Delta Galil in Q1: growth is helping margins, but cash remains tight

Delta Galil entered 2026 with a quarter that gives partial evidence for what investors wanted to see after 2025: sales are growing, gross margin improved, the Brands segment moved away from near-zero operating profit, and Private Label continues to work better. But the improvement still does not flow cleanly to common shareholders. Profit attributable to shareholders fell to $15.4 million, selling and marketing expenses grew faster than sales, and finance costs are taking a larger share of the operating improvement. Cash flow also looks much better than in the comparable quarter, yet after leases, investments, and dividends the overall cash picture remains tight. Two external items can still change the year: a $31.4 million U.S. tariff refund claim that was not recognized as an asset, and the delay of the Israeli logistics center to early 2027. Q1 therefore does not close the 2026 proof test. It sharpens it: the company has to show that the margin and working-capital improvement is not just an opening-quarter repair, but a base for profit and cash that can hold over the next quarters.

The company is a manufacturing and brands platform, not just an apparel retailer

Delta Galil sells underwear, socks, leisurewear and activewear through four main engines: private-label products for customers such as Victoria's Secret, Skims, Nike, Target and Walmart, owned and licensed brands, the Israeli activity, and Seven for all mankind. Its economics are driven less by a simple store-count question and more by manufacturing, sourcing, currency, DTC, inventory, leases and logistics.

The prior annual Deep TASE analysis on Delta Galil framed 2026 as a proof year: Private Label had to convert backlog into sales and margin, Brands had to recover from tariffs and integration costs, and the new logistics centers had to start returning cash. Q1 answers only part of that. Private Label and Brands improved profitability, but Israel weakened, the Caesarea logistics center was delayed, and net profit did not move with sales.

Market positioning adds another layer. Based on the latest local market data, the company traded around a NIS 4.6 billion market value, and short interest reached 1.14% of float, above the sector average of 0.49% but still moderate. That is not an extreme stress signal, but it does mean the market needs quality proof, not only a growth headline.

Profitability improved, but expenses and financing took most of the gain

Q1 sales rose 15% to $573.0 million, and rose about 10% in source-currency terms. Gross margin improved to 41.7% from 40.6%, mainly due to better factory profitability, restructuring programs, Daily Drills, and stronger shekel and euro exchange rates against the dollar. That is positive because the key question after 2025 was whether Delta could rebuild margin, not only grow revenue.

The next layer of the income statement was more expensive. Selling and marketing expenses rose 20% to $170.6 million, and increased to 29.8% of sales from 28.5%. The DTC expansion, mainly in Israel and Germany, improves control over the sales channel but leaves less gross profit on the way to operating profit. Operating profit before one-time items rose only 12% to $36.6 million, while the margin slipped to 6.4% from 6.6%.

The bottom line is weaker than the operating line. Net finance expenses rose to $13.1 million from $9.6 million, due to currency effects, mainly the Egyptian pound's depreciation against the dollar, higher IFRS 16 lease discounting costs, and higher interest and fee expenses as debt and activity expanded. Profit before tax fell 4%, and profit attributable to shareholders fell to $15.4 million. Even excluding a $1.5 million one-time fair-value remeasurement expense related to Daily Drills contingent consideration, adjusted profit attributable to shareholders rose only 3% to $16.6 million.

The segments show where the improvement is real and where it remains fragile

Private Label is the cleaner part of the quarter. Sales rose 9% to $224.8 million, and operating profit increased to $27.3 million from $24.1 million. The increase was split between volume and average selling price, while gross margin improved due to efficiency measures and the restructuring program in the company's Far East factories. That supports the view that the 2026 backlog is beginning to convert into revenue without breaking margin.

Brands shows a sharper repair, but it is less clean. Sales rose 22% to $183.7 million, and operating profit rose to $6.2 million from only $0.1 million. That is material progress, but it also relies on Daily Drills, currency and a higher average selling price that was partly offset by lower product volume. The contingent-consideration expense for Daily Drills also means the acquisition is beginning to carry a higher economic value, while still adding accounting volatility to operating profit.

Israel was the weak point. Dollar sales rose to $100.9 million, but local-currency sales stayed broadly flat at about NIS 315.3 million. Operating profit fell to $8.0 million from $11.8 million, mainly because stores were closed for about a week during Operation Lion's Roar, unusually warm weather hurt winter sales, and the company expanded licensed-brand activity in Israel and launched Bath & Body Works in Europe. The activity is still structurally growing, but this quarter that growth came with more expenses and lower profitability.

Seven for all mankind adds a smaller quality signal. Sales rose to $54.7 million, and operating profit rose to $3.4 million. The improvement came from wholesale sales in the U.S., a stronger euro, a higher average selling price, fewer promotions and discounts, and lower product sourcing costs. It is not the engine that decides the whole thesis, but it shows that the company can improve price and sourcing in at least part of the portfolio.

Cash flow improved, but it still does not leave much surplus

Cash flow from operating activities was $44.3 million, compared with $18.4 million in the comparable quarter. Excluding IFRS 16, meaning after lease principal repayments that are presented in financing cash flow, operating cash flow was $27.9 million versus $4.0 million. This is the most important improvement in the quarter. It came from lower working capital, mainly inventory and receivables, and inventory days fell to 119 from 139 in the comparable quarter.

Still, the overall cash picture is not wide. After $19.7 million of purchases of property, plant, equipment and intangible assets, a $10.0 million dividend to shareholders and a $2.7 million dividend to minority holders, operating cash flow excluding IFRS 16 did not leave a surplus. It left a net cash use of about $4.6 million. Looking at all cash movements, including investing and financing activity, cash declined by $12.0 million in the quarter. The working-capital improvement is therefore important, but it is still not enough to make Delta a comfortable cash-return equity during a year of investments, leases and dividends.

Debt also did not close. Net financial debt was $199.7 million, almost unchanged from year-end 2025 but above $160.2 million at the end of March 2025. The company presents an adjusted net financial debt to EBITDA ratio of 0.9, but when operating lease liabilities are included, net financial debt rises to $585.8 million and the ratio reaches 2.0. The company complies with its covenants, and S&P Maalot affirmed an AA- rating with a stable outlook in April 2026, but the gap between the two debt pictures explains why post-lease cash flow matters more than accounting profit.

The next quarters need to prove the improvement stays in cash

The rest of the year will be decided by three tests. The first is continued improvement in Brands and Private Label without DTC expenses, tariffs and external sourcing swallowing the margin. The second is working-capital discipline, because one quarter of lower inventory and receivables does not yet prove a durable change. The third is execution around external triggers: a potential $31.4 million tariff refund could surprise positively, but it is still not recognized in the accounts, and the delay of the Israeli logistics center to early 2027 pushes out part of the cost-saving evidence that the 2026 case relied on.

The current conclusion is cautiously positive. Delta has started to show that operating profitability can recover after 2025, mainly in Brands and Private Label, but it has not yet proven that this improvement turns into net profit and free cash for shareholders. The strongest countercase is that Q1 is only a slow start to a year in which tariff refunds, further Brands recovery, and later logistics benefits can still arrive. For that reading to strengthen, the next quarters need to show a rarer combination: operating profit moving toward full-year guidance, working capital staying controlled, and cash remaining after leases, investments and dividends.