount rate, storage costs, and the cost of moving to Urbanica's new logistics center, only partly offset by lower shipping costs and foreign-exchange effects.

That is exactly the kind of growth investors need to test carefully. Revenue is fine, but part of that revenue was preserved through deeper discounting and a more expensive logistics system during transition. Top Ten is the positive exception, with operating profit rising to NIS 33.1 million from NIS 26.1 million. On the other side, Carolina Lemke fell to NIS 31.3 million from NIS 42.6 million, and Urbanica Accessories fell to NIS 13.9 million from NIS 22.5 million.

Beauty and cosmetics were left without a cushion

Beauty and cosmetics fell in revenue to NIS 76.4 million, and operating profit almost disappeared, just NIS 0.39 million versus NIS 8.5 million in 2024. The fourth quarter was already operating-loss making, negative NIS 84 thousand. Yves Rocher remained profitable at NIS 2.76 million, but Kiko Milano moved to an operating loss of NIS 2.37 million.

The company's explanation points to weaker same-store sales, higher procurement costs, and a higher average discount rate. The interesting data point is that in beauty, online sites represented about 22% of segment revenue in the fourth quarter. So digital did help, but not enough to offset the deterioration in the stores.

Reported profit still includes some outside support

One more yellow flag is earnings quality. In 2025 the group recorded NIS 7.6 million of other income from compensation tied to the Swords of Iron war and Operation Rising Lion. That is real money, but it is not a recurring operating improvement. On top of that, net finance expense rose to NIS 95.1 million, including NIS 79.1 million of lease interest and a NIS 20.3 million loss on derivative financial instruments, partly offset by NIS 11.9 million of interest income on deposits.

That chart makes it clear why the headline "revenue grew" is not enough. Profitability weakened across almost every major engine, except for Top Ten and Castro's partial recovery from a near-zero base.

Cash Flow, Debt, and Capital Structure

Two different cash bridges need to be held in mind at the same time

There is an easy way to read 2025, and there is a better way. The easy way looks at cash flow from operations, NIS 301.9 million, and at year-end cash of NIS 426.2 million, and concludes that the group is generating very strong cash. That reading is not wrong. It is incomplete.

The better read is to hold two bridges in mind. The first bridge is normalized cash generation, meaning what the business produced before strategic capital-allocation choices. That bridge still looks reasonable. Cash flow from operations rose 17.7%, helped in part by a NIS 55.9 million release from receivables. On the other side, inventory increased by NIS 37.3 million, other payables fell by NIS 17.6 million, and working capital did not really become a tailwind. The business still generated cash, but not in a way that allows investors to ignore inventory and discounting.

The second bridge is all-in cash flexibility, meaning how much cash really remained after the actual cash uses of the year. That is where the picture changes materially. Start with NIS 301.9 million of cash from operations, subtract reported capex and intangible assets of NIS 100.9 million, subtract lease principal repayment of NIS 142.2 million, and subtract dividends paid of NIS 260.4 million. The result is a negative gap of about NIS 201.6 million even before new financing sources are considered.

That final figure is not identical to the cash balance in the balance sheet, because it does not include every financing, investing, and cash-movement line. It does show the important point: without the capital market and new financing, 2025 would not have looked like an easy cash year.

Cash in excess of debt exists only if leases are ignored

The presentation likes to emphasize NIS 362.6 million of cash in excess of bank debt. In narrow accounting terms that is true. At the end of 2025 the group no longer carried long-term bank loans, and short-term bank credit stood at only NIS 63.6 million.

But this is not the real liability picture of a physical-store network. Against NIS 426.2 million of cash and cash equivalents, the group carries NIS 1.372 billion of lease liabilities, including NIS 227.9 million current. On top of that, it has NIS 11.3 million of variable lease payments that are not included in the lease liability measurement. So the important question is not whether there is net cash versus the bank. It is whether store economics justify that lease base.

The bank is not pressing, but the stores are still heavy

On covenants, the group is far from pressure. Equity to total assets excluding the IFRS 16 effect stood at 73%, against a minimum of 35%, and the company states explicitly that it is in compliance. So this is not a covenant-stress thesis.

But another detail matters. By the report date, short-term credit utilization had already risen to about NIS 114.1 million, almost double the year-end figure. That is not dramatic with a large cash balance in hand, but it does show that the December cushion had already started to erode inside 2026.

Outlook and What Comes Next

Finding one: 2026 opens with a difficult mix of a broader cost base, heavier inventory, and a first-quarter hit that is already close to certain because of the store and logistics-center shutdown at the start of March.

Finding two: the group is still expanding formats and store count. Urbanica expects to roll out about 3 additional Urbanica Station stores during 2026. Hoodies expects to open or convert about 5 more stores into its larger concepts. In other words, management is still building growth engines, not stopping to preserve cash.

Finding three: for the story to improve, more openings alone will not be enough. Investors need to see that expansion no longer comes at the expense of margin. That is especially true in Urbanica, where the move to the new logistics center already hurt profitability in 2025.

Finding four: Radixis received an external stamp through the new investor group, but right now it still sits inside the loss-making "other unallocated activities" bucket. So this is still a strategic option, not an engine that can soften the pressure in Israeli retail profitability.

2026 is a proof year, not a breakout year

Management presents a clear strategy: renovating Castro stores, continuing Hoodies' move into larger store formats, expanding Urbanica, broadening Carolina Lemke in optical retail, and increasing awareness of the Yves Rocher brand. That is a coherent strategy. The problem is that 2025 does not yet prove those investments are already sitting on a wide enough margin base.

That is why 2026 looks like a proof year. If the new and expanded stores generate sales per square meter that cover rent, labor, and logistics, and if inventory moves without another round of aggressive markdowns, 2025 can still be read as a transition year. If not, investors will start asking whether the group bought volume growth at the expense of better-quality profitability.

What has to happen in the stores

In apparel, same-store sales need to stop falling. Not necessarily an immediate jump, but at least an exit from the Q4 level, where comparable stores fell 12.7%. In Hoodies and Urbanica, the larger formats need to prove they lift total sales without destroying operating leverage. And in Castro itself, the relative improvement of 2025 needs to show that it was more than just a rebound from a weak base.

What has to happen in inventory and logistics

Inventory days in apparel rose to 230 from 181. In accessories they were 252, versus 270 a year earlier but still high. At the same time, inventory on the balance sheet rose to NIS 527.8 million. If 2026 does not show faster inventory movement, every thesis of margin improvement will remain fragile.

What needs to happen outside the core

Radixis now needs discipline. The new investors are already in, and Castro kept control. The next question is not another round of storytelling. It is whether this activity can avoid becoming another managerial and financial consumer at a time when the retail core still needs precision.

Risks

Inventory became more sensitive after Castro closed most of its outlet stores

One of the more interesting details sits in the accounting note, not in the presentation. During 2024 and 2025 Castro gradually closed most of its outlet stores, and as a result it changed the inventory markdown estimate for the brand. Starting with the 2025 reports, inventory items are written down by 50% after two years from the collection launch date. The company says the effect of the estimate change is not expected to be material. Economically, though, the meaning is clear: the release valve for old stock became narrower.

That is not proof of an immediate problem, but it is a yellow flag. Group inventory rose to NIS 527.8 million, and inventory write-down expense rose to NIS 13.4 million from NIS 9.5 million. Once that happens, the ability to clear old goods becomes a practical question, not just an accounting one.

Rent still sits on the business like a fixed tax

Most of the group's stores sit in malls and shopping centers, and a large part of the rent and management fees is index-linked. The company itself estimates that a 1% rise in inflation over a full year could reduce net profit by about NIS 2.5 million, and it estimates the 2025 inflation impact on rent and management fees at about NIS 5.6 million. This is not a theoretical macro risk. It is already showing up in the bottom line.

Supplier and FX exposure, especially around Urbanica

About 47% of group purchases in 2025 came from four suppliers, and Urbanica itself depends on YM Inc. of Canada, which accounted for 12.8% of total group purchases and supplies the core of Urbanica's apparel products. The current agreement runs through December 2026. The company does say it expects an extension, but this is still dependence on one supplier and on a specific procurement structure. At the same time, inventory is purchased mainly in dollars, and 2025 included a NIS 20.3 million loss on derivative financial instruments. That is a reminder that hedging does not remove currency risk, it only manages it.

The security risk has already moved from footnote to P&L driver

2025 already included an estimated NIS 76 million hit to revenue and about NIS 35 million of lost potential operating profit during Operation Rising Lion. After the balance sheet, Operation Roaring Lion again shut stores and logistics centers for several days, and the company itself says the impact on first-quarter 2026 will be material. That means this is no longer just a scenario risk. There is already a proven chain of disruption.

Capital allocation is now part of the thesis

When the group pays NIS 260.4 million of dividends in a year in which operating profit falls 22.2%, and the cash relief depends mainly on Urbanica's IPO, capital allocation becomes part of the business analysis. That does not automatically mean the distribution was a mistake. It does mean the question is no longer only how much profit the group generates, but how much of that margin remains inside the system to fund stores, inventory, and logistics in a year that still needs proof.

Conclusions

Castro Hodies ends 2025 as a group with a more comfortable balance sheet, but not as a company with cleaner store economics. What supports the thesis right now is the scale of the platform, still-strong operating cash flow, and an asset and cash layer that received a very real boost from Urbanica's IPO. What blocks a cleaner thesis is margin erosion across almost every important engine, heavier inventory, and a high lease base that does not become easier simply because bank debt is low.

Current thesis: 2025 bought Castro time through the capital market, but 2026 now has to prove that the stores can rebuild margin, not just turnover.

What changed versus the earlier way of reading the company? It used to be easier to read Castro as a story of stabilizing the legacy brand while Urbanica and Hoodies kept scaling. In 2025 that changed. The question is no longer only whether Castro itself has stabilized, but whether the growth engines remain meaningfully profitable as they become larger and heavier.

Counter thesis: 2025 may simply have been a transition year. Urbanica went through an IPO and a structural change, logistics changed, the war hurt Q4, and the company still finished the year with slight revenue growth, strong operating cash, and a large cash balance. If those events prove one-off, 2026 could look materially better.

What could change the market's reading in the short and medium term? First, Q1 and Q2 2026 results, to see how deep the hit really was and how quickly the exit from it looks. Second, any sign that Urbanica's logistics transition is beginning to improve service and efficiency rather than erode profitability. Third, whether beauty moves back above breakeven or remains a layer that consumes management attention without generating contribution.

Why does this matter? Because this is a retail group where the gap between "there is cash on the balance sheet" and "there are good store economics" can become very wide. Investors who miss that distinction can end up reading an IPO as if it were an operating improvement.

Over the next 2 to 4 quarters, the thesis strengthens if same-store sales stabilize, if inventory starts coming down without another gross-margin hit, and if the larger Hoodies and Urbanica formats prove they add not just revenue but profit. It weakens if Q1 2026 turns out worse than expected, if inventory keeps swelling, or if new layers of growth keep arriving with lower profitability.