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While not unwarranted, there is currently plenty of fear in the market when it comes to how well the consumer is holding up with oil trading at over $100/barrel, diesel making new highs, the 10Y rate above 5%, and nothing seemingly getting better in people’s lives to make things more affordable.

This has made consumer discretionary stocks sink this year, as many investors have tried to rotate out of these names by front-running an impending doom. For most investors, they’ve been right. Looking at the XLY (S&P Consumer Discretionary ETF) return YTD against the SPY, the performance speaks for itself.

But we’re here to talk about a part of the consumer discretionary market that has produced more attractive entry points under this administration when fear reaches local highs.

We think the administration has once again potentially given investors an attractive opportunity in OneSpaWorld (OSW), largely because the market misunderstands its business model.

Disclaimer: Cedar Grove Capital Management (CGCM) is long OneSpaWorld (OSW).

For those of you who don’t know, OneSpaWorld (OSW) is an asset-light spa operator that almost exclusively works with the cruise line industry to run its onboard health-and-wellness centers on its various branded ship lines. As of the last quarter, it operates on 208 ships and 25 resorts, with notable brand names like Carnival, Royal Caribbean, and Norwegian.

It’s asset-light because the cruise lines build out these spas and wellness centers, and OSW receives the exclusive right to operate the onboard health, wellness, fitness, and aesthetic facilities and sell complementary products.

The cruise partner retains an agreed share of gross receipts (upwards of 50%); OSW records the customer revenue and records the cruise-line share, employee costs, consumables, and related operating costs within the cost of services or cost of products.

In a nutshell, the cruise lines build it, and OSW runs it for them for a rev-split agreement. That’s the 50,000 ft explanation, and it’s truly that simple.

To add more context for the opportunity, last year, we published a deep dive into why we went long the stock after Liberation Day in our post titled “When Misunderstandings Create Opportunities.”

In an effort to reduce redundancy, we’ve included the main points of that deep dive below, but we highly encourage you to read that piece before going into the rest of our note so you aren’t lost. It’s free, informative, and sets the stage further for why OSW.

*Note: Operating cash flow is more volatile than EBITDA because working capital can move significantly with inventory loading and the timing of commission payments to cruise partners.