Retailors in the first quarter: Mature stores are still weak, and refinancing only buys time

The first quarter of 2026 does not close the questions that were left open at Retailors at the end of 2025. It makes them sharper. Revenue fell 5.6% to NIS 496.6 million, but the real weakness is not only the top line: Nike same-store sales fell 17.7% and Foot Locker fell 11.7%, while sales per square meter continued to erode even after the group added selling space. Europe remains the only bright spot in the geographic map, rising to NIS 161.4 million, but that growth is not enough to cover the operating loss in Nike or the erosion in Foot Locker. January's refinancing improved visible liquidity, mainly because the company raised new bank debt and increased short-term investments, but the business itself consumed NIS 59.4 million of operating cash and another NIS 57.3 million went to lease principal repayments. That makes 2026 a proof year, not a recovery year: the company needs to show that mature stores are stabilizing, that France and Germany are not just adding space, and that more real cash remains after leases and CAPEX. Until that happens, the international expansion looks more like an expensive volume engine than a clean profit engine.

Mature Stores Are Still Weak

Retailors is a sports and leisure retail platform, but this quarter should be read less through the number of stores and more through store productivity. At the end of March, the group operated 284 stores: 179 Nike stores across Israel, Canada, Europe, Australia, and New Zealand, 90 Foot Locker stores in Israel, 12 Samsung stores in Australia, and 3 Converse stores in Israel. This is a business that requires inventory, leases, store investment, and strong brand relationships. When mature stores weaken, new openings can hold up revenue, but they also increase the cash burden.

The current report continues the question raised in the 2025 analysis: whether the expansion in Europe and Australia is replacing real improvement in existing stores. In the first quarter, the answer is still negative. Europe grew 24.8% and reached NIS 161.4 million, but Israel fell 14.0%, Canada fell 25.7%, and Australia and New Zealand fell 8.7%. This is not only a holiday-timing or security-disruption issue in Israel. Nike itself said on March 31, 2026 that it expected a continued low-single-digit revenue decline in the quarter ending May 31, 2026, so the company's core brand is not yet providing a full tailwind.

The numbers that decide the quarter are not the number of stores or the expansion in selling space. Nike had 179 stores at the end of March, versus 152 at the end of March 2025, and yet segment revenue fell 1.4% to NIS 334.8 million. The increase in space offset part of the decline, but it did not change the direction. In Foot Locker, where the store count barely changed, the decline was sharper: revenue fell 9.3% to NIS 136.5 million.

The security-related explanation is real. The company's stores in Israel were closed from February 28 to March 4, 2026, and after reopening operated under restrictions and weaker customer traffic. Still, the closure period itself was excluded from the same-store calculation in Israel, and the decline continued even on a base that should be cleaner than a full shutdown period. That is where the quarter weakens the recovery case: even after the adjustments, the mature store base is not back.

Foot Locker has another small but relevant issue. The e-commerce site that has been operated by a sister company is expected to move to the company's independent management from the end of May 2026. That could improve control over the digital channel, but it also adds an execution test in a segment whose operating profit has almost disappeared. For the move to be positive, the company will need to show that it improves sales or margin, not only that another management layer has moved in-house.

Gross Margin Was Not Enough

The quarter is not weak because every line eroded at once. Gross margin actually rose to 50.6% from 49.3%, and Nike's margin rose to 54.3% from 52.4%. But the improvement did not come from stronger store sales. In Nike, it came from purchasing-condition benefits received in 2025 that were also spread into the first quarter of 2026, partly offset by a higher average customer discount. In Foot Locker, the picture was the opposite: gross margin fell to 44.7% from 47.2%, mainly because the average discount increased.

The problem sits in the cost layer. Selling and marketing expenses rose to NIS 262.7 million, 52.9% of revenue, from NIS 244.6 million and 46.5% of revenue in the comparable quarter. That is a fairly natural result for a company carrying leased stores, employees, and inventory, but it also explains why better gross margin was not enough. In Nike, revenue declined only slightly but the operating loss deepened to NIS 20.2 million, and in Foot Locker operating profit fell to only NIS 0.8 million. At group level, operating profit turned into a NIS 17.5 million loss, versus a NIS 4.1 million profit in the comparable quarter.

The IFRS 16 lease view makes the retail economics look even tougher. Excluding the impact of the lease standard, operating loss was NIS 30.5 million versus NIS 9.5 million in the comparable quarter, and adjusted EBITDA moved to negative NIS 9.5 million from positive NIS 11.6 million. The point is not only accounting. When store sales decline, rent and operating costs do not fall at the same pace, so operating leverage works against the company.

Liquidity Looks Better, Cash Still Does Not

The January 2026 refinancing is the positive side of the quarter. The company received two loans totaling NIS 250 million, two additional loans totaling NIS 100 million, and a EUR 13 million loan. The loans were taken without collateral and without financial covenants or restrictions, which is a clear sign that credit access remains good. In the same month, the company repaid bank loans with NIS 180 million of principal, so the move extended the repayment schedule and increased available sources.

But the all-in cash picture for the quarter is still weak. The framing matters: this is not a normalized cash measure for the mature store base. It is a check of what remained after the quarter's actual cash uses, including working capital, CAPEX, and lease principal. Operating cash flow was negative NIS 59.4 million, purchases of fixed assets and intangible assets consumed NIS 21.8 million, and lease principal repayments consumed NIS 57.3 million. Before financing and before movements in the securities portfolio, that is roughly NIS 138.5 million of cash use.

The gap does not come only from the accounting loss. Working capital consumed NIS 96.9 million, mainly through a NIS 27.7 million increase in inventory, a NIS 28.1 million decline in suppliers, and a NIS 23.2 million decline in other payables. That is a warning sign for an expanding retailer: sales declined, but inventory and network commitments still required cash. Inventory reached NIS 522.4 million at the end of March, compared with NIS 499.8 million at the end of 2025 and NIS 444.2 million at the end of March 2025.

Visible liquidity improved, but through the balance sheet rather than through operations. Current financial assets, cash plus short-term investments, totaled NIS 591.1 million, against current loan maturities of NIS 82.1 million. Net current financial balances therefore rose to about NIS 509.1 million, compared with about NIS 411.1 million at the end of 2025. That increase came mainly from the new financing and short-term securities, not from better operations. It is useful flexibility, but it does not replace a recovery in stores.

The notes also explain the management burden. The Samsung agreement in Australia was in force until the end of 2025, and the parties are still negotiating an extension. The May 2026 shareholders' meeting extended and updated a series of agreements with Fox, the controlling shareholder, including an increase in the allocated labor cost under the services agreement from about NIS 410 thousand per month in 2025 to about NIS 504 thousand per month. These figures do not explain the quarterly loss, but they fit the broader picture: as the group spreads across more countries and brands, the service, management, and overhead layer grows with it.

A special NIS 440 thousand bonus to the CEO for 2025 was also approved outside the compensation policy because the company did not meet the minimum annual profit target that would have entitled him to an annual bonus. It is a small item, but it highlights the gap between building the platform and the reported profit. Management is getting credit for developing the activity in Israel and abroad, while shareholders are still waiting to see that development flow back to profit and cash.

Conclusion

The first quarter puts Retailors in a less comfortable position than it had after the annual report. The refinancing reduced short-term pressure, Europe keeps growing, and the banks are still willing to finance the company without collateral or covenants. Still, the three central tests for 2026 have not received a positive proof point: same-store sales are still falling, sales per square meter are eroding, and cash flow after working capital, leases, and CAPEX remains negative.

The fair counter-thesis is that the quarter was hurt by a difficult combination of seasonality, the security situation in Israel, shekel appreciation against operating currencies, and the digestion year for France and Australia. If Nike stabilizes, if France starts contributing full-year profitability, and if openings in Germany and France arrive without further productivity erosion, the first quarter may later look like a weak quarter inside a transition year. But based on the current evidence, the market gets an execution test first: better same-store sales, a halt in inventory build, and a narrower gap between operating cash flow and lease principal plus investments. Short interest as a percentage of float fell from about 4.5% at the end of April to 1.46% in early May, but it remains above the sector average of 0.73%. In other words, direct short pressure has eased, but skepticism around the quality of growth is still justified.