KinderCare’s learning curve
Services for working parents are day-care giant's bread and butter • The fast-growing caregiver expands into education services
KinderCare Learning Centers Inc. has discovered big profits in the worst headache that working parents suffer Ñ the search for dependable day care.
The Portland-based company's 1,257 centers raked in $743 million last year against competition ranging from the YMCA to family day-care operations.
Parents trust KinderCare staff to burp babies and soothe 5-year-olds. But with the Bush administration recently pushing through $500 million in funding for before- and after-school programs, KinderCare is scrambling to keep 10- to 15-year-olds occupied, too.
'We want to be positioned more as an education company,' said company spokeswoman Jill Eiland.
'Day care will be the focus, but where it makes sense to align ourselves with other education companies. There are opportunities for private companies to come in and augment these services.'
In the past year, the company bought KC Distance Learning and made minority investments in a charter school company, Massachusetts-based Chancellor Beacon Academies Inc., and an education curriculum developer, Voyager Expanded Learning Inc.
KinderCare has a team searching for other investment opportunities in education, Eiland said.
Few other competitors Ñ with the exception of Nobel Learning Communities Inc., a West Chester, Pa.-based company that manages 174 private and alternative high schools Ñ are pursuing the same strategy, said Jeff Silber, an analyst with Gerard Klauer Mattison & Co. in New York.
'Nobody has appeared on the radar screen that dramatically,' he said of KinderCare. The company 'is a little bit more aggressive than most. They are in a much better position with capital.'
Chief Financial Officer Dan Jackson acknowledged that KinderCare has been 'expanding at a fairly rapid pace.' Much of the financing for acquisitions and new construction came from its operations, leaving the company with negative cash flow. With a $100 million line of credit in place, Jackson said KinderCare's cash-flow problems would ease.
KinderCare's single biggest investor is Kohlberg Kravis Roberts & Co., the leveraged buyout king that Oregonians may remember from its $420 million buyout of Fred Meyer stores in 1981.
KKR, which paid $660 million for KinderCare in 1997 and shortly after fired its chief executive officer, is best known for buying and reselling companies at a steep profit.
Until KKR's appearance, KinderCare was a debt-laden company that had stalled its expansion after emerging from bankruptcy in 1993.
Keeping to the basics
For the quarter that ended in December, KinderCare reported a net income of $5.4 million on revenues of $192 million, up 15 percent from the same period the year before. The previous quarter saw the company's revenues bump up to $248 million after the purchase of 73 Mulberry Child Care Centers Inc. centers.
The company stock is traded over the counter, fluctuating from a 52-week low of $6 a share on Jan. 15 to a high of $30 on Jan. 7.
KinderCare isn't ignoring its bread and butter.
The company has been pursuing local and regional providers, buying Mulberry's centers in April 2001.
KinderCare also is stepping up its construction, from 22 centers last year to 35 this year, at a cost between $95 million and $100 million, CEO David Johnson told analysts two weeks ago.
KinderCare, which has 19 centers in Oregon, is increasingly looking to other financing options for constructing new facilities, including its so-called 'synthetic lease' plan. It allows for a third party to construct up to 44 KinderCare centers in the next three years.
A changed business
Over the past decade, the day-care business has moved away from a baby-sitting mentality toward educating kids. Much of the change is because of more moms in the work force willing to pay a premium tuition, more single-parent homes and more focus on the link between child care and school readiness.
Oregonians spent $5 billion on child care last year. That's brought a hungry Wall Street into education.
KinderCare's strategy of packing more children into its facilities is touching a nerve with critics of for-profit day care. More kids per building means more revenue, operating income and margins than KinderCare's older centers, according to its SEC filings.
The company's newest centers, such as the one on West Union Road in the Bethany area of unincorporated Washington County, are licensed for 180 children, up from 125 licensed in 1997, and have 25 to 30 teachers.
A study by Georgetown University professor William Gormley found that for-profit day care has lower staffing levels, poor training and more turnover than nonprofits.
'There is a danger that managers will resort to cost-cutting at the expense of children,' he said at the time of KKR's purchase of KinderCare.
Arlene Hett, director of teacher education at the University of Portland, said she does not see disparities in care between nonprofit and for-profit centers.
The price of tuition and quality of care are driving forces in selecting a center, said Chris Gangre, mother of 3-year-old Cole.
Gangre is looking into day-care options after learning that tuition at Children's World would increase March 11 by $60 a week, to $136. KinderCare increased tuition $8.72, or 6.8 percent, to $137.21 a week.
'I don't have any options and have to re-evaluate,' Gangre said. 'You don't have a lot of time to do that. For a working parent, this is the most frustrating thing.'