Hamashbir 365: Gross Margin Improved, But Cash Is Paying The Price

Getting To Know The Company

At first glance, Hamashbir 365 looks like a fairly simple story: a long-established department-store chain, a large customer club, a co-branded credit card, and in 2025 a new international dream around Kenneth Cole in Europe. That is only half the picture. What really matters is that the group’s strongest engines are already visible, but so is the active bottleneck: the business slightly improved gross margin, the loyalty clubs continue to generate relatively clean profit, yet the shift toward owned inventory, the heavy lease burden, and the investment in building an international arm have turned cash generation into the real center of the story.

The numbers themselves are easy to misread. Consolidated revenue fell only 2.35% to NIS 921.3 million, gross margin improved to 47.07% from 46.60%, and reported operating profit still stood at NIS 46.1 million. That sounds like a year of erosion, not a year of real strain. That is misleading. Excluding the effect of IFRS 16, 2025 operating profit was almost flat at only NIS 0.95 million, and the net loss still amounted to NIS 4.3 million. In other words, the core friction is not just sales. It is how much real cash remains after the system pays rent, carries more inventory on balance sheet, and funds a new growth initiative.

This is also not a one-layer business. There are three very different engines here: the department-store chain, the loyalty-club business, and the Kenneth Cole arm. The stores still generate almost all of the revenue, the clubs generate a much higher-quality profit stream on a lighter capital base, and Kenneth Cole is still mostly a platform under construction. Anyone reading the group as an ordinary retailer misses the importance of the clubs. Anyone reading it as an international brand story misses that the brand arm is still loss-making. Anyone reading it mainly as a club business misses that cash pressure still sits first inside the store network.

The retail chain had 37 stores at the reporting date. The Atarot store was closed in November 2025, and the Acre store opened in February 2026. That small detail helps frame the story: this is not an aggressive footprint-expansion case. It is a case about trying to improve store economics, change the sourcing model, and extract more profit and flexibility from the existing platform.

The Economic Map

Inside that map sit four findings that do not jump out at first glance:

1. Gross margin improved, but revenue quality did not. Total retail turnover fell 2.77%, same-store turnover fell 4.33%, and average monthly net sales per square meter fell 8.95%. The store base itself became less productive even as product margin improved slightly.
2. The cleanest profit engine in the group sits in the clubs. The loyalty-club segment generated NIS 45.2 million of revenue and NIS 12.3 million of ordinary profit on a far smaller revenue base than the store network.
3. Kenneth Cole is still more obligation than proof of commercialization. In 2025 the segment generated NIS 18.6 million of intersegment revenue, effectively all internal to the group, and finished with a NIS 2.0 million segment loss.
4. 2026 does not begin from a clean base. From the end of February through March 5, 2026, all stores were closed, and after reopening the company still reports weak customer traffic and expects a material hit to first-quarter revenue.

One more point helps frame the business. In 2025 the retail network employed 1,357 direct employees, down from 1,418 a year earlier, and another 775 sales representatives from suppliers and franchisees were operating in the stores. This is a heavy operating business, with a store layer, a supplier layer, and a loyalty layer. That is why the central question is not only whether a sale happens, but who finances the path to that sale and at what cost.

Events And Triggers

The Court Ruling That Changed The Year

The first trigger is legal rather than commercial. In August 2025 a court ruling went against Hamashbir’s retail subsidiary in a landlord dispute, and the company was ordered to pay about NIS 12.5 million plus linkage, interest, and legal costs. The effect is already in the numbers: NIS 10 million was recorded in other expenses and another NIS 2.7 million in financing expense. This matters because a large part of the 2024-to-2025 deterioration is not a quiet operating slide, but a one-off hit. On the other hand, anyone normalizing it away and declaring the problem solved would miss that cash flow still weakened and profit excluding IFRS 16 was close to zero.

Sales Fell, But Not Because The Brand Collapsed

The second trigger is the June 2025 security disruption and what it did to store traffic. Management explicitly ties a large part of the 2025 sales decline to store shutdowns during that period. The turnover data supports that reading: total turnover fell to NIS 956.6 million from NIS 983.9 million, and same-store turnover fell to NIS 756.2 million from NIS 790.4 million. In the fourth quarter the decline was sharper, 7.67% in total turnover and 8.11% in same-store turnover, partly because of the timing of the Tishrei holidays and unusually warm weather that delayed winter-collection sales. So the issue is not only whether the brand still works. It is whether the chain can rebuild a normal traffic and demand level through the full season.

The Loyalty-Club Layer Is Being Pulled Into The Retail Core

The third trigger is organizational, but it has economic meaning. In December 2025 the merger of the financial-club entity into Hamashbir’s retail subsidiary was completed. At the same time, the company is examining the transfer of the Club 365 customer database into the retail subsidiary, and in March 2026 an amendment was signed under which the retail subsidiary will pay NIS 1 million per year for access to and use of that database. This move does not by itself change the economics of the group, but it clearly signals what management is trying to do: pull the loyalty and data engine closer into the operating company in order to strengthen the capital structure and practical usefulness of the club at the store level.

Kenneth Cole Is Moving From Story To Obligation

The fourth trigger is Kenneth Cole Europe. In February 2025 the exclusive European license was signed. In May Kenneth Cole Design and Development was formed in Israel, and later Kenneth Cole Europe was formed in the Netherlands. In August a NIS 10 million credit line plus a $500,000 hedging line were secured. In November the company signed the global design, development, and production agreement for franchisees worldwide, together with a Global-e agreement to manage e-commerce in Europe. In December 2025 Global-e invested $3 million for a 19% stake in Kenneth Cole Europe. In January 2026 the showroom in Dusseldorf opened, and in the first quarter of 2026 the European e-commerce site went live.

That sounds like a chain of positive triggers, and fairly so. But it is not a one-way positive move. The company guarantees minimum royalties to KCP, guarantees bank obligations around Kenneth Cole as well, undertook commitments to Global-e in relation to up to $2 million of collateral support, and after three years Global-e can require Kenneth Cole Design to repurchase its full stake at the original investment price, net of dividends if any are paid. So future value may be created here, but first a layer of obligations and minority rights is being built ahead of monetization.

Efficiency, Profitability And Competition

The central insight from 2025 is that the group improved gross margin, but not the quality of profit to the same extent. Revenue fell to NIS 921.3 million from NIS 943.5 million, while gross profit slipped only slightly to NIS 433.7 million from NIS 439.7 million and gross margin rose to 47.07% from 46.60%. On paper, that looks like good margin defense in a less supportive demand environment. In practice, that defense came with a very visible cost.

The Shift To Owned Inventory Does Improve Margin, But It Also Heavies Up The System

The company explicitly describes an ongoing shift from consignment inventory to owned inventory, and says that most of the chain’s inventory is now already held in purchase mode rather than consignment mode. This is the heart of the story. The positive side is clear: more control over assortment, more room for exclusivity and differentiation, and less sharing of margin with suppliers. The negative side is just as clear: more working capital, higher logistics costs, and more risk that excess inventory will have to be cleared through outlet channels or meaningful discounts.

That is also what the numbers show. Receivables rose to NIS 110.4 million from NIS 90.6 million. Inventory rose to NIS 210.0 million from NIS 205.8 million. Trade payables fell to NIS 169.9 million from NIS 177.5 million. So the company is not only carrying more product on its own balance sheet, it is also getting less supplier funding than in the prior year. This is no longer just a gross-margin story. It is about who finances that gross margin.

The chain works with 262 suppliers, including 172 under purchase agreements, 88 under consignment, and 3 under franchise arrangements. There is no dependence on a single supplier, which is a clear positive. But the quality of the sourcing system now depends much more on the company’s ability to manage inventory, move goods quickly, and limit excess without damaging price. The filing itself says inventory that cannot be returned to suppliers is sold through outlet stores or at meaningful discounts. That is an embedded yellow flag in the new model.

The Store Base Itself Became Less Productive

This is where the contradiction sits. If gross margin improves, it is easy to assume the store base is operating better as well. But turnover tells a different story. Monthly net sales per square meter fell to NIS 1,149 from NIS 1,262 even though selling area barely changed. Even in the store segment’s own operating numbers, the picture is much weaker than the consolidated line suggests: operating profit before other income, G&A and management fees fell to NIS 47.9 million from NIS 99.4 million, and the operating margin fell to 5.4% from 10.9%.

The company attributes much of that decline to the one-off legal expense, and that is fair. But the cost base is also saying something. Selling and marketing expense rose to NIS 338.3 million from NIS 329.9 million, and management itself ties the increase to higher logistics costs, additional human-capital buildout for Kenneth Cole Design and Development, and the opening of the Queen of Sheba store. In other words, some of the gross-margin improvement never dropped through to operating profit because the business structure itself became heavier.

The Clubs Are The Cleanest Earnings Layer In The Group

The loyalty-club segment generates almost the opposite picture. It finished 2025 with NIS 45.2 million of revenue and NIS 12.3 million of ordinary profit attributable to owners. That is broadly stable versus 2024, even if profit slipped modestly. There is no store base here, no heavy inventory, and no lease burden running through the whole sales chain. This is simply a much cleaner earnings layer.

The value of the clubs is not limited to membership fees. Club 365 has roughly 460,000 households. Cal365vip has roughly 165,000 cardholders, and the club’s non-bank credit balances amount to roughly NIS 589 million, provided by Visa Cal rather than by Hamashbir itself. That distinction matters. The credit is not sitting on Hamashbir’s own balance sheet. But it still shows how large the data, loyalty, and marketing ecosystem already is relative to the retail business alone.

Kenneth Cole Has Not Yet Proved Standalone Economics

On the other side of the map, Kenneth Cole is not yet mature enough to deserve much operating credit. In 2025 the segment produced NIS 18.6 million of intersegment revenue, NIS 2.0 million of gross profit, and a NIS 2.0 million segment loss. That is not a failure. It simply shows that 2025 was a setup year. The problem is that what comes with a setup year is not only the dream of 30 stores in Europe by 2028. It is also minimum royalties, guarantees, credit lines, minority rights, and a PUT option.

From a competition standpoint, the chain faces Fox, Castro-Hoodies, Zara, and Golf in fashion, and Super-Pharm, Be-Pharm, April, and private cosmetics stores in beauty. This is a crowded market with promotions, seasonality, and online competition. The fact that Hamashbir managed to protect and slightly improve gross margin is positive. The fact that sales per square meter and same-store turnover both fell shows that the battle for the customer’s wallet is far from settled.

Cash Flow, Debt And Capital Structure

On an accounting read, Hamashbir’s position at the end of 2025 does not look dramatic. The subsidiaries are in compliance with all financial covenants, and the covenant picture does not look especially tight. But on a cash-flow read the picture is harsher, and that is where the real test sits.

Cash Flow Weakened Even Before Europe Starts To Scale

Cash flow from operating activities fell to NIS 71.6 million from NIS 114.2 million. That is a 37.3% decline in a year when revenue fell only 2.35%. The gap matters far more than the top line. It mainly reflects working-capital use: receivables increased by NIS 19.8 million, inventory increased by NIS 4.2 million, trade payables fell by NIS 7.6 million, and accruals and other balances fell by NIS 12.5 million. Put more simply, the business sold less efficiently, self-funded more inventory, and received less supplier funding.

This is where cash framing matters. On an all-in cash flexibility view, meaning how much cash remains after actual cash uses, the picture is not clean. In 2025 the company paid roughly NIS 98.5 million of lease principal, spent NIS 8.5 million on capital expenditure, distributed NIS 10 million of dividends, and repaid NIS 13.2 million of long-term loans. Operating cash flow of NIS 71.6 million was not enough to cover all of that. As a result, cash fell to NIS 48.0 million from NIS 65.0 million even though the company received NIS 25 million of long-term loans, NIS 6.9 million of short-term borrowing, and NIS 9.7 million from the minority equity issuance in Kenneth Cole Europe.

IFRS 16 Is Not The Whole Problem, But It Does Expose The Burden

The company gives readers a useful anchor. Without IFRS 16, working capital would have been positive by NIS 105.7 million rather than a reported deficit of NIS 6.9 million. The current ratio and quick ratio also look materially better without the lease standard. So it would be wrong to declare a liquidity problem simply by reading the reported current balance sheet.

But it would also be wrong to use that adjustment to clean up the story altogether. Leases are a very real cash cost. In 2025 financing expense related to leases was NIS 48.6 million, and lease liabilities at year end were above NIS 1.0 billion, including roughly NIS 98.8 million current and NIS 908.2 million long term. IFRS 16 may distort part of the accounting picture, but it does not invent Hamashbir’s rental burden. It merely forces the reader to look at it directly.

Covenants Still Look Comfortable, But The Guarantee Layer Is Expanding

The positive news is that the retail subsidiary remains in compliance with all financial covenants. Equity plus shareholder loans stood at NIS 49.9 million against a minimum requirement of NIS 30 million. Fixed-asset investment stood at NIS 7.6 million against a ceiling of NIS 16.5 million. Four-quarter operating profit excluding IFRS 16 stood at NIS 10.2 million and is therefore not negative. Adjusted four-quarter operating cash flow stood at NIS 24.7 million against a NIS 10 million minimum. The receivables-to-financial-debt ratio stood at 2.6 against a 1.5 minimum. Kenneth Cole sales inside the Hamashbir chain reached NIS 95 million versus a NIS 72 million minimum for 2025.

Those are reasonable cushions. But the other side also matters. The company guarantees all obligations of the retail subsidiary to the bank. It guarantees minimum royalties to KCP. It also guarantees Kenneth Cole Design’s bank obligations. In addition, Global-e committed to provide up to $2 million of collateral support to Kenneth Cole Europe, and the company undertook obligations toward Global-e in the shareholders’ agreement. So the 2025 covenant picture does not look tight, but the broader guarantee and commitment layer is clearly getting larger.

Outlook

2026 is the most important section in Hamashbir 365, because 2025 still leaves room for both sides of the debate to choose the interpretation they prefer. Before getting into the detail, four points define how the coming year should be read:

1. This is a proof year, not a harvest year. Europe has launched, but it has not yet proven meaningful external sales.
2. Gross-margin improvement has not yet translated into cash improvement. So even renewed sales growth will not be enough if working capital keeps dragging.
3. The clubs are not a side business. They are a critical earnings layer. If the new structure does not strengthen the retail subsidiary in practice, the value will remain split.
4. The first quarter of 2026 is already hit. That means the market will first test the depth of the decline and the pace of recovery, and only afterward the European growth story.

What Management Is Really Asking The Market To Believe

Management is asking the market to hold two stories at once. The first is a retail story: a new sourcing mix, brand differentiation, and stronger customer loyalty through clubs and data. The second is a strategic story: the creation of an international Kenneth Cole arm, with a target of opening up to 30 stores in Europe by 2028 and achieving roughly $400 million of cumulative net sales between 2026 and 2030.

That target is not trivial, and it is not completely unsupported. There is a strategic partner in Global-e, an exclusive license across the European Union, the United Kingdom, Norway, Switzerland, and Morocco, a showroom already opened in Dusseldorf, and an e-commerce site that launched in the first quarter of 2026. But the starting point still matters. In 2025 Kenneth Cole Design sold only inside the group, finished with a segment loss, and operated under investment requirements, royalty obligations, and guarantees. So 2026 is not a free-acceleration year. It is a test of whether a recognized brand can actually be converted into profitable external sales.

What Must Happen For The Thesis To Hold

There are four clear checkpoints over the next 2 to 4 quarters.

The first is customer-traffic recovery after the March 2026 disruption. The company already says the first-quarter revenue hit should be material versus the prior-year period. So the next filing will be judged first by the depth of that hit, the pace of reopening, and whether same-store turnover begins to stabilize again.

The second is the quality of the gross-margin conversion. The market will want to see that the move toward owned inventory does not keep absorbing cash through receivables, inventory, and weaker supplier support. If gross margin remains firm while cash flow remains weak, that would show that the improvement is being bought at an expensive price.

The third is proof of commercialization in Kenneth Cole Europe. More agreements, more showrooms, or more credit lines will not be enough. What needs to arrive is external sales, additional franchisees, and signs that the company can operate outside Israel without every new step becoming another layer of obligations.

The fourth is the transfer of club value into the retail layer. The merger of the financial-club entity, the potential transfer of Club 365 data, and the March 2026 database-use agreement all need to show that the company is not just rearranging legal entities. It needs to show that the economics of the operating company are actually getting stronger.

What Could Break The Thesis

The clearest risk is that the company posts renewed sales growth but again through economic compromise. The current filing does not provide direct evidence of unusual financing promotions like 10/90 structures or long payment deferrals, so none should be attributed to Hamashbir. But it does provide clear evidence that the business has become heavier from a cash perspective through inventory, logistics, and weaker supplier funding. If 2026 brings more inventory build without a quick improvement in sell-through, reported profit could again look better than actual cash generation.

The second risk is that Kenneth Cole turns from strategic story into funding sink. The $400 million target implies inventory, marketing, systems, franchisees, and logistics. If commercialization slips, the obligations will remain while revenue arrives too slowly.

The third risk is that the clubs remain a separate layer of value that does not really ease the burden on the retail chain. In that case, the group will continue to own one relatively clean earnings engine alongside a much more cash-intensive retail engine.

What The Market Is Likely To Measure Immediately

In the near term, the market is unlikely to focus only on the European vision. It will probably measure three simpler points first: the depth of the first-quarter hit, whether gross margin can hold even in a weak traffic environment, and whether operating cash flow stops moving away from profit. If those three improve, Kenneth Cole will begin to look like a real option. If not, it will look mainly like another financing requirement.

Risks

The first risk is working-capital and inventory risk. The company has moved toward a model that carries more inventory on its own balance sheet and less with suppliers. That can help margin, but it also increases the risk of excess inventory, discounting, and cash-flow pressure. The company itself says inventory that cannot be returned is sold at meaningful discounts. That is simultaneously an operating and cash-flow risk.

The second risk is rent and lease risk. Even if a reader chooses to neutralize IFRS 16 for analytical purposes, cash itself neutralizes nothing. Lease-principal repayment amounted to NIS 98.5 million in 2025, and the company entered 2026 after a period in which stores were closed and rent and management fees had to be renegotiated.

The third risk is legal and regulatory risk. The August 2025 judgment has already cost meaningful money. Beyond that, several additional lawsuits remain at early stages, and in October 2025 the company also received an arnona assessment of roughly NIS 9.5 million, including NIS 8.6 million retroactive to 2018. The company says the probability of ultimately bearing that charge is below 50%, but it still shows that the legal perimeter around the business is not clean.

The fourth risk is execution and funding risk around Kenneth Cole. There are minimum royalties, guarantees, credit lines, minority rights for Global-e, and a PUT option after three years. That does not make the move bad. It does mean the path to value creation for common shareholders first runs through meeting those obligations, and only then through successful commercialization.

The fifth risk is labor-cost and demand risk. The company cites labor shortages in the sector, and minimum wage rose in April 2025 to NIS 6,248 per month and is expected to rise again in April 2026 to NIS 6,444. For a store-heavy business whose revenue productivity per square meter already declined, that is not a footnote.

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Conclusion

Hamashbir 365 comes out of 2025 with two real assets and two heavy open questions. The first asset is the loyalty-club platform, which continues to generate relatively high-quality profit while providing data, loyalty, and marketing leverage to the retail chain. The second asset is the modest gross-margin improvement and some brand differentiation. The first open question is whether any of that improvement will eventually show up in cash. The second is whether Kenneth Cole Europe becomes a profitable option or simply another layer of obligations. In the near term, the market is likely to focus mainly on the first-quarter 2026 hit and the pace of recovery from it.

The current thesis: Hamashbir is not a collapse story, but it is not a clean turnaround story either. It has a strong loyalty-club engine and a retail brand that still knows how to protect margin, yet cash flow, leases, and the Kenneth Cole investment still leave 2026 as a proof year.

What changed versus the earlier read of the company: in 2025 the group no longer looks like just a department-store chain with a club attached. Kenneth Cole has moved from idea to a full operating and funding structure, and the clubs are being pushed deeper into the operating subsidiary. That sharpens the question not only of how much value is created, but where it sits and who can actually access it.

The strongest counter-thesis: a large part of the 2025 deterioration came from a one-off legal charge and security-related disruption, so the market may be reading a structural problem into what could still prove to be temporary noise around a transition year.

What could change the market reading over the short to medium term: a fast recovery from the March 2026 hit, stable gross margin without another deterioration in working capital, and the first genuine signs of external Kenneth Cole sales in Europe.

Why this matters: because Hamashbir has already shown that it owns value engines, but it has not yet shown that this value can move through the cash layer, the lease layer, and the corporate structure all the way to common shareholders.

What needs to happen over the next 2 to 4 quarters is fairly clear: store turnover needs to stabilize, operating cash flow needs to stop lagging profit, and Kenneth Cole needs to show external sales rather than only more agreements. What would weaken the thesis is continued traffic pressure, further working-capital strain, or a Europe buildout that grows obligations faster than revenue.