OneSpaWorld Holdings Limited

Moat: 1.5/5

Understandability: 3/5

Balance Sheet Health: 2/5

OneSpaWorld Holdings Limited is a global provider of health and wellness services and products onboard cruise ships and in destination resorts, with a focus on beauty, fitness, and wellness.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

OneSpaWorld operates a unique business model, primarily relying on partnerships with cruise line operators and destination resorts to provide onboard and on-site services and products.

Business Overview

OneSpaWorld operates through several revenue streams:

  • Cruise Line: This segment generates most of its revenue by providing a wide range of health, beauty and wellness services on board cruise ships. These include spas, hair and nail salons, fitness services, and retail sales of related products. The cruise segment is a crucial driver for the company and is susceptible to economic downturns and travel restrictions.
  • Destination Resorts: This segment includes wellness centers, spas and salons at land-based resorts and destinations. It contributes significantly to revenue but typically operates with lower margins.
  • Product Sales: The company also sells various products onboard and at destination facilities. These products include skin care, wellness supplements and other related retail items. These products typically earn high margins for the company but form the smallest part of the revenues.

The company’s competitive landscape is complex. The on-board cruise operations have very little competition as they hold long term, exclusive partnerships with major cruise lines. At the same time, the resort based operations face competition from well-established hotel and retail brands.

While OSW has a diverse range of service offerings, its core business comes from its cruise and resort based spa operations, both being capital intensive operations.

Competitive Landscape and Moat Analysis

OSW has long-term exclusive partnerships with major cruise lines, which act like moats and create high barriers to entry for competitors in that market, however there is no real switching costs for the cruiselines.

  • Intangible Assets (Weak Moat): The company relies on its brand reputation, especially in luxury services. However, this is often highly correlated to the quality of service and can be susceptible to change. The brand has not proven a significant differentiator from competitors.
  • Switching Costs (Moderate Moat): The switching costs for their cruise line partners are moderate, since there are no real costs for the cruiselines, they can replace OSW if another firm offers a better value. The cruiselines also have significant bargaining power, which can reduce OSW’s pricing power. This means that there are few switching costs on paper but in reality replacing is not easy due to the company’s reputation and years of service provided, creating a small friction to switch. The switching costs for individual customers are low, as they can switch between spas, resorts, or products quite easily.
  • Network Effect (Negligible Moat): There’s little evidence of a network effect, as customer usage does not attract further customers on a massive level. Word of mouth for a good experience may bring repeat customers.
  • Cost Advantages (Negligible Moat): The company’s business model, which relies on long-term exclusive contracts does not offer significant cost advantages. It needs to operate in facilities already built and does not have much economies of scale to exploit.

Moat Rating: 1.5/5 Given all that, the company has a weak moat. The company’s reliance on its partners makes it too exposed to their pricing power. The partnerships are not a strong moat, as they provide very few switching costs from the POV of their partners.

Legitimate Risks and Resilience

  • Economic Downturn: The company’s reliance on travel, especially cruise lines, is a major vulnerability. Economic downturns can cause people to reduce their discretionary spending, directly impacting demand for cruise and resort services.
  • Travel Restrictions and Disruptions: Travel restrictions imposed by any pandemics or any other reason could negatively impact performance.
  • Dependence on Partnerships: OSW’s revenues rely heavily on continued partnerships with cruise lines and resorts, and the company has little or no control over those clients. Changes in contract terms or the loss of a key customer may have dire consequences.
  • Pricing Power: The company’s pricing power is limited. Cruise and resorts have large bargaining power and will likely take all the profits and not share them with the company.
  • Competition in Destination Resorts: The land-based facilities are susceptible to heavy competition and the loss of any location can hurt revenue.
  • High Operational Costs: The company’s business model, which is capital intensive, can be vulnerable to higher operational costs.
  • Limited Product Differentiation: There are plenty of different spas, resorts, and products that offer the same services. If OSW cannot compete with pricing, it may lose to these competitors.

The resilience of the company stems from its long-term contracts, which can help it during periods of lower revenues. In addition, the unique relationships it has, gives it an edge compared to competitors, even if the moat is weak.

Financial Analysis

  • Revenue: Revenues have been quite volatile because of the Covid-19 pandemic. For fiscal 2022, OneSpaWorld reported revenues of $522.9 million, an increase compared to the prior year. Cruise revenue was the largest source of revenue, at $349.4 million, an increase compared to 2021’s $45 million, a jump of 669%. Destination resort revenue totaled $109.7 million, and product sales totaled $63.8 million.
  • Profitability: The profitability is dependent on both the sales and expenses. Operating profit was significantly higher, at $37.4 million, versus a loss of $127.8 million for fiscal 2021, driven by the recovery of cruises and cost reductions.
  • Cash Flow: The company’s cash position was $45.9 million in 2022, an increase compared to the prior year’s $11.7 million, mainly due to the improvement in cash flow from operations and the issuance of new shares.
  • Debt: The company has a lot of long-term debt of around $153 million as of 2022.

The pandemic caused severe impact to the financials. The company’s revenues from cruise business were reduced considerably during 2020 and 2021.

OneSpaWorld needs to prioritize debt management and improvement in profitability to maintain a long-term stable position. Also it’s crucial for the company to reduce dependency on its cruise line partners and improve revenues from other business segments like destination resorts and product sales.

Understandability

Understandability Rating: 3/5 While the general concepts behind spas, health, and retail products are easy to grasp, some complexities emerge when trying to comprehend the business structure of the company and its financials. The reliance on long-term contracts with cruise lines, and its expansion to resorts and other products require a moderate level of understanding, warranting a 3 out of 5 for understandability.

Balance Sheet Health

The company’s liabilities greatly outweigh the assets, a sign of concern. As of 2022, it has $103.4 million in current liabilities and $679 million in long term liabilities, compared to total assets of $717.8 million.

Balance Sheet Health Rating: 2/5 The high debt level, coupled with volatile earnings due to market and competition, makes its balance sheet health questionable and worthy of a 2/5.

Recent Concerns

  • In the Q3 2023 earnings call, the CFO admitted that the company’s credit rating was under review due to the leverage.
  • The company mentioned a continued delay in the restoration of staffing and service levels. This has been leading to inconsistent financial performance.
  • In the same call, there was mentioned a substantial increase in interest expense during Q3 2023 because of increased market interest rates.

The management believes the current business conditions are only temporary and should improve in the future. Management said that the higher costs are going to be covered through higher margins. But these are all claims without any historical data to back up these claims. They are also hoping a change in cruise behavior from customers could improve the overall business position.