Rami Levy in the First Quarter: Profitability Improved Through Costs, Not Gross Margin

Rami Levy opened 2026 with a strong quarter, but the quality of the improvement is less simple than the 34.5% increase in net profit. Sales rose 14.7% and operating profit rose 24.6%, yet gross margin fell to 23.01% because of deep Passover promotions and the company's low-price positioning. The quarter therefore proves operating efficiency and strong working capital more than stronger pricing power. That is a real improvement versus the concerns left at the end of 2025, especially because the Super Cofix comparison data was restated and Good Pharm did not deepen margin erosion. Still, holiday timing and security-related restrictions supported the sales pace, while the NIS 42 million and NIS 58 million dividends declared around the report absorb much of the cash surplus. The rest of 2026 will be tested less by whether sales grow and more by how much cash remains after leases, capex and dividends once the seasonal pace cools.

Company Background

Rami Levy is a national food-discount retailer, but the group now includes several layers of activity. At the end of the quarter it operated 62 supermarket branches, including 3 franchises, 36 neighborhood minimarket branches, a business-sales point in northern Israel, and a logistics center in Modi'in spanning about 30,000 square meters. Alongside retail, the group includes Good Pharm with 80 branches, a cellular business with about 471,000 subscribers, Cofix cafes, a credit-card club, an insurance agency, and an early-stage stock-store activity.

The economic machine is a combination of high sales volume, negative working capital and the ability to layer additional services onto a broad customer base. The other side is a large lease layer, new branches that need to mature, and dividends that reduce flexibility if cash flow does not remain high. The first quarter matters because it tests three questions left open in the previous annual analysis: whether Super Cofix can enter retail without distorting the read, whether Good Pharm can grow without further margin deterioration, and whether cash after leases and distributions can improve.

At the end of May 2026 the share traded at a market cap of about NIS 5.2 billion, while short interest was only 0.55% of the float. That is not a short-seller stress signal. The market is mainly testing operating quality and cash conversion, not a crisis scenario.

Profitability Rose Because Expenses Fell as a Share of Sales

The simple headline is strong growth: sales reached NIS 2.12 billion, compared with NIS 1.85 billion in the corresponding quarter. The margin bridge matters more. Gross profit rose 11.2%, less than sales, and gross margin fell from 23.75% to 23.01%.

The positive surprise sits in expenses. Selling, marketing, general and administrative expenses rose only 6.7%, while sales rose 14.7%. The expense ratio fell from 19.03% of sales to 17.70%, enough to lift operating margin from 4.86% to 5.27%. Net profit rose to NIS 73.8 million, but it rests on the same dynamic: not better gross economics, but the ability to operate a larger network with a lower relative expense load.

That makes 2026 a year of efficiency proof. If price promotions continue and gross margin remains around the current level, the company will need to keep extracting lower expenses from each shekel of sales. If the sales pace cools after Passover timing and the effect of the security environment on consumption, that operating leverage will be harder to repeat.

Super Cofix, Good Pharm and Cash Still Need Proof

The absorption of Super Cofix was the main expected source of noise heading into 2026. From the first quarter, 30 urban grocery stores operated through Super Cofix until the end of 2025 moved into the retail segment, but the comparison data was restated so Q1 2025 also includes that activity inside the segment. That reduces the risk that the market sees an accounting jump and mistakes it for fully organic growth.

Even after the comparison-base adjustment, retail grew sharply. Segment revenue rose to NIS 1.92 billion, up 13.2%, and operating profit after IFRS 16 rose to NIS 82.7 million, up 23.8%. Sales per square meter rose from NIS 14.48 thousand to NIS 15.73 thousand, and same-store sales including Super Cofix rose 8.75%. The achievement is that the transition did not immediately hurt segment profitability, but the next proof point is harder: preserving sales per square meter and operating margin in a less seasonal quarter.

Good Pharm offers a mixed signal, but a better one than the prior concern. Segment sales rose 26.0% to NIS 146.7 million, mainly from new branch openings and a 2.75% increase in same-store sales. Operating profit rose to NIS 14.9 million, leaving operating margin close to the corresponding-quarter level. That does not make pharmacy a clear margin engine yet, but at least in this quarter growth did not come with another decline.

On cash, the right frame is all-in cash flexibility: cash left after lease cash, capex and dividends actually paid. Operating cash flow reached NIS 233.7 million, and negative working capital continued to support the group: inventory rose to NIS 481.7 million and customers to NIS 453.1 million, but suppliers and service providers rose to NIS 1.47 billion. After NIS 50.0 million of lease-principal repayment, NIS 50.2 million of property, plant, equipment and intangible capex, and NIS 8.3 million of dividends actually paid, about NIS 125.2 million remained.

The table does not say the full NIS 100 million left in March. NIS 42 million was declared in March and paid in April, and another NIS 58 million was declared with the report approval. It does show that the company continues to behave like a cash-return equity: even when the quarter produces strong cash flow, a meaningful part goes to shareholders. The lease layer remains large, NIS 2.24 billion at the end of March, so EBITDA of NIS 201.4 million, or earnings before depreciation and amortization, should be read alongside NIS 128.4 million of EBITDA before IFRS 16.

Conclusion

The first quarter improves the read on Rami Levy, but it does not settle it. The concern that a retail jump would mainly reflect the transfer of Super Cofix is weaker because the comparison base was restated and the segment still grew strongly. The Good Pharm concern is also somewhat weaker, because the segment continued to grow without another decline in operating margin. On the other hand, gross margin eroded, part of the sales pace was supported by timing and an unusual environment, and leases plus dividends still require high cash generation.

The rest of 2026 will be decided in three places: whether gross margin stabilizes without losing same-store sales, whether Good Pharm preserves profitability while opening more branches, and whether cash after leases, capex and distributions remains positive. The customer-club transaction with Israir Group and Isracard received audit committee and board approval on May 28, 2026, but still depends on signed agreements and regulatory approvals. The direct proceeds to the company from selling 10% of the club company are expected to be about 56% of an estimated NIS 20 million, so the real value is customer loyalty rather than immediate cash. The counter-thesis is clear: in food retail, leases, inventory and supplier credit are natural parts of the model, and the dividend is currently supported by strong cash flow and NIS 858.3 million of cash. What would weaken the positive read is a quarter in which same-store sales cool, gross margin does not recover, and distributions continue to absorb most of the surplus after cash uses.