KinderCare just became a public company. Can it fix the childcare shortage?
Early childhood education provider KinderCare (KLC) hit the public market on Wednesday. The IPO came at a timely moment as the high cost of childcare has gained attention ahead of the US election.
KinderCare, the largest private provider of early childhood education, debuted under the ticker “KLC” on the New York Stock Exchange at $24 per share. The price was at the low end of the expected range of between $23 and $27 and valued the company at $2.75 billion.
KinderCare stock climbed 16% in its first trading week to settle at $28 as of the close Friday.
CEO Paul Thompson told Yahoo Finance that the company was “really pleased” with where it was at and said it was “focused on the long term,” with growth ahead for the organization.
Wednesday marked the second time the company sought to make a public debut; it had previously pulled back IPO plans in 2022. Following the IPO this week, the Swiss private equity firm Partners Group still maintained a controlling interest in the company, owning roughly 70%.
KinderCare brought in $2.5 billion in revenue, $102.6 million in net income, and $266.4 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in fiscal year 2023.
The company plans to use the proceeds to pay back debt. As of June 29, the company had $1.5 billion in outstanding debt, plus $104.2 million available for borrowing under its credit facilities and outstanding letters of credit of $55.8 million.
“Most of [the IPO proceeds are] going to paying down debt,” Thompson said. “That was an interest of ours to get our leverage where we wanted it to be in a public market.”
Despite the favorable reaction in its first week as a public company, not all investors are sold on the stock.
New Constructs founder and CEO David Trainer is skeptical about KinderCare, telling Yahoo Finance over the phone that investors should “wait it out at a minimum,” but they “probably never want to be in this.”
“It appears to be quite unprofitable and very expensive stock as well,” Trainer said, raising concerns over the amount of outstanding debt the company holds. “We’re seeing a very highly indebted business … It looks like a private equity bailout.”
The competitive landscape in childcare
According to S&P Global Ratings senior analyst Carlee Martineau, all childcare providers have benefited from increased occupancy due to high demand for day care and backup care.
KinderCare is the largest private childcare provider in the US, with 2,000 early childhood education centers that create the capacity to care for over 200,000 children. Thompson noted there’s a “lot of opportunity” for KinderCare to serve more families beyond the 40 states and District of Columbia, where it operates today.
However, the childcare company faces plenty of competition from local community organizations providing daycare and others in the public market.
Michigan-based Learning Care Group is the second-largest provider, with a capacity of 160,000, per S&P Global Ratings. It is followed by Bright Horizons Family Solutions (BFAM), which has the capacity to serve approximately 115,000 children across 1,032 care centers.
Childcare costs have soared in recent years. The cost of day care and preschool is up 6.2% year over year, according to the latest Consumer Price Index, and the Department of Labor recently estimated that childcare costs account for roughly 8% of the median family income.
Yet, due to necessity, the demand in the US remains “supported by favorable economic and demographic trends, such as an increasing number of dual-earner households that require childcare services,” an S&P Global Ratings note to clients said. S&P analysts added that there is an “increasing recognition of the importance of early education,” yet there is a “substantial shortage of child care capacity.”
“Affordability is definitely a challenge because, with a good day care center, it could be $500 or so a week to send a kid there,” UBS analyst Joshua Chan said. “It is a higher-ticket item, and so most day care chains likely gear toward the higher income demographics.”
Day care is ‘bipartisan’
The looming presidential election has drawn a spotlight on the industry and its vital role in the US economy.
Several experts, analysts, and economists Yahoo Finance spoke to highlighted the ripple effect of a robust childcare network on employment and long-term household income.
Childcare is the “backbone” of the economy, Wellesley Centers for Women senior research scientist Wendy Wagner Robeson said. “If we want our economy to grow and thrive, then you have to have childcare, because if you want men and women and people to work in your economy, you cannot leave those babies home alone.”
As Yahoo Finance’s Ben Werschkul reported, Vice President Kamala Harris outlined a plan to cap the cost of childcare at 7% of working families’ incomes and proposed a new $6,000 tax credit for the first year of a child’s life as part of her cost-of-living plan.
Donald Trump is also considering an expansion of the child tax credit, according to sources, though details from his campaign remain scarce. During his time in office, Trump doubled the tax credit from $1,000 to $2,000 per child.
Yet, KinderCare’s Thompson said he isn’t expecting the election to affect the business, as the day care industry is “bipartisan.”
If anything, large players like KinderCare are expected to benefit from the expiration of American Rescue Plan Act (ARPA) funding, while smaller providers could face an even tougher challenge. S&P said it expects consolidation among childcare providers to increase over the next 12 months.
“The COVID relief funding that has really helped the industry for the past couple years is rolling off,” S&P’s Martineau said. “We are expecting, in our base case, that there will be some strain for the smaller childcare operators and that these larger operators could potentially acquire additional childcare operators to help grow their base.”
“If you want a thriving economy, you need to have parents being able to go back to work. Parents need to know their child is in a safe and nurturing environment,” he said.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].
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