Castro in the First Quarter: Lower Store Sales Met Heavy Leases and Negative Cash Flow
Castro opened 2026 with an unusually weak sales quarter, but the point is not only the store closures during Operation Shaagat HaAri. The quarter exposed a cost and lease base that is hard to absorb when sales per square meter fall, even though the cash balance remains strong.
Castro opened 2026 with a quarter that can easily be read as an external shock: stores were closed at the start of Operation Shaagat HaAri, mall traffic remained weak until the ceasefire, and unusually warm weather hurt winter fashion sales. That is a large part of the story, but not all of it. The same-store sales metric already neutralized the six corresponding operating days, and still fell 9.1% including e-commerce and 11.4% excluding e-commerce. The quarter therefore did more than erase selling days. It tested what happens when sales per square meter fall while selling space, rent, marketing and lease commitments stay heavy. Revenue fell 8.6% to NIS 430.3 million, and operating profit of NIS 20.0 million became an operating loss of NIS 11.5 million. After the previous annual analysis framed 2026 as a margin proof year, the first quarter gives an uncomfortable answer: inventory fell from the year-end peak and the cash balance is still strong, but inventory days rose, leases kept growing, and cash flow after investments and lease principal repayment remained negative. For the quarter to be read as a temporary disruption rather than an overextended footprint, the acceleration the company describes after April 8 needs to reach sales per square meter, gross margin and cash flow quickly.
The Business Is Broader, But Profit Still Depends On Sales Per Square Meter
Castro is a fashion and consumer retail group with three main engines: apparel through the Castro brand, Hoodies and part of Urbanica, fashion accessories through Top Ten, Carolina Lemke and another part of Urbanica, and beauty and cosmetics through Yves Rocher and Kiko Milano. The business map looks broad, but the economic machine is simpler: large selling areas must generate enough sales to cover rent, employees, inventory, marketing and leases. When sales per square meter weaken, the group’s flexibility shrinks quickly.
The first quarter shows this clearly. The number of stores and kiosks in Israel rose to 359, and the selling area used to calculate average monthly sales per square meter rose 9.5%, but average monthly sales per square meter fell 18.8% to NIS 1,502. In same stores, sales per square meter fell from NIS 1,845 to NIS 1,635, even after adjusting for the direct closure days. Revenue is still materially above the first quarter of 2023, but operating profit is back in loss. That is the important point: not only a temporary closure, but a gap between a larger physical footprint and weaker sales in existing space.
That gap went straight into margin. The consolidated gross margin fell from 54.1% to 52.5%, mainly because of the weather, Operation Shaagat HaAri and the revenue decline, with foreign exchange offsetting part of the damage. Selling and marketing expenses still rose slightly to NIS 207.2 million, and general and administrative expenses rose to NIS 32.2 million. In retail, this is not an accounting anomaly. It is operating math: when revenue falls and the store remains open, expenses do not decline at the same pace.
The Damage Was Uneven Across Brands
Apparel is where the quarter hurt most. Segment revenue fell 9.2% to NIS 297.4 million, gross margin dropped from 50.0% to 47.7%, and the segment moved from NIS 10.6 million in operating profit to a NIS 14.2 million operating loss. Inside the segment, the Castro brand deepened its operating loss from NIS 8.4 million to NIS 15.2 million, Hoodies remained profitable but its profit fell from NIS 11.2 million to NIS 3.0 million, and Urbanica apparel moved from NIS 7.7 million in operating profit to a NIS 1.9 million loss.
| Activity | Q1 2026 revenue | Change vs Q1 2025 | Q1 2026 operating profit | What it means |
|---|---|---|---|---|
| Apparel | NIS 297.4 million | -9.2% | NIS -14.2 million | The main pressure point: lower sales, weaker gross margin and higher marketing |
| Fashion accessories | NIS 108.2 million | -8.8% | NIS 4.5 million | Still profitable, but operating margin fell from 12.4% to 4.2% |
| Beauty and cosmetics | NIS 15.8 million | -12.7% | NIS -2.0 million | A smaller weak point, but still not a balancing profit layer |
| Unallocated others | NIS 9.0 million | +38.8% | NIS -0.1 million | Small growth outside the core, not enough to change the quarter |
Fashion accessories look better only at first glance. Gross margin in the segment rose slightly to 63.8%, helped by sales mix and foreign exchange, but operating profit fell from NIS 14.8 million to NIS 4.5 million. The reason is again the cost base: rent and management fees rose to 16.33% of revenue from 14.1% in the comparable quarter, and store labor rose to 18.76% of revenue from 17.1%.
Beauty and cosmetics is smaller, but it keeps showing the same open issue from the end of 2025: even with international brands and a relatively strong online channel, same-store sales fell 20.9% including e-commerce and 26.7% excluding e-commerce. Kiko and Yves Rocher together posted a NIS 2.0 million operating loss. This will not decide the group’s valuation on its own, but it prevents the segment from becoming a profit buffer when apparel is weak.
Inventory Fell, Leases Did Not
The key balance in the quarter sits between two figures that look contradictory at first. On one hand, inventory fell from NIS 527.8 million at the end of 2025 to NIS 502.2 million at the end of March 2026, and operating cash flow benefited from a NIS 25.7 million inventory decrease. That is the kind of datapoint the market was waiting for after the prior discussion of inventory and outlet closures. On the other hand, consolidated inventory days rose to 258 from 248 in the comparable quarter, and apparel inventory days rose to 239 from 223. The company reduced the inventory balance, but not enough relative to the weaker sales pace.
Cash flow also tells a more complex story than profit alone. Operating cash flow was negative NIS 17.2 million, compared with positive NIS 9.6 million in the comparable quarter. Under an all-in cash flexibility view after actual cash uses, the quarter also included NIS 24.5 million of property, plant, equipment and intangible investments and NIS 37.8 million of lease principal repayment. These are real cash uses. NIS 23.4 million of short-term bank borrowing and NIS 6.2 million of equity issuance to minority interests in Radixis reduced the cash decline, but cash fell by NIS 49.8 million from the start of the year to NIS 376.3 million.
| Cash use or source in the quarter | Amount | Economic meaning |
|---|---|---|
| Operating cash flow | NIS -17.2 million | Profit did not convert to cash, even after inventory fell |
| PP&E and intangible investments | NIS -24.5 million | The store footprint continues to consume capital |
| Lease principal repayment | NIS -37.8 million | Store obligations are cash flow, not only accounting |
| Net short-term loans | NIS 23.4 million | Part of the cash use was financed through short bank credit |
| Equity issuance to minority interests | NIS 6.2 million | Radixis brought in capital, but this is not core operating cash flow |
Leases are still the layer that prevents the balance sheet from looking too clean. The group has no long-term bank loans, net cash over debt stood at NIS 289.1 million, and equity-to-assets was 35.0%. Those are relatively strong figures for a retailer after a loss-making quarter. But lease liabilities totaled NIS 1.398 billion, and the quarter added NIS 59.2 million of net lease liabilities. The banks and the company also treat leases as a real economic issue: financial covenants for 2026 will be calculated excluding IFRS 16 effects, and the group was in compliance at the end of March. This is not immediate pressure, but it means the physical footprint must return to profitability.
What Will Shape The Market Read In The Next Quarters
The company gives the market one optimistic proof point: after the ceasefire took effect on April 8, 2026, it describes a significant acceleration in sales and demand. If that acceleration appears in the next report through higher sales per square meter and a steadier gross margin, the first quarter can be read as an external shock that hit a broad activity base without changing the group’s economics. If sales productivity remains weak after the return to routine, the conclusion will be harder: the new footprint and store expenses are too large for the current sales pace.
Two additional checkpoints matter, but they should not take over the main read. The first is Urbanica’s supplier base: three main suppliers provided about 38% of the products manufactured for the group during the quarter, and the company is negotiating with the Canadian supplier YM Inc. to renew the agreement. The second is Radixis: TenenGroup’s second payment was made on May 3, while the third payment remains due within 120 days of closing. These are execution points around growth and capital allocation, not fixes for the core margin problem.
The first quarter is not enough to determine that the damage is structural. It is enough to change the order of questions. Another decline in inventory days, a recovery in apparel gross margin and continued preservation of a comfortable cash balance would tilt the interpretation back toward an unusual quarter. Another quarter of weak sales and growing lease obligations would push the market to read 2026 not as a transition year, but as a year in which Castro must prove again that the physical expansion actually pays off.
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