KLC earnings call transcript, November 12, 2026

Welcome to KinderCare's third quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speech.

There will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone. If you would like to withdraw your question, press star one again. It is now my pleasure to introduce Olivia Keir, Kinder Cares VP of Investor Relations. You may begin the conference.

Thank you and good afternoon, everyone.

Welcome to Kinder Cares 3rd Quarter 2026 Earnings Call. Joining me from the company are Chief Executive Officer Tom Wyatt and Chief Financial Officer Tony Amandie. Following Tom and Tony's comments today, we will have a question and answer session. During this call, we will be... discussing non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and within the supplemental earnings presentation. Both of which are posted on our investor relations website at investors.kindercare.com. A reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and involve a number of uncertainties and risks, which are explained in detail in the risk factors section of our most recent annual report on Form 10-K and other filings with the SEC. Please refer to these filings for a more detailed discussion. of forward-looking statements and the risk and uncertainties of such statements. The actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. All forward-looking statements are made as of today and except as required by law, KinderCare undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

I will now turn the call over to our Chief Executive Officer, Tom Wyatt.

Thank you, Olivia, and good afternoon, everyone. Third quarter revenue was $665 million as enrollment pressure in the KinderCare brand was partially offset by continuing... ...growth in Champions, which delivered its fifth consecutive quarter of double-digit revenue growth. CRIM continued to build on the progress we've seen throughout the year. We're investing to capture the long-term growth opportunity we see... ...Kendicare for employers, and we have made additional progress on our planned footprint optimization. Starting off with KinderCare, our largest brand, back-to-school enrollment fell short of our expectations. While inquiries... From perspective families are up year-to-date, we haven't been converting enough of that interest into enrollment. As we reviewed performance across our centers, it became clear that we could bring greater consistency to how we approach enrollment and family engagement. During the... the last quarter, we made a leadership change in the KinderCare brand, naming Chesley Escobedo to lead the business. Chesley has a proven record of successfully driving growth within our organization and has been given a clear mandate to drive performance across our centers. We also streamline the organization through additional field leadership changes and reductions in corporate and support roles. Together, these changes are designed to strengthen accountability, speed up decisions, and better align our support team.

Thank you, Tom.

I'll start with our third quarter financial results, provide an update to our optimization. work, and then I'll discuss our outlook for the remainder of 2026. Third quarter revenue was $665 million, a decline of 1.7% from $677 million last year. Lower enrollment across our KinderCare centers continue to pressure revenue, partially offset by growth in Champions, along with contributions from small group enrichment and newer centers. Average weekly ECE enrollments declined approximately 6% for Q3 compared to the prior year, including a negative impact of approximately 190 basis points from center closures as part of our footprint optimization. Same center revenue declined approximately 20 million or 3.2% primarily reflecting lower enrollment at our existing centers. The decline included approximately 21 million in lower revenue from centers operating in both periods, along with the 12 million impact from center closures. These decreases were partially offset by approximately 13 million in revenue from newer and acquired centers entering the same center cohort. Same center occupancy was 63.8% in the third quarter down 320 basis points year over year. Our optimization work provided a benefit of approximately 150 basis points for the quarter. As we assess the performance of our remaining portfolio, we're looking for progress on two fronts. Growing enrollment, which drives revenue, and improving occupancy.

Which reflects how we effectively work utilizing our center capacity. Pricing contributed approximately 2.8% to ECE revenue performance during the quarter, in line with our expectations. Turning to other components of our revenue performance, Champion. Pricing contributed approximately $8 million in year over year revenue growth. Importantly, that growth reflects both higher enrollment in existing programs and the additions of new sites. We're encouraged by the opportunities in KinderCare for Employers. A growing pipeline of employer-sponsored centers provide visibility into future expansion, while tuition benefit offers another way to connect families with our existing KinderCare centers. We've recently expanded our investment in B2B sales and client success capabilities to support both opportunities. And we believe these investments will help KinderCare for Employers become an increasingly important contributor to our long-term growth. During the quarter, we opened six new centers and acquired three additional centers. Cash considerations for the acquisitions was approximately $764,000 net of cash acquired. New and acquired centers have contributed approximately $20 million in revenue so far this year. Turning to the financial impact of our footprint optimization, we estimate the center closures will result in revenue headwind of approximately $32 million for 2026. We also estimate the closures will provide a benefit of approximately 150 basis points to the same center occupancy for the full year. Looking at the ongoing financial impact based on the work completed to date, we estimate an annualized benefit to adjusted EBITDA of approximately $2 million.

$10 million, mainly comprised of lower rent expense associated with leases that have definitive termination dates. For this year, cash impacts from the lease terminations are expected to be $15 to $17 million. We also expect an additional $8 to $10 million impact in early 2027 for leases terminated related to the closures completed this year. Although our plan center closures are nearing completion, we still have work ahead to resolve the associated lease obligations. We currently expect approximately $10 million in dead rent. associated with 2026 closed centers to carry into next year. We've engaged a third party firm to help negotiate additional lease terminations with the goal of reducing those remaining obligations where it makes financial sense. As we did last quarter, we've included a slide in our supplemental earning materials. Outlining the impact of center closures completed to date and our expectations for the remaining work this year. Turning into profitability, we reported a net loss of $85 million, or $0.71 per share, compared to net income of $5 million, or $0.04 per share, in the prior year quarter. The year-over-year change was primarily driven by higher non-cash impairment losses, including goodwill impairment triggered by the decline of our stock price, as well as impairment related to closed and underperforming centers. Adjusted net loss was approximately $3 million, or $0.03 per share.

compared to adjusted net income of $15 million, or 13 per cents per share, in the prior year quarter. Adjusted EBITDA was $43 million, compared to $66 million in Q3 last year, primarily reflecting lower enrollment and the resulting operating deleverage in our ECE business. This quarter's results include approximately $3 million in severance expenses associated with the organizational changes Tom discussed earlier. These costs are included in G&A and were not added back to adjusted EBITDA. reducing the reported result by the full amount. As Tom discussed, we're taking a disciplined approach to managing expenses while making targeted investments to improve enrollment performance. We're also making deliberate staffing decisions that balance labor costs. with maintaining the capacity to welcome new families and deliver a quality care they expect. SG&A was 10.9% of revenue compared to 10.8% in the prior year quarter. While expenses declined slightly in absolute dollars, the lower revenue based resulted in a modest increase of the percentage of revenue. Lower incentive and stock based compensation expenses helped reduce SG&A during the quarter. Those savings were largely offset by ongoing rent and other property related costs associated with the remaining lease obligations at closed centers. As well as severance expenses I mentioned earlier. Interest expense declined to $18 million from $24 million a year ago. Turning to the balance sheet, we ended the quarter with $143 million in cash and $188 million of available

capacity under a revolving credit facility. We've generated approximately $20 million of free cash flow year to date while continuing to take a disciplined approach to capital spending and investment priorities. Net debt to adjusted EBITDA was approximately $3.5 million. five times, reflecting lower earnings and reduced cash balance, including costs related to our optimization plan. As we discussed last quarter, we expect leverage to remain elevated through year end as we complete the remaining closures and continue working to resolve the associated lease obligations. While the closure will be completed this year, we expect the lease resolution process to continue into 2027. Termination payments will continue to affect near term cash flow and we've reflected the anticipated 2026 impact in our updated free cash flow outlook. Turning to our updated financial outlook for the remainder of 2026, we now expect revenue between $2.64 and $2.66 billion, adjusted EBITDA between $190 and $195 million, and adjusted EPS between $0.02 and $0.04. The reduction in our outlook primarily affects enrollment performance during the third quarter that fell short of our previous expectations and the resulting impact on revenue and profitability. While enrollment trends have improved in the fourth quarter, that timing improvement limits contribution to our full year results. Looking at the revenue growth assumptions, we expect occupancy to be a headwind of approximately 2.5% for the year. Because our optimization work has reduced capacity and benefit to report occupancy, enrollment occupancy have diverged more.

than they typically would. As a result, we expect lower enrollment to represent an additional headwind of approximately 1.5%. We expect tuition to contribute approximately 2.5%. We are maintaining our expectations for champions in B2B. to contribute approximately 1% to revenue growth, with new center openings and acquisitions, each contributing in approximately 50 basis points. We continue to expect center consolidations represent approximately a 1.5% headwind to revenue growth. Finally, the absence of the 53rd week, the benefit revenue last year represents approximately a 1.5% headwind. We expect capex for the year to total 120 to 125 million dollars. Free cash flow expected to be less than 10 million dollars. including the elevated cash costs associated with optimization work. For modeling purposes, assume an effective tax rate of 3% for the year. Our updated guidance reflects our latest expectations for the fourth quarter, including improving enrollment trends we observed through October. These are the progress we've seen in the recent weeks, and while we're taking a measured approach to its financial contribution for the remainder of this year, those trends give us greater confidence in our starting position for 2027. Before closing, I want to reinforce some of the key messages Tom shared earlier. We've taken decisive steps to strengthen our growth. accountability, improve execution, and drive better enrollment performance.

We're backing those actions with deliberate investments in our people and capabilities, including in B2B, curriculum, and enrollment. Importantly, we're beginning to see results. The improvement in our recent enrollment trends gives us greater confidence in the actions we've taken and the direction we're headed. With more work ahead, we're focused on sustaining that progress and entering 2027 on stronger footing. With that,

let's open the line for questions. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your next question comes from the line of-

Well, I am still curious about this line in the press release that, you know, since the end of back to school, new enrollment have outpaced the same period last year, though- Overall enrollments remain below last year. I just want to understand what the word overall enrollments mean. Is that after closures or is this existing, let's say, remaining centers, and then if it's remaining centers- don't those remaining centers somewhat benefit from repatriating families from the closed centers? Yep, good question, Andrew. Let me see if I can explain a little bit. So first, let me take your last question. We always hope to maintain- and retain as many of those families at centers as we can. I know you've heard from us in the past when we did some of our closures years and years ago. So many of our centers were overlapping that we retained a really high percentage of them. I guess, unfortunately, in this moment, not as many centers were as close to each other. So it was harder to take those children into other magnet centers as much. We still did a nice job and tried to maintain as many as possible. So there's. A little bit of that in the hundreds of students that we were able to kind of maintain from those 85 centers. What we mean by that statement Andrew about coming out of back to school was we're trying to be clear that we're seeing. better new student enrollments so new students joining us after back to school kind of through the holiday season than the new students that joined us last year. However also trying to be very clear that our.

Total enrollment is still below last year, so we have not broken through to that. So we're trying to explain those two things in that one sentence and that might have been what the confusion was in Andrew, just to add on to that we. What I tried to say relative to the difference in that, the growth that we've seen post back to school has increased or decreased the deficit of children we had up to year to date from over 5%. to 3%. So that was a 200 basic points that I refer to. OK, still behind, but but gaining on it. OK, thank you.

Thanks, Andrew.

Your next question comes from the line of Manav Patnik of Barclays. Your line is open. Please go ahead.

Your next question comes from the line of Jeff Silber of BMO Capital Markets. Your line is open. Please go ahead.

Your next question comes.

Hi, good evening.

I guess your comment about the. 200 basis points narrowing that you've seen since back to school. I guess like what period are you defying that as? Because it seems like a very short period of time to have such large improvements. So I just want to make sure, you know, and. Thinking about that, right? And then, you know, how are you? What are you attributing the sudden really sudden change in the trajectory of things? Yeah, let me talk about the numbers a little bit and I can talk about some of the things we're doing. Tom might want to add on here, so. As we look at that 200 basis points that we're seeing right now, we're looking at coming out of back to school, which is, call it around mid-September, I won't get in our week numerals with you, mid-September, and that's as we look forward into our system right before the holidays. So, we've talked about technology and stuff with you in the past. One of the great things about one of our technology ads is the visibility that I have, Tom has, our field leaders have in our expected enrollments in the future. So those are enrollments that we know they've paid their deposits and they're enrolled in a certain week. We also do a nice job of taking out anyone that we know might be leaving us also. So we're looking forward to right before the holidays and seeing that improvement. continue to grow week over week as we look out to that. And that's where you can hear that we're encouraged by the trajectory we're going to take into next year with as we sit today. And there's opportunity for that to move even up as we kind of get even closer to the holidays. So that's where that.

coming from, not even necessarily a forecast. Those are the children we know are going to be with us. And you're right to say thanks Tony. You're right to say it's significant. That's what's encouraging to us. We're talking about thousands of children in the last six to seven weeks that we did not see through the trajectory of back to school that have come after back to school to. Our company and specifically to kind of care alone and candidly, we've seen increases enrollment in our other business as well. So all in all, we've had a we've had a strong post back to school in early fall. session, which is very, very promising to us. Yeah, that makes a lot of sense. But thank you. And then maybe if I think about, you know, your your EBITDA guidance for May 26. And maybe this is a Tony question, I guess, like, what are the pieces, as we think about 27 EBITDA, you know, I know that you won't give that Roman assumption, but, you know, just kind of like, what are the known pieces, you know, as think about how 26 EBITDA would translate into 27 EBITDA. Thank you. Yeah, you bet. Yeah, I mean, Josh, as I think about it, right, the biggest driver that we've talked about all year, and frankly, we'll continue to talk about it next year, too. is going to be about that FTE enrollment, right? And so the encouragement you just heard from Tom is going to be a big driver of how we start the year, and we'll have pretty great visibility as we start the year coming out of the holidays all the way through Memorial Day. And so that will be great.

for us to share with you in March on how those FTEs are going, because those FTEs are not only is it revenue, but as you've heard from us this year, the impact on our operating leverage is just so significant with the level of occupancy we're at right now that turning that back up and getting back above last year and then getting back to where we were eventually over the short and short medium term will allow us to get a lot of that leverage back, which will flow through down to EBITDA even more. And then you also probably read and we commented also in our prepared remarks, but we're being really conscious about where we're spending money. So we did some changes in GNA and had some severance related to that here in the third quarter as we're being thoughtful. to where we're spending money here at our NSC and in the GNA to support it. And then we're also making some some investments, not as much as we took out of the business in things like curriculum and things like our B2B group. But to drive that. So those are the other ones, I think, for you to watch.

Thanks for the time.

Thanks, Josh.

Your next question comes from the line of George Tong of Goldman.

There are no further questions at this time. I will now turn the call back to Tom Wyatt for closing remarks.

Thanks, Ben.

This concludes today's call.

Thank you for attending.

You may now disconnect.