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KinderCare Learning Companies (KLC) is experiencing a steep selloff despite beating 1Q25 EPS expectations and reaffirming FY25 guidance, underscoring investors' concerns beyond the main headline numbers. While the EPS beat was positive, sluggish revenue growth, enrollment trends, and a cautious outlook are likely sources of disappointment. Higher tuition rates (+6% in recent quarters) implemented to offset inflationary pressures and rising labor costs, in addition to cost containment efforts, are bolstering KLC's earnings, but also played a role in same-center occupancy rates dipping by 50 bps in 1Q25.

• Adjusted EBITDA grew by a healthy 12% yr/yr to $83.6 mln, driven by pricing adjustments at educations centers and a decrease in SG&A expenses as a percentage of revenue to 10.7% from 13.8/% in the year-earlier period. One of the more notable factors underlying KLC's cost containment efforts is the reduction in cost reimbursements from COVID-19 stimulus programs. In Q1, reimbursements related to COVID-19 stimulus was less than $1.0 mln compared to nearly $19.5 mln in the year-earlier period.
• Operational efficiency via optimizing center utilization and reducing non-volume related expenses has also been a cornerstone of KLC's cost containment strategy. Although these factors contributed to the solid EPS beat, soft demand-oriented metrics are raising concern among investors.
• The childcare industry faces demographic challenges, including declining birth rates, which could limit enrollment growth, and regulatory uncertainties, such as potential changes in federal childcare subsidies or state-level policies. Macroeconomic factors, such as inflation and interest rate fluctuations, also pose risks, particularly for a company reliant on both organic expansion and acquisitions. These issues were evident within KLC's Q1 results, such as a slight decrease in enrollment.
• Revenue from early childhood education centers increased by 1.6%, of which approximately 2% was from higher tuition rates, partially offset by slightly lower enrollment. KLC's Q4 earnings report, released on March 20, noted similar trends, with CEO Paul Thompson emphasizing the company's strategy to grow market share despite industry headwinds. The company's expansion strategy, including opening five new centers and completing five acquisitions in 1Q25, was aimed at offsetting these pressures, but the immediate impact on enrollment appears to have been limited.
• Despite topping Q1 EPS expectations, KLC opted to reaffirm its FY25 guidance, reflecting a cautious outlook amid several headwinds. The reaffirmed guidance, while within expectations, may have failed to inspire confidence, especially given the stock's recent volatility and the industry's competitive dynamics.

The sharp selloff in KLC following its 1Q25 earnings report can be attributed to concerns over revenue growth and enrollment trends, despite the company beating EPS expectations and reaffirming its FY25 guidance. The reaffirmed guidance, while consistent, may have disappointed investors by highlighting ongoing headwinds such as demographic shifts, regulatory risks, and macroeconomic uncertainty. A rebound in the stock is possible if KLC demonstrates stronger-than-expected enrollment growth or operational efficiency in subsequent quarters, particularly given its expansion into Idaho.