Toys"R"Us ANZ : Annual Report

2023

Annual Report

Contents

Our story	01
Chair's Letter	02
CEO's Letter	04
Directors' Report	06
Financial Statements	27
Shareholder Information	89
Corporate Directory	91

Toys"R"Us ANZ Limited

Annual Report 2023

Our story

At Toys"R"Us, we believe that toys have the power to change lives. Play enables children to develop their imagination, collaborate, problem solve, explore, create or simply express themselves spontaneously.

Our mission at Toys"R"Us is to encourage children to engage with as many forms of play as we possibly can.

We have relaunched in 2019, as a new company, to bring play back into the lives of children of all ages.

01

current shopper database with aims to double within the next 12 months

Chair's Letter

Dear Fellow Shareholders, on behalf of the Board of Directors, I present the 2023 Annual Report for Toys"R"Us ANZ Limited (ASX:TOY) ("the Company")

The financial results for FY23 were very disappointing with the Company failing to navigate a technology, marketing and operational pathway through a challenging macro environment. This has led to a change of leadership in your Company, and its business activity.

During FY23, Toys"R"Us ANZ achieved overall flat revenue with high inflation and low consumer confidence impacting the toy market globally. In ANZ, top line revenue declined by 15.2%, largely driven by lower e-commerce revenue. With a greater focus later in the year on driving profitability, the overall profitability in ANZ was similar to FY22. The UK market, delivering sales below forecast, placed unsustainable working capital demands on the group, well in excess of those previously forecast by management. This led to the decision to exit the UK business.

By end of H1 of FY23 the Board of Directors agreed to instigate a full strategic review of the Group in the post-holiday season of 2022.

On 10 May 2023 the Board announced that, following the strategic review, the Company had shortlisted applicants for the new Managing Director role for the ANZ region, and on 15 May Louis Mittoni resigned as CEO. As Non-Executive Chair, I took on the role of Interim CEO and Executive Chair. Mr Mittoni subsequently resigned from the Board of Directors on 27 July 2023.

On 13 June 2023, the Board announced the appointment of Penny Cox, MA, MBA,

1. seasoned e-commerce executive with multinational expertise in the UK, Asia and Australia growing e-commerce businesses, as CEO.

With the appointment of our new CEO, the Company implemented several initiatives that included the development of a business model to reach breakeven in ANZ by 2025, through

02

Toys"R"Us ANZ Limited Annual Report 2023

the reduction of fixed operating costs, a focus on margin improvement, several strategic marketing and partnership initiatives, exiting the UK business, clearing of aged inventory, the upgrade of business systems and a review of goodwill.

The short-term priority for the Company is to reduce fixed overheads while implementing strategic marketing and associated business systems to profitably grow the top line. Since August, the Company has decreased the annualised staff and salary overhead by c.$1.3 million and implemented a plan to replace fixed costs with variable costs which should see further cost reductions, exited warehousing in NSW with stock to be consolidated in Victoria.

The Company's near-term focus is on improving productivity through a step-change in e-commerce conversion rates and automating marketing activities to target additional revenue streams such as gift cards and drop shipping. The Company commenced the migration from its legacy OsCommerce website infrastructure to Shopify Plus in June 2023, with a go-live date of late October 2023. The new technology will facilitate more effective marketing including the introduction of drop shipping which will allow additional products to be offered to our shoppers, without the need to tie up cash in inventory

and warehousing space.

Under the new CEO, the Company began systematically applying its marketing spend, reducing customer acquisition costs by 50% without impacting customer acquisition performance. The Company is increasing its customer reach through partner programs, targeting a doubling of its current shopper database from c.1 million to 2 million over the next 12 months.

The Company plans to accelerate and scale the Toys"R"Us, Babies"R"Us and Hobby Warehouse operations in Australia and New Zealand over the next 12 months through improved functional leadership, merchant and marketing capability, more productive technology-enabled footprint and sub-licensing through physical retail partners.

With the change in our Executive and Board leadership, with our new CEO Penny Cox, and new Chair Kelly Humphreys, I believe our company has a pathway to profitable growth based upon capability of its people and capacity of its technology platforms, supporting the best toy, baby and hobby brands in the world.

Kevin A Moore

Chair of the Board

26 October 2023

03

CEO's Letter

Dear Shareholders,

As the new CEO of Toys "R" Us ANZ Limited, I am excited to be here, and by the potential of the business. In FY23, the Company did not meet the expectations of the Board or our Shareholders, and we have a lot of work to do to turn things around.

My initial focus is on fixing the Company's declining revenue and profitability, and rebuilding the balance sheet. I am committed to addressing the Company's challenges and have already started a plan to turn things around, to deliver growth and profitability. This plan includes:

• Exiting the UK market, which was unsustainable;
• Reducing our overheads and right-sizing the cost base;
• Reducing aged inventory and managing new inventory more carefully;
• Better measurement of operational KPIs and marketing effectiveness;
• Re-buildingof the technology and data stack, including website relaunch;
• Creating new channels to market, including physical retail (e.g store-in-store models); and
• Delivering growth in the Baby category, which has significant untapped potential.

Whilst it will take time to see the results of all these streams of work, I am confident in the plan we have in place to address the huge market opportunity, with one of the strongest brands in the world.

With almost 1 million loyal shoppers, we have a large and active database and are well-positioned to grow our market share in Toys and Hobbies from < 1% to 5% over the next three years. We will be particularly focused on improving our product range, developing new products and services that will better meet the needs of our existing customers, and developing marketing strategies to reach a larger pool of toy, hobby and baby goods buyers.

I would like to thank the Board of Directors for their confidence in me and their unwavering support during this period of transition. I would also like to thank you, our Shareholders, for your continued support and investment in Toys "R" Us ANZ Ltd. The path forward is becoming clear, and there is an opportunity for the Company to create significant value for our customers, our partners and our shareholders as we deliver on our plan.

Penny Cox

CEO

04

Toys"R"Us ANZ Limited Annual Report 2023

05

Directors' Report

The directors present their report, together with the consolidated financial statements, on the consolidated entity (referred to hereafter as the 'Group') consisting of Toys"R"Us ANZ Limited (referred to hereafter as 'Toys"R"Us ANZ', 'TOY', the 'Company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 31 July 2023.

Directors

The following persons were directors of Toys"R"Us ANZ Limited during the whole of the financial year and up to the date of this report unless otherwise stated:

• Kevin Moore;
• John Tripodi;
• Silvio Salom (appointed 11 November 2022);
• Louis Mittoni (resigned 27 July 2023);
• Nicki Anderson (resigned 31 August 2022);
• Penny Cox (appointed 24 August 2023 & ceased 18 October 2023); and
• Kelly Humphreys (appointed 5 October 2023).

Principal activities

Toys"R"Us ANZ Limited is an Australian based listed company with a mission to enrich the lives of people by encouraging exploration, creativity and living life more fully through the enjoyment of toys and hobbies. The Company acquired 100% of the Hobby Warehouse Group in November 2020, including Australian e-commerce websites Toys"R"Us, Babies"R"Us and Hobby Warehouse and the distribution business Mittoni Pty Ltd. In October 2021, a 100% owned subsidiary UK Toys"R"Us Limited was incorporated for the distribution of toys and baby products under the brand name Toys"R"Us® and Babies"R"Us® in the United Kingdom.

Dividends

There were no dividends paid, recommended or declared during the current or previous financial year.

Financial and operational review

Financial results

Key Financials AUD 'm	FY23	FY22	% Change
Revenue from continuing operations	32.1	37.9	(15.2)
EBITDA from continuing operations	(9.0)	(9.1)	7.2
Profit/(Loss) before Tax from continuing operations	(25.6)	(24.6)	11.6
Net profit/(loss) after tax from continuing operations	(25.3)	(24.3)	11.6
Basic EPS (cents) from continuing operations	(3.2)	(2.8)	11.1
Dividend per share (cents)	N/A	N/A
ROE1	(11.15%)	(8.48%)	(2.67)
Net cash balance/(Net debt) ($m)	(10.8)	2.5	(533.8)
Gearing2	831%	29%	n/a

1. NPAT/average shareholder equity.
2. Debt/shareholder equity.

The Group's statutory loss after income tax for the year ended 31 July 2023 was $32.7 million (2022: Loss after income tax $24.8 million).

06

Toys"R"Us ANZ Limited

Annual Report 2023

Operating review

During FY23, Toys"R"Us achieved overall flat revenue growth, against a challenging macro environment. High inflation and low consumer confidence hit the toy market globally. In ANZ, the topline revenue declined by 15.2% largely driven by lower e-commerce revenue, but a greater focus on driving towards profitability meant that the overall profitability in ANZ was similar to FY22. The UK market, while growing, placed unsustainable working capital demands on the Company that led to the decision to exit that business.

By end of H1 of FY23, it became clear that Toys"R"Us revenue and margin growth in ANZ were both slowing, and the working capital demands of the new UK market entry were greater than previously forecasted. The Board of Directors agreed to instigate a full strategic review of the Group post-holiday season 2022. On 10 May 2023 the Board announced, following the strategic review, that the Company had:

• Realised cost reductions of c.$4 million in calendar year 2023.
• Released c.$1 million of previously secured working capital and highlighted a further $1 million of secured working capital.
• Accessed $1.5 million of debt facilities of c.$5 million in new funds, bringing total debt utilised to $11.5 million.
• Appointed a UK Commercial Director.
• Shortlisted applicants for the new Managing Director role for the ANZ region.
• Improved the Company's gross margin in the Australian direct to consumer e-commerce division from 16.4% for the month of February 2023 to 22.3% for the month of April 2023.

On 15 May 2023 Louis Mittoni resigned as CEO and subsequently resigned from the Board of Directors on 26 July 2023. Kevin Moore Non-Executive Chair took on the role of Interim CEO and Executive Chair. On 13 June 2023 the Board announced the appointment of Penny Cox, MA, MBA, a seasoned e-commerce executive with multinational expertise in the UK, Asia and Australia growing e-commerce businesses as CEO. Penny began consulting to the Company on 19 June 2023 and formally joined as CEO and Managing Director on 24 August 2023 and ceased as Managing Director on 18 October 2023.

On 21 July 2023, the Company announced the successful raising of $1.3 million in new equity. On 15 August 2023 the Company announced the restructure of its operations in order to refocus working capital on the ANZ e-commerce business and reduce operating costs. The Company reached an agreement in principle with licence owner TRU Kids Inc (TRUK), to facilitate an orderly transition of the UK business and the transfer of the UK licence to TRUK. The benefit of transferring the licence is anticipated to release $7 million of working capital, reduce operating loss by $6 million over the next 12 months as well as reduce debt by $2.9 million.

With the appointment of the new CEO, the Company instigated a number of initiatives which included the development of a business model to reach breakeven by 2025, reduction of operating costs, focus on margin improvement, exiting the UK business, clearing of aged inventory, upgrade of business systems and review of goodwill.

Clearing of aged inventory in ANZ commenced in June, reducing the ANZ business' total inventory holding from $10.3 million (FY22) to $6.3 million (FY23).

After review, the Company decided to recognise further impairment of goodwill and intangible assets based on its planned exit of the UK market and revised forecasts for the ANZ e-commerce business. Similarly to the previous financial year, a driver of the Company's statutory net loss after tax was the recognition of impairment of goodwill and intangible assets valued at $13.3 million.

The UK business brought in $5.3 million revenue for the year, largely from e-commerce revenue from launch in September 2022 and culminating in the launch of 9 x WHSmith store-in-stores in June 2023.

07

Directors' Report

(Cont.)

Overall, the UK business had a negative $5.1 million impact to EBITDA and required a significant investment in working capital to build up the inventory for the physical stores, building up to $3.3 million inventory value in May 2023. Team expansion in the UK was also a driver of increased overheads. After detailed review, the Company has made the decision to exit the UK business and focus its resources on developing the

ANZ business.

The Company commenced the migration from its legacy OsCommerce website infrastructure to Shopify Plus in June 2023. The benefits of migration to this global standard platform allows for access of a wide range of capabilities to deliver improved productivity, website performance, shopper experience and better management of all digital communications assets and spend in ANZ. Roll out is planned for late October 2023.

The Company is reviewing its warehousing and robotics facilities in Clayton, Victoria with a view of significantly reducing the cost of that operation by early 2024.

Shanghai Allocacoc Industrial Design Co

On 6 July 2023 the Company announced that a court case begun in China in 2018 had been successfully found in its favour. The court awarded the Company approximately AUD $940,000 net of court costs in its favour. This ruling was not appealed and was subsequently confirmed by the Chinese court. The Company continues to pursue its right of payment in China and all other jurisdictions available to it.

Outlook and Strategic Plan

The Company is focused on putting in place cost structures and operating strategy to ensure that it reaches profitable operations by end of Q1 2024 and continues to pursue its aspirations of driving top line growth and deploying capital efficiently to achieve its medium-term goal of 5% market share penetration in the toys, baby and hobby markets in ANZ.

The Company plans to accelerate and scale Toys"R"Us, Babies"R"Us and Hobby Warehouse operations in Australia under new leadership, with improved merchant and marketing capability, and more productive technology enabled footprint as well as investigating expansion through physical partners.

The Company continues to review strategic options to expand and realise its growth ambitions by identifying suitable business opportunities in addition to the growth initiatives reported above.

Significant changes in the state of affairs

UK licence and operations

Prior to year end, the Group have made the decision to restructure and refocus on the ANZ operation

and has reached agreement in principle with TRUK to surrender the UK licence and exit the UK operations. The Group agreed to facilitate an orderly transition of the UK business and the transfer of its UK licence to TRUK by 31 January 2024. Official announcement was issued to the ASX on the 15 August 2023.

Other than the above matters, no other significant changes in the state of affairs of the Group occurred during the year ended 31 July 2023.

08