KinderCare's Q3 2025 Earnings Call: Contradictions Emerge on Enrollment Trends, Subsidy Impact, and Pricing Strategy

Date of Call: November 12, 2025

Financials Results

• Revenue: $677.0M in Q3, up nearly 1% YOY; same-center revenue $617M; updated FY2025 revenue guidance $2.72B–$2.74B
• EPS: Adjusted EPS $0.13 in Q3, up from $0.05 a year ago; FY2025 adjusted EPS guidance $0.64–$0.67
• Operating Margin: Adjusted EBITDA margin just under 10% in Q3; Adjusted EBITDA $66M, down 7% YOY; income from operations $26M vs $54M prior year

Guidance:

• Full-year 2025 revenue $2.72B–$2.74B; adjusted EBITDA $290M–$295M; adjusted EPS $0.64–$0.67.
• FY2025 free cash flow $88M–$94M; CapEx $131M–$133M; effective tax rate ~27%.
• Expect full-year occupancy ~200 bps below 2024; tuition growth ~2% in 2025; tuition contribution expected larger in 2026.
• B2B ≈ +1% growth contribution in 2025; NCOs <1%; tuck-ins ≈ +1%; directional expectation ~1% for each lever in 2026.
• No formal 2026 guidance provided; management expects return to medium-term algorithm by 2027.

Business Commentary:

• Operational Challenges and Enrollment Trends:
• KinderCare reported a 67% average same-center occupancy, down 160 basis points from the previous year.

• The enrollment challenges were attributed to a cautious consumer backdrop, resulting in lower average weekly enrollings and headwinds in subsidy business due to reduced tuition reimbursement rates and fewer new student authorizations in some states.

• Revenue and Tuition Growth:

• Revenue was $677 million, up 80 basis points from the previous year, with a 2% contribution from tuition despite lower enrollment.

• The company maintained a 50 to 100 basis points spread between wages and tuition, supporting margin stability amidst enrollment pressures.

• B2B and New Center Expansion:

• KinderCare's B2B programs, including Champions and KinderCare for Employers, demonstrated solid growth, with Champions' revenue growing by 11%.

• New center openings and tuck-in acquisitions, with 2 new centers and 6 acquisitions in the quarter, contributed to revenue, despite overall enrollment trends.

• Cost Management and Cash Flow:

• Despite enrollment pressures, free cash flow was $138 million, allowing for funds to be used for new center and tuck-in acquisitions.
• The company maintained a strong balance sheet with a net debt to adjusted EBITDA ratio of 2.5x, indicating disciplined financial management.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Management described Q3 results as "mixed," highlighted occupancy at 67% "at the lower end of our expected range," and cut FY2025 guidance while reiterating confidence in long-term fundamentals and a return to the growth algorithm by 2027; CFO emphasized continued cost discipline and deleveraging (net debt/EBITDA 2.5x).

Q&A:

• Question from Yehuda Silverman (Morgan Stanley): Directional expectations for enrollment heading into 2026 — better, worse or the same?
  Response: Inquiries at the center level remain healthy; management expects enrollment to recover over time and return to historical growth but will monitor near-term uncertainty (e.g., government shutdown effects).

• Question from Yehuda Silverman (Morgan Stanley): Was the government shutdown uncertainty factored into the guide and which assumptions does it affect?
  Response: Few families were directly impacted; uncertainty mainly affects state subsidy budgeting decisions and is reflected qualitatively in expectations rather than a quantified line item.

• Question from Andrew Steinerman (JPMorgan Chase & Co): When will you get back to the medium-term algorithm and will pricing increases be higher in 2026?
  Response: Management expects to return to the medium-term algorithm in 2027; tuition increases for 2026 are expected to be higher than the ~2% in 2025, but final private-pay rates are pending state subsidy clarity.

• Question from John Ronan Kennedy (Barclays Bank PLC): Please expand on the 'softer starting point' for back-to-school and the extent macro vs subsidy vs conversion drove lower enrollment.
  Response: Softer start reflected lower carry-in from Q2; drivers include macro consumer caution, subsidy reductions (notably Indiana ~1,000 full-time subsidy enrollments lost), and local conversion/operational opportunities — no precise split provided.

• Question from John Ronan Kennedy (Barclays Bank PLC): Can you provide occupancy trends by quintile through the quarter and exiting into Q4?
  Response: Top three quintiles saw slight declines; lower-occupancy centers, especially the opportunity region (quintiles 4–5), are improving materially via diagnostics and represent the primary upside.

• Question from Jeffrey Meuler (Robert W. Baird & Co.): Why does management characterize current weakness as short-term versus a structural supply/demand imbalance?
  Response: They track inquiries per center (still healthy), see policy support for childcare, and emphasize controllable operational levers (center director/district improvements) that underpin belief the headwinds are temporary.

• Question from Jeffrey Meuler (Robert W. Baird & Co.): At what point would you take more proactive cost-outs given revenue weakness?
  Response: Cost-efficiency is continuously assessed (G&A, labor); labor optimization is a focus and further targeted actions will be weighed carefully against investments needed for long-term revenue recovery.

• Question from Jeffrey Silber (BMO Capital Markets): Are you thinking about more aggressive center closures as a cost-control measure?
  Response: They evaluate centers continually on demographics, inquiries, engagement and profitability; will close centers when justified considering lease timing and ROI, with no preset cap.

• Question from Jeffrey Silber (BMO Capital Markets): Could acquisitions be paused to accelerate deleveraging?
  Response: Board supports a medium/long-term capital plan; management will continue funding NCOs and tuck-ins because tuck-ins are accretive at low single-digit EBITDA multiples while balancing leverage reduction.

• Question from Keen Fai Tong (Goldman Sachs Group, Inc.): How much of enrollment headwinds are due to macro consumer factors versus local idiosyncrasies?
  Response: No precise attribution; subsidy reductions in a few states are a clear near-term drag—absent those, enrollment would be closer to flat—other macro factors also contribute but are harder to quantify.

• Question from Keen Fai Tong (Goldman Sachs Group, Inc.): What local factors often prevent enrollment growth per your diagnostic tools and have they changed since last quarter?
  Response: Diagnostic and digital tools are driving improvement in low-occupancy centers; common barriers are local engagement and conversion execution, which management is addressing and scaling from the opportunity-region playbook.

• Question from Joshua Chan (UBS Investment Bank): What enrollment decline is baked into Q4 guidance (e.g., is it ~4%)?
  Response: Q4 assumes a slight decline versus Q3 (much smaller than a ~4% drop); the holiday period is a key inflection that will set outcomes through May.

• Question from Joshua Chan (UBS Investment Bank): Why does EBITDA guidance move down relatively more than revenue — what's driving margin deterioration in Q4?
  Response: Lower occupancy reduces revenue and operational leverage; more impactful is lower subsidy reimbursement rates in certain states (e.g., Indiana), which largely flow through to EBITDA and compress margin.

• Question from Faiza Alwy (Deutsche Bank AG): How much did subsidy changes impact the quarter/year, timeline for resolution, and what to watch for state actions?
  Response: Most states have set budgets; a handful made cuts (Indiana the largest impact); some states (Texas, Arizona) have since increased funding; management expects further clarity/positive moves into 2026.

• Question from Faiza Alwy (Deutsche Bank AG): On pricing for 2026 vs wage inflation — why expect higher pricing and can you preserve spread?
  Response: They target a 50–100 bps spread between tuition and wages and expect to maintain it in 2026; pricing will be set center-by-center based on engagement, occupancy and local competition while wages are being finalized.

• Question from Faiza Alwy (Deutsche Bank AG): Will the 50–100 bps differential be higher in 2026 or is higher wage growth driving pricing?
  Response: No direct one-to-one tie; management expects to preserve a 50–100 bps tuition premium over wages in 2026 and sets wages and pricing independently to achieve that spread.

Contradiction Point 1

Enrollment Trends and Economic Factors

It involves differing explanations for enrollment trends and their correlation to macroeconomic factors, which could impact the company's strategic positioning and investor expectations.

What are your 2026 enrollment expectations given the current weaker trend? - Yehuda Silverman(Morgan Stanley)

2025Q3: We continue to see improved performance from our center directors and district leaders. We believe that as consumer confidence returns, we will return to our historical growth algorithm. - [Paul Thompson](CEO)

What demand levels does the guidance account for, and how might it affect the rest of the year? - Ronan Kennedy(Barclays)

2025Q1: We're seeing week-on-week growth in enrollments, and we remain flexible to manage expenses and deliver profitable growth. - [Paul Thompson](CEO)

Contradiction Point 2

Subsidy Impact and State Budget Considerations

It involves the impact of subsidy funding and state budget considerations, which could affect the company's revenue projections and operational strategies.

What impact did subsidies have on the quarter and when is the resolution expected? - Faiza Alwy(Deutsche Bank)

2025Q3: Most states have already made budget decisions. Some states like Texas and Arizona plan to increase funding. - [Paul Thompson](CEO)

Are you assuming improved conversion rates in your 2025 guidance? - Jeff Meuler(Baird)

2025Q1: We are not yet aware of any material impacts from the government shutdown. As we previously stated, some states are starting to budget for the upcoming year, which could impact subsidy funding levels. - [Anthony Amandi](CFO)

Contradiction Point 3

Pricing Strategy and Market Dynamics

It involves the company's pricing strategy and its alignment with market dynamics, which are crucial for revenue projections and competitive positioning.

When do you expect to return to the long-term algorithm, and what are your pricing increase plans for 2026? - Andrew Steinerman(JPMorgan)

2025Q3: We believe pricing increases will be higher in 2026 compared to the 2% we ended 2025 with. We're finalizing private pay rates and aligning with local market dynamics. - [Anthony Amandi](CFO)

How much can you increase prices beyond the 3% to 5% range? - George Tong(Goldman Sachs)

2025Q1: We'll evaluate the need for in-year price increases, but our current pricing strategy focuses on maintaining the current approach with next price increases planned for January 1, 2026. - [Paul Thompson](CEO)

Contradiction Point 4

Enrollment Trends and Factors Affecting Enrollment

It highlights a shift in the company's perspective on the drivers of enrollment trends, which could impact investor expectations and strategic decisions.

What are your expectations for 2026 enrollment, given the current weaker trend? - Yehuda Silverman(Morgan Stanley)

2025Q3: We continue to see improved performance from our center directors and district leaders. We believe that as consumer confidence returns, we will return to our historical growth algorithm. - [Paul Thompson](CEO)

Can you provide details on recent enrollment trends, specifically the timing and reasons for the slower enrollment and the impact on different market quintiles? - Toni Michele Kaplan(Morgan Stanley)

2025Q2: The enrollment softening occurred during the summer, affecting new student enrollment rather than existing parents. - [Paul Thompson](CEO)

Contradiction Point 5

Subsidy Impact and Budgetary Decisions

It addresses the impact of subsidies on enrollment and budgetary decisions, which could influence revenue projections and operational strategies.

Can you clarify the subsidy impact on this quarter and the expected resolution timeline? - Faiza Alwy(Deutsche Bank)

2025Q3: Most states have already made budget decisions. Some states like Texas and Arizona plan to increase funding. We believe most states have worked through their budgetary issues. - [Paul Thompson](CEO)

How are enrollment trends differing between private-pay and subsidy students? - Unidentified Analyst(JPMorgan)

2025Q2: State governments continue to refine their budget approaches to reduce subsidy waitlists and increase tuition rates to compete with private pay rates. - [Paul Thompson](CEO)