Victory in 2025: Gross Margin Improved, but Wages and Leases Ate the Profit

Company Overview

Victory is an Israeli discount food retailer, but 2025 is no longer a simple story of "more stores, more sales." The company ended the year with 70 stores and had 71 by the report date, including 65 regular discount stores and 6 Victory CITY stores. It finished 2025 with NIS 2.52 billion of revenue, a market cap of roughly NIS 772 million, and a stock that traded on only about NIS 35 thousand of turnover on the latest trading day. That matters because the real question here is no longer just operating scale. It is whether management can turn a bigger network into a cleaner cash machine for shareholders.

What is working right now is the gross margin. Victory raised it to 25.18% from 24.01%, mainly through better supplier terms, more direct imports and sharper commercial execution. The company also has real operating assets: 75,602 square meters of net selling space, about 2,894 direct employees plus roughly 200 agency workers, a 77% identified-purchase rate, a logistics center, its own truck fleet and a diversified store footprint with no single dominant location. What is not working is the translation of that operating progress into operating profit, net profit and cash.

A superficial read can miss how sharp that gap has become. Sales were down only 2.4%, but same-store sales were down 5.5%, which means the new stores masked weaker trading in the core base. The fourth quarter makes the same point even more clearly: gross margin rose to 26.22%, yet net profit fell to just NIS 1.2 million. The bottleneck is no longer the purchasing side. It is labor, rent, depreciation and the lease burden.

That is why 2026 looks like a proof year. Management is leaning on maturing new stores, a broader Max club partnership, a better online channel, growth in categories such as consumer electronics and household appliances, and especially the absorption of foreign workers that should lower labor costs after the training phase. But the market is unlikely to reward another small gross-margin gain on its own. It will want proof that same-store sales have stabilized, store costs are easing and cash flow is no longer being squeezed.

Four non-obvious findings that frame the whole year:

• The modest revenue decline hides a much sharper deterioration in the existing base: same-store sales fell 5.5%.
• Gross margin improved, but selling and marketing expense jumped to 20.43% of revenue, so operating profit still weakened.
• Traditional financial debt is almost gone, but the real economic leverage is a NIS 1.252 billion lease stack.
• On an all-in cash-flexibility basis, 2025 left no excess cash for shareholders after CAPEX, lease principal, bond amortization and dividends.

The Economic Map

The real issue is the gap between purchasing power and cash conversion. The top 10 suppliers accounted for 46% of cost of sales, so better trade terms can genuinely create value. On the other hand, Victory has no material customer, and its large-customer activity with Wolt, Ashmoret, Ten Bis and Sodexo is not material on a stand-alone basis. That is good from a concentration standpoint, but it also means there is no single growth engine that can rescue the year by itself. Victory has to make the whole system work at once.

Events and Triggers

First trigger: store openings kept coming, but their cost is already visible in the numbers. Victory opened Harish, Emek Hefer and Bat Yam during 2025, then opened Afula Rakevet in January 2026. It also plans two more openings, in Tel Mond and Beer Sheva, while closing the Lincoln branch in Tel Aviv at the end of March 2026. That creates a real growth option, but it also loads the current period with ramp-up costs, new rent and staff training before the sales base is fully mature.

Second trigger: Victory CITY is no longer an automatic expansion story. The company opened 6 stores in that format through the end of 2023, but 2 of them were loss-making as of the end of 2025, and development of the sub-format was frozen back in 2023 for reassessment. That is an important signal. It shows not every square meter carries the same economics. Victory can expand, but it is also learning that expansion has to be more selective.

Third trigger: foreign workers are both a positive lever and a source of temporary distortion. The company was approved to bring in about 600 foreign workers from Thailand and India, and roughly 65% of that approved number had already been absorbed by year-end. Management says explicitly that during the training phase wage costs rise because the company keeps existing staff while training the newcomers. Only after that phase should labor costs come down meaningfully. If that happens, 2025 will look like a transition year. If it does not, this becomes another cost layer that simply stays in the system.

Fourth trigger: Bond B is close to maturity, but that does not solve the lease story. The bond balance at year-end was down to just NIS 16.6 million, entirely current, with final maturity in July 2026 and an A2 rating with a stable outlook. That is a useful external confirming signal. It says the visible financial debt burden is manageable. But lease liabilities do not disappear once the bond is gone, so balance-sheet simplification is not the same as a clean jump in flexibility.

All of these triggers point in the same direction: Victory is not short of initiatives. What is still missing is the proof phase in which those initiatives start to improve profit and cash in the same year, rather than simply promising that improvement later.

Efficiency, Profitability and Competition

The core story of 2025 is a paradox. Victory bought better, but it operated more expensively. Gross profit rose to NIS 634.3 million and gross margin expanded to 25.18%, up 117 basis points from 2024. That is a meaningful move for a food retailer, and the company attributes it mainly to better supplier terms. Direct imports are also helping, even though management still says the scale of those imports is not yet material.

The other side of the equation deteriorated much more sharply. Selling and marketing expense rose to NIS 514.6 million and jumped to 20.43% of revenue from 18.54%. General and administrative expense rose to NIS 43.6 million. Combined, selling, marketing and G&A reached 22.15% of revenue, versus 20.04% a year earlier. That is why operating profit fell 23% to NIS 72.3 million and net profit was almost cut in half to NIS 24.0 million.

Where the gross-margin gain disappeared

Management points fairly directly to the culprits: a move to self-merchandising at the start of 2025, the second-half absorption of foreign workers, and higher rent, municipal taxes, advertising and depreciation. That list matters because it shows the problem is not one-dimensional. Part of the wage inflation comes from a deliberate operating change, part from labor shortages in the sector, and part from the inefficient training phase of the foreign-worker program. In other words, not every extra cost is permanent, but neither should investors assume it all disappears on its own.

The fourth quarter already captured that tension in a very clean way. Sales fell to NIS 608.9 million, yet gross profit rose to NIS 159.6 million and gross margin reached 26.22%. Even so, operating profit fell to NIS 12.6 million and net profit almost vanished at NIS 1.2 million. That quarter says one simple thing: even if the supplier side improves, Victory still has not shown that it controls store-level cost well enough.

Who is funding the growth

This is exactly where the quality-of-growth question matters. Inventory rose to NIS 293.2 million from NIS 277.8 million. Receivables rose to NIS 211.3 million from NIS 202.8 million. Suppliers and service providers actually fell to NIS 376.8 million from NIS 380.3 million. Customer credit days rose to 26 from 24, while supplier credit days slipped to 60 from 61. The spread is still positive, but it is less comfortable than it was.

Those numbers fit the operating narrative very well. Victory says explicitly that inventory increased because of new store openings, more direct imports, a bigger online operation and the introduction of consumer electronics and home-appliance categories near year-end. That means growth in new categories and delivery channels is not free. It consumes more inventory, more working capital and, at times, more customer credit.

Competition is still visible inside the numbers

Victory continues to present itself as a discount retailer, and part of that risk is already visible in the language of the filing. Management says explicitly that if suppliers raise prices, the company may absorb part of the increase in order to protect the customer basket. That matters because it reminds readers that the gross-margin improvement did not happen in a benign vacuum. It happened in a competitive market, with regulatory pressure and still-meaningful supplier power. The top 10 suppliers represented 46% of cost of sales, so trade terms improved, but they can also turn the other way.

It is also worth avoiding an overly easy read of the online channel. The Wolt partnership reached roughly NIS 9 million of monthly turnover by the report date, and the company says its profitability is in line with the group average and does not carry special extra costs. That is positive. At the same time, the company also says that broader online distribution points increased inventory. So even here, there is no such thing as growth without a price.

Cash Flow, Debt and Capital Structure

This is where the key distinction in Victory really sits. On a normalized or maintenance-style reading, the business still produces cash: cash flow from operations came in at NIS 148.8 million. But on an all-in cash-flexibility basis, after actual cash uses, the picture is much tighter.

Take the NIS 148.8 million of operating cash flow, subtract NIS 50.1 million of CAPEX, NIS 108.8 million of lease-principal repayments, NIS 16.7 million of bond amortization and NIS 27 million of dividends, and the result is negative NIS 53.7 million. That explains why cash and cash equivalents fell to NIS 26.6 million at year-end, and why the real liquidity cushion does not look anything like the EBITDA figure.

There is another way to see the same issue. EBITDA was NIS 241.0 million, but cash rent was NIS 158.1 million. So even before CAPEX, dividends and bond repayments, a very large portion of the operating result was already being consumed by the lease layer.

Financial debt is small, economic debt is not

This is exactly where investors need to separate standard financial debt from leases. Victory ended 2025 with no material bank debt and no material credit-line usage. Bond B is almost gone from the balance sheet, with only NIS 16.6 million left. For bondholders, the picture is even comfortable: the rating remained A2 with a stable outlook, tangible-equity-to-tangible-assets stood at 43.8% versus a 16% floor, and the company is well inside all covenant thresholds.

But anyone who stops there misses the real point. Lease liabilities stood at NIS 107.1 million current and NIS 1,145.3 million non-current, or NIS 1.252 billion in total. So the covenants are easy, visible financial debt is low, but the fixed economic commitment of the network remains very heavy. That is not an immediate solvency alarm. It is a flexibility issue. It determines how quickly any operating improvement can actually reach common shareholders.

IFRS 16 reorganizes profit, not cash

The company itself gives readers a useful tool by presenting 2025 on an IFRS 16-neutral basis as well. Profit for the year rises to NIS 38.4 million from NIS 24.0 million reported, and net finance flips to NIS 6.8 million of income instead of NIS 40.6 million of expense. That sharpens how much the standard changes the earnings view. But it does not change the cash leaving the company. Anyone building the Victory thesis on NIS 241 million of EBITDA without connecting it to cash rent and lease-principal outflows is reading the wrong layer of the business.

Forward View

2026 looks like a proof year, not a harvest year. For the read on Victory to improve meaningfully, more than one thing has to happen.

The four tests for 2026

• The stores opened in 2025 and early 2026 need to lift revenue without further weakening sales density.
• The foreign-worker program needs to move from training mode to actual wage relief at store level.
• Bond B repayment by July 2026 should reduce financial noise, but that will not be enough if cash keeps leaking through leases and working capital.
• Online, the club ecosystem and the new categories need to show that they improve the quality of growth, not just the volume line.

Management is pointing to almost every available lever: more stores, a wider Max partnership, more gift-card activity, broader parallel imports, a better online platform, a lean headquarters, the foreign-worker ramp and more sales in categories such as electronics and household appliances. Narratively, that is a rich story. Analytically, it is also a crowded one. When there are this many moving parts, the risk is that each contributes a little, but none solves the main bottleneck.

That bottleneck is conversion quality. If the company can combine three things, the read could improve fairly quickly: stabilization in same-store sales, genuine store-labor savings after the foreign-worker program matures, and continued gross-margin improvement without a renewed squeeze in trade terms. In that case, 2025 will look like a year in which the cost of expansion hit reported earnings on a temporary basis.

But there is a real downside case too, and it is not a weak one. If same-store sales remain soft, if the new categories continue to require more inventory and working capital, and if labor and rent keep rising faster than sales, Victory will remain a larger network without necessarily becoming a more profitable one for shareholders. That is the difference between "more activity" and "more value."

There is also a subtle message in the CITY format. Management already stopped developing it in order to reassess the model, and 2 stores are still loss-making. That shows Victory is capable of stopping where the economics are not good enough. If the same discipline is applied to regular store expansion, that is a positive. If competition pushes the company to keep expanding at any cost, it becomes another source of pressure.

So the 2026 question is not whether Victory knows how to grow. It already does. The question is whether it can get back to a version of growth that leaves surplus cash after leases, CAPEX and shareholder distributions. That is the proof the market will be looking for in the next few quarters.

Risks

Input costs and rent

Victory operates in a market where supplier power still matters, even after the improvement in trade terms during 2025. Management explicitly warns that it may absorb part of supplier price increases in order to protect the customer basket. On top of that, most lease agreements are CPI-linked, which means inflation hurts not only through product costs but also through rent, municipal taxes and other operating inputs.

Operating execution

The foreign-worker program could become a genuine inflection point, but for now it raises costs because the company is effectively carrying both incumbent workers and trainees. If the training period drags on, turnover is high, or service quality is affected, the program will remain more of a cost story than a savings story.

Working capital and growth quality

Inventory is up, receivables are up, and the supplier-credit versus customer-credit spread is slightly less favorable. That is still far from a balance-sheet crisis. But it does mean part of Victory's growth is being funded through the balance sheet. If the company keeps pushing new categories, online activity and large-customer channels without a corresponding improvement in turns, cash flow will stay under pressure even if accounting earnings look acceptable.

Legal noise

The company is facing several legal processes, including class-action motions and a derivative claim related to alleged disclosure delays, as well as an appeal by Brand For You after a judgment for which a provision had already been recorded in 2024. Management and its legal advisers say these matters do not create a significant financial risk. That is reassuring, but it does not fully remove the legal overhang.

Market actionability

The stock itself trades with very weak liquidity, while short interest is almost nonexistent. That means the practical investor constraint here is not a crowded short or a sharp technical dispute. It is simple market liquidity. Even if the thesis improves, the market may not be able to absorb that improvement quickly.

Conclusions

Victory ends 2025 as a company that improved on purchasing economics but weakened on cash conversion. The positive side of the story is a stronger gross margin, a broad operating base and a long list of levers for 2026. The main blocker is that labor, rent and expansion consumed the improvement before it reached the equity layer. In the short to medium term, market interpretation will depend mainly on two data points: whether same-store sales stabilize and whether store costs actually start to come down.

Current thesis: Victory proved in 2025 that it can improve the supplier side of the model, but it still has not proved that the improvement can reach profit and cash after rent, labor and expansion costs.

What changed: Through 2024 the story was gradual gross-margin improvement alongside growth. In 2025 it became clear that expansion was no longer enough to hide same-store weakness and cost inflation.

Counter-thesis: If the foreign-worker program matures, the new stores stabilize, and Bond B rolls off without being replaced by new debt, 2025 may look in hindsight like a temporary year of overload rather than structural erosion.

What could change the market read: Evidence that store-level wages are actually coming down, together with an end to the inventory build and a return to growth or at least stability in same-store sales.

Why this matters: In food retail, business quality is not defined only by buying well. It is defined by how much cash is left after the heavy operating layers are paid for.

What has to happen over the next 2 to 4 quarters: The new stores need to lift sales without further damaging cash flow, foreign-worker absorption needs to produce lower labor costs, and Bond B repayment needs to come together with better cash generation rather than instead of it.