Hamashbir 365 in the First Quarter: Lower Activity Released Cash, Leases Still Set the Test

Hamashbir 365 opened 2026 with a report that looks weak on sales, but much less weak on cash. Network sales fell 22%, and the quarter was hit by store closures and weaker customer traffic around Operation "Shagat HaAri", yet reported operating profit remained almost unchanged and operating cash flow reached NIS 50.5 million. This is not a full recovery of the retail business. It is a quarter in which lower activity released receivables, inventory and supplier credit, giving the cash balance temporary relief. After capex, lease-principal repayment and loan repayment, the company still had about NIS 17.9 million of all-in cash flexibility before taking short-term credit, but that number depends on working capital rather than on a stronger sales run-rate. The customer clubs still look like the higher-quality profit engine, and Kenneth Cole Europe is beginning to show external sales, but the number is still small relative to the ambitions and obligations around the brand. The quarter therefore does not turn the company into a clean retail recovery story. It buys the company a better liquidity quarter, and it puts the next proof point in a clear place: whether the next quarters can generate cash after restocking, lease payments and continued investment in Kenneth Cole.

Weak Retail Activity, Operating Profit That Did Not Break

The company is a complicated mix of department stores, customer clubs and a Kenneth Cole brand platform. That matters because profit and risk are not located in the same layer: department stores generate the revenue base and most of the cash burden, the customer clubs generate higher-quality profitability, and Kenneth Cole is an attempt to turn a brand into a broader distribution and franchise platform. Reading the quarter only through revenue misses the point, but reading it only through cash would be too generous.

The operating hit in the quarter was sharp. Group revenue fell to NIS 176.9 million from NIS 225.4 million in the comparable quarter, down about 21.5%. Gross network sales were NIS 180.2 million versus NIS 233.9 million, and same-store sales also fell 22%. The company mainly attributes the decline to Operation "Shagat HaAri", during which all network stores and group headquarters were closed for several days, followed by lower customer traffic.

Still, reported operating profit was NIS 3.0 million, almost unchanged from NIS 2.9 million in the comparable quarter. Gross margin rose to 47.4% from 46.6%, mainly because Kenneth Cole represented a higher share of network sales, and selling, marketing and administrative expenses declined following cost-reduction steps during the activity disruption. That points to some cost flexibility and a better mix, but it does not prove that the network has returned to a comfortable profitability run-rate. Before IFRS 16, the business still posted an operating loss of NIS 8.4 million, very close to the NIS 8.6 million loss in the comparable quarter.

The comparison with earlier Deep TASE coverage matters. In the annual analysis, the question was whether the gross-margin improvement would reach cash, and in the working-capital follow-up, the question was whether the move toward owned inventory would burden cash flow. The first quarter gives only a partial answer: cash improved, but not because the retail engine started running faster.

Cash Improved Through Working Capital, Not Strong Sales Run-Rate

Operating cash flow was NIS 50.5 million, compared with a NIS 1.9 million outflow in the comparable quarter. That is a meaningful number for a company with a heavy lease burden, but it has to be decomposed before concluding that the cash problem has been solved. Working-capital changes contributed NIS 30.4 million to cash flow: lower receivables contributed NIS 15.7 million, lower inventory contributed NIS 9.2 million, and suppliers contributed NIS 10.7 million. These are good cash numbers for the quarter, but part of the explanation is the decline in activity and the delay in inventory purchases because of the security situation.

The relevant cash calculation here is all-in cash flexibility after actual cash uses: operating cash flow less capex, lease-principal repayment and loan repayment. In the first quarter the company generated NIS 50.5 million of operating cash flow, invested NIS 3.8 million in fixed assets, repaid NIS 24.8 million of lease liabilities and repaid NIS 4.0 million of long-term loans. Before taking NIS 1.5 million of short-term credit, about NIS 17.9 million remained. That is real relief compared with 2025, but it is not the same as recurring cash capacity if inventory and receivables rise again in the next quarters together with sales.

The same gap is visible on the balance sheet. Inventory fell to NIS 200.8 million from NIS 210.0 million at the end of 2025, and the company links the decline partly to delayed stocking. Receivables fell to NIS 94.7 million from NIS 110.4 million at the end of 2025. These movements help cash now, but in a retailer they can reverse when the company returns to a normal sales season, opens new stores or rebuilds inventory for the next activity cycle.

The quarter therefore improves liquidity, but it does not by itself change cash-flow quality. Excluding the working-capital contribution, cash flow before movements in receivables, inventory and suppliers was around NIS 20 million, below the lease-principal payment in the quarter. This is not a company-reported adjusted metric, but it is the right way to read the recurring cash burden: without inventory and receivables release, leases remain the main cash use.

The good news is that the quarter does not look like immediate banking pressure. The department-store subsidiary met all its financial covenants, including equity plus owner loans of NIS 44 million versus a NIS 30 million minimum, a cash-flow covenant measure of NIS 102 million versus a NIS 10 million minimum, and a receivables-to-financial-debt ratio of 3.5 versus a 1.5 minimum. The Kenneth Cole sales covenant was also marked as compliant. Debt therefore does not turn the read into a survival story, but it keeps cash quality at the center: whether the business can continue paying leases and carrying inventory without an unusual working-capital contribution.

The Three Engines Give Different Answers

Department stores remain the center of gravity. Segment revenue fell to NIS 167.0 million from NIS 217.1 million, down about 23%, but segment profit before management fees and headquarters expenses rose to NIS 3.5 million from NIS 3.1 million. The segment profit margin rose to 2.1% from 1.4%. That looks better than sales, but part of the improvement came from cost reductions during an unusual period and from the Kenneth Cole mix inside the network. The company showed that it can protect reported profit in a disrupted quarter, but it still has to show that this protection holds when sales volume and expenses normalize.

The customer clubs tell a different story. Holdings and customer-club segment revenue rose to NIS 11.3 million from NIS 10.8 million, and segment profit rose to NIS 3.6 million from NIS 1.9 million. Segment profitability reached 32%, mainly after the prior year included participation in department-store marketing expenses. That strengthens the point made in the customer-club analysis: the higher-quality economic value sits in the clubs and customer data, but the question is how much of it will flow into the retail operating company rather than remain a separate value layer.

This is also where the plan to examine transferring Club365 from the parent company to the department-store company matters. The company says the move is being examined to strengthen the equity structure and financial results of the subsidiary, while emphasizing that there is no certainty it will happen. If completed, the move could make part of the club value more accessible to the layer that operates the stores and carries the leases. If not, investors will continue to see a gap between a valuable customer asset and a retail business that still has to prove recurring cash generation.

Kenneth Cole is the third engine, and still the earliest one. The segment recorded NIS 0.8 million of external revenue from sales to Kenneth Cole Europe, alongside NIS 6.8 million of intersegment revenue from sales to the group’s department stores. The segment still lost NIS 1.7 million before management fees, even though the activity already includes sales to European franchisees, European online sales and activity through the DACH company in Germany. Compared with the focused Kenneth Cole Europe analysis, the quarter adds an initial proof point of external sales, but the number is too small to decide that the platform can already carry its costs and brand obligations.

Conclusion

The first quarter of 2026 makes the read on Hamashbir 365 easier, but not clean. The company went through a quarter in which sales were hit hard, and still preserved reported operating profit, improved gross margin and generated high cash flow. That is an operating achievement in an unusual period, but cash-flow quality is limited because much of the cash came from lower receivables, inventory and supplier movements rather than from a stronger sales engine.

Over the next 2-4 quarters, the important signs will be less about store reopening headlines and more about the smaller numbers: whether same-store sales recover without gross-margin erosion, whether inventory rises again without consuming cash, whether the customer clubs actually strengthen the department-store company, and whether Kenneth Cole Europe shows materially larger external sales. If these occur together, the first quarter will look in hindsight like a transition quarter in which the company bought time and used it well. If cash flow weakens with restocking and Kenneth Cole remains small and loss-making, the cash improvement will look more like favorable timing than a change in business quality.