-$1.42
$13.38
bear -$1.42
base $5.32
bull $13.38
margin of safety $1.75
market price* $1.77
Business condition attached to the margin of safety
Center-level cost growth must stop outrunning tuition growth: at least two consecutive quarters in which cost of services (before depreciation and impairments) is no higher as a share of revenue than in the same quarter a year earlier, and quarterly operating profit before impairments stops falling year over year.
KinderCare Learning Companies runs over 1,600 early childhood education centers (licensed capacity of about 215,000 children in 40 states and Washington, D.C.), about 1,150 before- and after-school sites under the Champions name, and 77 employer-sponsored on-site centers. Parents pay tuition, and about $1.0 billion of the $2.73 billion of fiscal 2025 revenue (37%) came from government child care subsidies, up from $796 million in fiscal 2023. Almost every center is leased, so rent, wages and health costs are the big expenses, and about 80 cents of each revenue dollar goes to running the centers before depreciation and overhead. What we measure. We start from cash generated by operations and remove three things: swings in working capital, stock-based pay (a real cost that the cash flow statement adds back), and the part of capital spending that only grows the business. Owner earnings per share on that basis were about $2.35 in fiscal 2022, $1.21 in 2023, a loss of $0.95 in 2024 and $0.90 in 2025. Those figures are not a stable run rate. Fiscal 2022 to 2024 were lifted by COVID-era government stimulus that offset costs ($181.9 million in 2023, $63.3 million in 2024, $0.7 million in 2025). Fiscal 2024 also carries a one-time $113.1 million stock compensation charge from the October 2024 IPO, and fiscal 2024 and 2025 include $23.4 million and $30.1 million of employee-retention tax credits that were booked as income without new cash. Because the business today has no stimulus and a different capital structure, we treat only fiscal 2025 as representative, after removing the $30.1 million credit, and we value the business before its lenders (adding back about $83 million of cash interest) and then subtract what it owes. On that basis fiscal 2025 produced roughly $158 million of cash before interest, about $1.33 per share. What has changed. That level is not holding. In the first half of fiscal 2026 revenue was flat ($1,370 million versus $1,368 million) while cost of services rose about 8%, and operating profit before impairments fell to about $45 million from about $121 million a year earlier, even allowing for the retention credits. Enrollment fell about 1.9% in fiscal 2025 (tuition rates rose 2.2%), wages, health insurance and rent keep rising, and stimulus is gone. Cash before interest in the first half of 2026 was about $52 million. Three consecutive weaker periods is enough for us to reset the starting level rather than assume a rebound, so we begin the base case at about $90 million a year, well below the fiscal 2025 level. Fiscal 2025 growth from the trailing year is not meaningful because fiscal 2024 was distorted by the IPO charge; our year-one assumption is a fall of roughly 43%, below the prior trend, and we know of no dated reason that would reverse it. Management's targets are not used. Write-downs. The company wrote off $178.0 million of goodwill in the fourth quarter of 2025, a further $273.5 million in the first quarter of 2026 and $22.9 million of other asset write-downs in the second quarter of 2026, and it is impairing leasehold improvements at more centers. Those charges are non-cash and are correctly ignored in the earnings level, but they are evidence that the acquired business is worth less than was paid and that some centers are underperforming, and we carry that in the cases rather than in the earnings level. What it owes. The company has a term loan with about $952 million of principal outstanding, due June 2030 (about $921 million comes due then), at roughly SOFR plus 2.75%, or about 7% today. There is also a $262.5 million revolving credit line that appears undrawn. Cash was about $174 million; we treat about $124 million as excess over what the centers need. Net borrowings are about $832 million, and because the loan costs about a point more than our 6% yardstick for the next four years we add about $36 million, giving roughly $868 million or $7.31 per share. Operating leases (about $2.4 billion of future payments) are already inside cash flow and are not subtracted again. A $50 million settlement of a civil action is offset by an equal insurance receivable and has no net effect; self-insurance reserves of about $121 million are a continuing cost we watch. Base case: $5.32 per share. The business is worth about $1.5 billion ($12.63 per share) if it produces about $90 million a year with no growth: tuition increases of about 2% a year are assumed to keep pace with cost inflation, but no recovery of margins, no share gains and no growth from new sites is credited because none of that has happened yet. Less about $868 million owed ($7.31 per share) leaves $5.32. Bull case: $13.38 per share. Cash before interest recovers to the fiscal 2025 level of about $150 million from 2027, after about $105 million in 2026. That level was actually achieved in fiscal 2025, so it is the company's own demonstrated earning power rather than a hoped-for windfall. Business value is about $2.46 billion ($20.69 per share) less the same $868 million owed, leaving $13.38. Bear case: minus $1.42 per share. Costs keep outrunning tuition, as they did through the first half of 2026. Cash before interest is about $75 million in 2026 and falls to $40 million from 2028, below the roughly $68 million annual interest bill. The business is then worth about $700 million ($5.89 per share) against about $868 million owed ($7.31 per share), so the company would owe roughly $168 million more than the business is worth, leaving nothing for shareholders. A lender-led restructuring, sale of assets or heavy dilution ahead of the June 2030 maturity is the likely route. About 37% of revenue depends on government subsidy funding, which sharpens this risk. What we credited and left out. We credited no growth in any case. Before- and after-school revenue grew 9.5% in fiscal 2025 and subsidy revenue 6%, but both are small against a cost base rising about 5% a year, so they were left out. We left out any margin recovery from center closures, price increases above cost inflation and cost programs because none is yet visible in reported results. What would make this wrong. The upside is a faster stabilisation of margins, since a $1 change in yearly cash flow per share is worth about $17 of business value. The downside is a further deterioration in enrollment or subsidy funding. We could not confirm from the available filings how much of the fiscal 2025 retention-credit income fell into each half of the year, so the first-half comparison is bracketed rather than exact, and the second-quarter 2026 report was available only as reported figures without the accompanying management discussion. The 53rd week in fiscal 2025 added roughly $63 million of revenue and flatters the year-over-year comparison slightly.