ADAIRS LIMITED — Investor Presentation 2021

Nov 24, 2021

Adairs Limited Acquisition of Focus on Furniture Investor Presentation

25 November 2021

1

Transaction overview

Adairs has agreed to purchase Focus on Furniture, a vertically integrated omni-channel furniture designer and retailer operating in Australia.

• Transaction ▪ Adairs has agreed to acquire 100% of Focus on Furniture (“Focus”) for an Enterprise Value of $80m on a debt free basis

• Consideration comprises cash ($74m) and Adairs shares ($6m) issued to the majority shareholder and Focus CEO, Rob Santalucia

• Focus will continue to operate independently of the Adairs business, with its existing management team continuing under new contracts

Strategic rationale

  - Strategic fit for Adairs within the Home category, with attractive growth potential:

     - Strongly profitable furniture retailer with revenue of $150m+ in Australia (FY21) through a network of 23 stores and a small but growing online channel

     - Growth opportunities across store roll out, online growth and category/range expansion

     - Vertically integrated, omni channel furniture and bedding retailer, operating in close adjacency to Adairs’ existing businesses

     - Complementary customer/product overlap; opportunities to leverage strengths in store expansion, product development and last mile delivery capability

     - Significant operating infrastructure, management experience, store and supplier network, passionate team and established brand

     - Increases the Group’s exposure to the bulky furniture category (an $8.3b+ market)

     - Established operating infrastructure, capable management team, supplier base and store network from which to build out a national omni-channel business

     - Further develops the Group as a leading homewares and home furnishings omni-channel retail group operating across Australia and New Zealand

• Funding ▪ Consideration of $80m to be funded through: – $74m of debt (new and existing facilities)

• –

• ▪ Increased facilities expected to remain comfortably within existing covenants; leverage ratio to remain below 1.2x

   - a placement of c.1.71m Adairs shares (~1.0% of ADH) to Rob Santalucia at $3.51 per share ($6m), escrowed until the release of Adairs’ FY23 results
  

  • Effective from 1 December 2021

• Acquisition ▪ Equates to an EV/EBIT multiple of 2.4x FY21 actual EBIT ($32.8m) metrics and ▪ The acquisition is expected to:

• financial impact

   - be immediately EPS accretive
  
   - deliver pro-forma double-digit EPS accretion[1] in FY23 (first full year of ownership) and beyond
  

  • No change to Adairs’ dividend payout policy (65%-80% of net profit after tax)

Notes:

1. Based on Adairs assessment of Focus’ FY23 contribution and current Adairs Group FY23 business plan (pre-AASB 16 adjustments).

2

Focus overview

Focus is a vertically integrated, omni-channel furniture and bedding retailer targeting the Australian middle market.

Overview

• Omni-channel retailer operating 23 stores with a small but growing online channel

• Offers a collection of well designed, functional and on trend home furniture and bedding

• Vertically integrated

• All product design and development done in-house (Melbourne)

• Long-standing manufacturer/supplier relationships (SE Asia)

• Targeting 'on trend' middle market customers who focus on quality at a good price

• Head Office and main warehouse in Melbourne, with smaller supporting warehouses in Sydney and Adelaide

Sales and EBIT

• Focus has a solid sales and profit track record

• FY21 saw a 52% increase in sales and 325% increase in EBIT over FY20 driven by Focus capitalizing on the impact of COVID-19

• Adairs estimate that a sustainable earnings base for FY21 after normalizing for the impact of COVID-19 to be sales of ~$125 million and EBIT of approximately $12-14 million (pre-AASB 16)

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Historic Sales and EBIT (FY19-FY21)

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154
COVID-19
supported
trading period
101
96
42
32.8
10.1
5.7
FY19 FY20 FY21
Sales EBIT
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Source: Focus, Adairs

Estimated sustainable FY21 earnings base[1] of ~$125 million and EBIT of approximately $12-14 million (pre-AASB 16)

Notes:

1. After normalizing for the impact of COVID-19

3

Strategic alignment

The Focus business model is a strong strategic fit with Adairs. The acquisition expands the Group’s presence in home furniture, transforming the Group into a broader portfolio of attractive businesses all targeting the Australian home furnishings and furniture middle market.

Business model alignment

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Adairs Group brand principles

Direct to consumer brand via Focus deals direct with consumers exclusively owned channels through its own channels Omni-channel Focus operates 23 retail stores with a small but growing online channel

Vertical supply chain model Focus controls its entire product lifecycle which allows it to offer a value for money proposition while retaining strong margins

In-house design and Majority of products are designed and development of exclusive and sourced by Focus. differentiated products

High service, customer focused Customer-centric culture and store environment

Quality on-trend everyday Well designed quality product at reasonable product at great value prices for all Australians Majority ownership and control Adairs will have 100% ownership and control from Day 1

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The opportunity

Focus has an attractive growth profile supported by a clear set of initiatives. We see potential sales of $250m+ within 5 years.

Large market

The Australian home furniture market is c.$8.3b. Focus is a small player in a large market with significant opportunities for growth driven by an omni channel approach

Growth initiatives

Store rollout

Online growth

Brand awareness

In-store experience

Range expansion

Focus has 23 stores today (15 The online channel is quite new Historical reliance on store With only a modest investment Opportunity to widen range in in Victoria). National furniture for Focus and has performed location to attract customers we see a clear opportunity to occasional furniture and use businesses have 50-60 stores strongly to date with little with minimal investment in enhance and differentiate the Adairs to support relevant and we see the potential to investment. Investment in the marketing and brand awareness. in-store customer experience. decorator items within Focus operate 50-60 profitable Focus digital platform and team will stores, before building out other stores across Australia. accelerate online growth. categories.

Our Omni-channel model

Omni-channel furniture retailers are best placed to win the category as most people place high importance on physically feeling and seeing the product. They also value a multi-channel process of discovery and making their house a ‘home’. Integrating both channels means Focus can create a differentiated customer experience and a strong competitive advantage. Adairs’ omni-channel experience will support Focus’s growth in both stores and online.

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Lar e market with cate or rowth o ortunities g g y g pp

The Australian home furniture TAM is c.$8.3b. Focus is a small player targeting the key middle market home furniture categories – Lounge, Bedroom and Dining – with clear opportunities for range expansion (e.g. Outdoor, Home Office, Storage).

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$13.3b Australian
Furniture Market Product Range
Outdoor
5% Mattress
Lounge 6%
Soft / Rugs 27%
$8.3b 9%
Bedroom
16%
Storage /
Home office14% 1.9%
$8.3b Lounge
market 61%
TAM
share
$5.0b Dining8% Dining
17%
Mattress
16%
Bedroom
21%
Home Segment
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Furnishings Furniture

Source: IBISWorld, Focus, independent experts

6

Adairs Group post-acquisition

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Adairs Group
Total Addressable Pro-forma FY21 Pro-forma FY21 Stores
Market (TAM) Sales [1] Online Sales [1] 192
$13.3 billion $654 million $201 million (all profitable)
FY21 Sales [1] FY21 Channel Mix [1] FY21 Product Mix [1]
Mocka 9.2%
9%
Online
37.3%
Focus 31%
24%
Adairs 31.5%
67% Stores
69%
1.4%
8.7%
11.9%
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Note 1: Amalgamation of the actual FY21 results for Adairs, Mocka and Focus.

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Transaction structure, funding and financial implications

Acquisition of 100% of the shares in Focus on an EV/EBIT multiple of 2.4x FY21 actual EBIT ($32.8m) with immediate EPS accretion (no synergies assumed).

Financial impact on Adairs

Transaction structure and funding

• Acquisition of 100% of the shares in Focus effective from 1 December 2021

• Consideration of $80.0m including $5m of cash to stay within Focus to be funded as follows:

Sources	A$m
New 3-year term debt facility (Nov 2024 expiry)	45.0
Existing debt facility (Jul 2023 expiry)	29.0
Placement of Adairs shares to CEO, Rob Santalucia Adairs cash reserves Total	6.0 1.0 81.0

• Without assuming any synergies, the acquisition is expected to:

• be immediately EPS accretive

• deliver pro forma double-digit EPS accretion in FY23[1] (first full year of ownership)

• No change to Adairs’ dividend payout policy (65%-80% of net profit after tax)

Potential synergies

While Adairs will run Focus independently to maximise its growth potential there exist potential synergy benefits that have not been quantified or included in our financial plans. These could include:

Uses			A$m
Acquisition Transaction Total	costs	(approx.)	80.0 1.0 81.0

• shared distribution infrastructure for furniture and bulky goods providing an improved and more efficient customer experience across all brands

• shared operational infrastructure and support such as photo studios, leasing, IT, finance and treasury

• greater access to a large and established offshore supplier base

• scale benefits across suppliers with increased order volumes / lower unit costs

• Increased facilities remain comfortably within existing covenants and retain sufficient head room for unexpected changes in the general macro environment or business performance

• shared market insights regarding product trends and operations

• potential reduction in third-party costs (e.g. BNPL fees, freight, 3PL etc.)

• cross product synergies (e.g. Adairs can provide complementary accessories and other home décor and furnishings without the need for Focus to develop this product themselves)

Notes:

1. Based on Adairs assessment of Focus’ FY23 contribution and current Adairs Group FY23 business plan (pre-AASB 16 adjustments).

8

Summary

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Highly profitable business with excellent growth potential acquired for $80 million

– acquisition multiple of 2.4x FY21 EBIT

– double-digit EPS accretion in FY23 (first full year of ownership)

Adairs Group is well positioned to support and accelerate the growth strategies of Focus

Adairs Group evolves to operate three attractive businesses, all with vertically integrated business models, attractive economics and large addressable markets in Australia and New Zealand Long-term growth of Focus to be driven by:

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1 National store rollout 4 Enhanced store experience 2 Online growth 5 Range expansion

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3 Increased brand awareness

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This will be a significant value adding acquisition for Adairs Limited shareholders Adairs is excited to welcome the Focus on Furniture team to the Adairs Group family

Appendices

1. Store network map

2. Store network growth potential 3. Product overview

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A endix 1 - Store network pp

Network of 23 stores, predominantly in Victoria. Typical store size is 1,500-2,000 square metres.

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MacGregor (Brisbane)
Kotara
Bankstown
Gepps Cross
Mile End Fyshwick
Wagga Wagga
Albury
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State/ Territory	Stores	GLA m2
Victoria (Greater Melbourne)	11	17,647
Victoria(Regional)	4	8,079
NSW (Greater Sydney)	1	3,365
NSW(Regional)	3	5,376
ACT (Canberra)	1	2,125
South Australia (Adelaide)	2	2,714
Queensland(Brisbane)	1	1,712
Totals	23	41,018

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Shepparton
Bendigo Maribyrnong
Essendon
Preston
South
Hoppers
Wharf Nunawading
Crossing
Ballarat
Moorabbin
Springvale
Pakenham
Geelong
Hallam (HQ)
Dandenong
Frankston
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Appendix 2 - Store network growth potential

Focus has 23 stores today. National furniture businesses have 50-60 stores (Adairs has over 50 homemaker stores). We believe there is the potential to operate a network of 50-60 profitable Focus stores across Australia.

• Adairs existing property team will identify sites and negotiate terms

• Expect 4-5 new stores per year

• Initial focus for new store opportunities will be in NSW and Queensland

• Average new store sales ~$3-5m pa

• NSW will leverage the existing Focus warehouses in NSW

• Queensland warehouse to be established to support more Queensland stores

National retail furniture competitors

				Harvey	Amart	Fantastic		Early
State / Territory		Nick Scali	Plush1	Norman	Furniture	Furniture	Freedom	Settler
Victoria	15	14	14	45	15	17	12	18
NSW	4	20	15	56	17	33	13	13
Queensland	1	15	9	44	21	17	10	16
South Australia	2	4	3	11	3	5	3	1
Tasmania	0	1	0	7	1	2	1	0
Western Australia	0	7	4	27	8	7	6	3
ACT	1	1	2	2	1	2	1	1
NT	0	0	0	2	1	1	0	0
Totals	23	62	47	194	67	84	46	52

1. Owned by Nick Scali but operated independently.

Source: Company websites as at November 2021

Appendix 3 - Product overview

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Appendix 3 - Product overview (continued)

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Appendix 3 - Product overview (continued)

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Strong Omni Channel Execution
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Disclaimer

Some of the information contained in this presentation contains “forward-looking statements” which may not directly or exclusively relate to historical facts. These forward-looking statements reflect Adairs Limited current intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside the control of Adairs Limited.

Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Because actual results could differ materially from Adairs Limited’s current intentions, plans, expectations, assumptions and beliefs about the future, you are urged to view all forward-looking statements contained herein with caution.