On August 13, KinderCare Learning Companies (NASDAQ:KLC) reported second-quarter results that captured the company in the middle of major surgery on itself. Revenue slipped 0.4% to $697.5 million, and the company swung to a net loss of $8.8 million from net income of $38.6 million a year earlier. Behind those numbers sits a deliberate choice: management is closing dozens of underperforming centers even as the core business absorbs the hit.
Where The Real Growth Hides
The clearest bright spot is Champions, KinderCare’s before- and after-school program, where revenue climbed 13.4% to $59.4 million on 85 net new sites added over the past year, marking four straight quarters of double-digit growth for the segment. KinderCare for Employers added new corporate partners during the quarter, including a stretch providing 24-hour childcare for Dallas public safety workers during the World Cup, and management is leaning further into tuition benefit programs as employers look for ways to support working parents.
The center closures are framed as addition by subtraction. Ninety percent of the locations shut so far sit in the lowest-performing fifth of the portfolio, and the 49 centers closed this quarter averaged occupancy below 37%. Management expects the full round of 80 to 85 closures to lift occupancy by roughly 1.5 percentage points once complete, while trimming annual rent by about $7 million.
Meanwhile, Creme School, KinderCare’s premium brand, opened its first California location in Irvine and posted 26% growth in summer camp enrollment, and CEO Tom Wyatt said revenue from the Learning Adventures enrichment programs “has almost doubled from a year ago.” The company also entered its 42nd state with a new center in Bentonville, Arkansas, helped along by fresh childcare funding commitments in New York, California and New Hampshire.
The Core Keeps Losing Ground
The headline numbers tell a rougher story. Adjusted EBITDA fell to $63.0 million from $82.4 million, and adjusted earnings per share dropped to $0.08 from $0.22, as lower occupancy ate into operating leverage. Same-center occupancy fell 2.4 percentage points to 68.6%, and enrollment in the core early childhood education business declined 4.0% year over year, a drag that a 2.6% tuition rate increase only partly offset. Same-center revenue fell $14 million, or 2%, with $11 million of that tied directly to center closures.
Management also lowered its outlook for state subsidy support, now expecting tuition contribution to revenue growth of just 2.5% for the year, well below what it had been counting on from reimbursement rate increases. The quarter absorbed roughly $8 million in incremental insurance costs tied to a workers’ compensation and general liability actuarial review. Full-year adjusted EPS guidance now sits at just $0.05 to $0.15, and free cash flow is expected to come in under $10 million, weighed down by an estimated $20 million to $25 million in lease exit payments still to come.
A Cheap Stock, Heavy Skepticism
Hedge fund ownership dipped from 18 funds to 17 last quarter, a modest pullback rather than a stampede. Short sellers have positioned more aggressively, with 13.01% of the float sold short, pointing to a real bear camp betting against the stock. Yet shares trade at a forward price-to-earnings ratio of just 5.01 as of August 27, a level that suggests the market has already priced in significant earnings pressure.
Betting On Fewer, Stronger Centers
KinderCare is trying to shrink its way to stronger footing, closing its weakest centers while newer, faster-growing businesses expand around them. The bull case rests on Champions, Creme School and the employer-focused business growing large enough to offset a smaller core center count, with occupancy healing as the worst locations disappear.
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