Adairs : ADH Acquisition of Focus on Furniture Presentation

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Adairs Limited

Acquisition of Focus on Furniture

Investor Presentation

25 November 2021

Transaction overview

1

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
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Strategic	▪ Strategic fit for Adairs within the Home category, with attractive growth potential:
		rationale	- 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
use		- 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)
  • 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
• Increased facilities expected to remain comfortably within existing covenants; leverage ratio to remain below 1.2x
• 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-formadouble-digit EPS accretion1 in FY23 (first full year of ownership) and beyond
	▪ No change to Adairs' dividend payout policy (65%-80% of net profit after tax)

ersonalNotes:

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

Focus overview

2

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

Historic Sales and EBIT (FY19-FY21)

only	- 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
use	supporting warehouses in Sydney and Adelaide

▪ Vertically integrated

154

96101

42

COVID-19 supported trading period

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

ersonal	normalizing for the impact of COVID-19 to be sales of ~$125 million
and EBIT of approximately $12-14 million (pre-AASB 16)

Notes:

1. After normalizing for the impact of COVID-19

					32.8
5.7			10.1
FY19		FY20	FY21
		Sales		EBIT

Source: Focus, Adairs

Estimated sustainable FY21 earnings base1 of ~$125 million and EBIT of approximately $12-14 million (pre-AASB 16)

Strategic alignment

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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.

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Business model alignment

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

The opportunity	4

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

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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

Store rollout

Growth initiatives

Online growth		Brand awareness		In-store experience

Range expansion

Focus has 23 stores today (15 in Victoria). National furniture businesses have 50-60 stores and we see the potential to operate 50-60 profitable Focus stores across Australia.

The online channel is quite new for Focus and has performed strongly to date with little investment. Investment in the digital platform and team will accelerate online growth.

Historical reliance on store location to attract customers with minimal investment in marketing and brand awareness.

With only a modest investment we see a clear opportunity to enhance and differentiate the in-store customer experience.

Opportunity to widen range in occasional furniture and use Adairs to support relevant decorator items within Focus stores, before building out other categories.

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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.