Sears Canada Reports Third Quarter Results


    2008 Operating EBITDA Increases 20.6% versus 2007

    TORONTO, Nov. 21 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its
unaudited third quarter results. Total revenues for the 13-week period ended
November 1, 2008 increased 5.5% to $1.442 billion compared to $1.368 billion
for the 13 weeks ended September 29, 2007. Beginning in 2008, the Company
changed its year end to the Saturday closest to January 31st instead of the
Saturday closest to December 31st. Compared to the 13-week period ended
November 3, 2007, revenues increased 0.6%, same store sales increased 0.9%,
gross margins increased by 95 basis points and operating expenses, as a
percentage to revenue, decreased by 49 basis points.
    Net earnings for the quarter, excluding unusual items, increased 47.4% to
$67.8 million or 63 cents per share compared to $46.0 million or 44 cents per
share in the quarter last year which ended September 29, 2007. Unusual items,
net of tax, in the third quarter of 2007 of $58.0 million or 53 cents per
share were related to property transactions including the sale of the
Company's headquarters building, and as a result, net earnings for the third
quarter, including unusual items, decreased 33.8% to $68.9 million or 64 cents
per share compared to $104.0 million or 97 cents per share in the quarter
ended September 29, 2007.
    Operating EBITDA (Earnings before interest, taxes, depreciation and
amortization), before unusual items, increased by 20.6% to $129.7 million for
the 13-week period ended November 1, 2008 versus $107.5 million in the
comparable 13-week period ended November 3, 2007. Operating EBITDA is a
non-GAAP measure; please refer to "Reconciliation of Net Earnings to Operating
EBITDA" attached.
    Commenting on the third quarter, Dene Rogers, President and Chief
Executive Officer, Sears Canada Inc., said, "We were pleased to increase same
store sales, considering the difficult economic period being experienced in
Canada with the lowest consumer confidence index in more than 25 years. We did
this by offering Canadians tremendous value through special promotions
including our innovative "Budget Relief Price Drop" program which helped our
customers stretch their household spending dollars in these uncertain times."
    Total revenues for the 39-week period ended November 1, 2008 increased
2.1% to $4.117 billion compared to $4.031 billion for the 39-week period ended
September 29, 2007. Compared to the 39-week period ended November 3, 2007,
revenues decreased 0.3%, same store sales increased 0.3%, gross margins
increased by 100 basis points and operating expenses, as a percentage to
revenue, increased by 17 basis points.
    Net earnings for the 39-week period ended November 1, 2008, excluding
unusual items, increased 75.3% to $163.7 million or $1.52 per share compared
to $93.4 million or 87 cents per share for the 39-week period ended September
29, 2007. Net earnings for the 39-week period ended November 1 2008, including
unusual items, increased 20.2% to $193.1 million or $1.79 per share compared
to $160.6 million or $1.49 per share for the 39-week period ended September
29, 2007.
    For the 39-week period ending November 1, 2008, Operating EBITDA before
unusual items increased by 11.3% to $337.1 million versus $302.9 million for
the comparable 39-week period ended November 3, 2007. As previously mentioned,
please refer to "Reconciliation of Net Earnings to Operating EBITDA" attached.
    "We expect our customers to have household budget concerns into the
fourth quarter," continued Mr. Rogers. "Sears will respond with special
marketing offers designed to help them shop with confidence that they are
receiving the best possible value from Sears as we head into this Holiday
period. Our 35,000 associates are committed to providing our customers with
memorable and satisfying shopping experiences as they help them get ready for
the 2008 Holiday season."

    This release contains information which is forward-looking and is subject
to important risks and uncertainties. Forward-looking information concerns the
Company's future financial performance, business strategy, plans, goals and
objectives. Factors which could cause actual results to differ materially from
current expectations include, but are not limited to: the ability of the
Company to successfully implement its cost reduction, productivity improvement
and strategic initiatives and whether such initiatives will yield the expected
benefits; the impact of the sale of the Company's Credit and Financial
Services operations and the results achieved pursuant to the Company's
long-term marketing and servicing alliance with JPMorgan Chase Bank, N.A.;
general economic conditions; competitive conditions in the businesses in which
the Company participates; changes in consumer spending; seasonal weather
patterns; customer preference toward product offerings; changes in the
Company's relationship with its suppliers; interest rate fluctuations and
other changes in funding costs; fluctuations in foreign currency exchange
rates; the possibility of negative investment returns in the Company's pension
plan; the outcome of pending legal proceedings; and changes in laws, rules and
regulations applicable to the Company. While the Company believes that its
forecasts and assumptions are reasonable, results or events predicted in this
forward-looking information may differ materially from actual results or
events.

    Sears Canada is a multi-channel retailer with a network of 198 corporate
stores, 187 dealer stores, 44 home improvement showrooms, over 1,850 catalogue
merchandise pick-up locations, 106 Sears Travel offices and a nationwide home
maintenance, repair, and installation network. The Company also publishes
Canada's most extensive general merchandise catalogue and offers shopping
online at www.sears.ca.SEARS CANADA INC.
    RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
    Unaudited

                                        Third Quarter         Year-to-Date
    (in millions, except         --------------------------------------------
     per share amounts)                2008       2007       2008       2007
    -------------------------------------------------------------------------
    Net earnings(1)               $    68.9  $   104.0  $   193.1  $   160.6
    -------------------------------------------------------------------------
    Unusual items, net of taxes:
      Restructuring activities    $    (1.1)         -  $    (1.1)         -
      Sale of real estate/joint
       venture                            -      (58.0) $   (28.3)     (67.3)
      Sale of airplane                    -          -          -       (2.3)
      Settlement of lawsuit               -          -          -        2.4
    -------------------------------------------------------------------------
    Net earnings excluding
     unusual items(1)             $    67.8  $    46.0  $   163.7  $    93.4
    -------------------------------------------------------------------------
    Depreciation and amortization      31.5       34.8       95.5      107.1
    Interest expense, net               2.9        3.5        5.5       14.4
    Income taxes expense excluding
     taxes on unusual items(1)         27.5       25.5       72.4       54.0
    -------------------------------------------------------------------------
    Operating EBITDA(2)           $   129.7  $   109.8  $   337.1  $   268.9
    -------------------------------------------------------------------------
    Adjustments to arrive at
     comparable period operating
     EBITDA(3) for 2007:
      Change in fiscal year end                    7.0                  20.1
      New inventory standard                     (11.1)                 (0.6)
      Retrospective change in
       financial instruments
       accounting policy                           1.8                  14.5
    -------------------------------------------------------------------------
    Comparable period operating
     EBITDA(3)                    $   129.7  $   107.5  $   337.1  $   302.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings per share        $    0.64  $    0.97  $    1.79  $    1.49
    Net earnings per share
     excluding unusual items      $    0.63  $    0.44  $    1.52  $    0.87
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Net earnings and income taxes expense for the third quarter and year-
        to-date ("YTD") 2007 have been restated as a result of the
        retrospective application of the change to the Company's financial
        instruments accounting policy choice regarding recognition of
        embedded derivatives.
    (2) The third quarter and YTD periods of 2008 and 2007 represent the
        13 and 39-week periods ended November 1, 2008 and September 29, 2007,
        respectively.
    (3) For the third quarter and YTD 2008 and the comparable third quarter
        and YTD 2007, comparable period operating EBITDA represents the 13
        and 39-week periods ended November 1, 2008 and November 3, 2007,
        respectively.



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

    Unaudited
                                                            As at      As at
                                                        September   February
                                                 As at   29, 2007    2, 2008
                                              November  (Restated  (Restated
    (in millions)                              1, 2008   - Note 1)  - Note 1)
    -------------------------------------------------------------------------

    ASSETS
    Current Assets
    Cash and short-term investments          $   803.5  $   736.0  $   871.6
    Restricted cash (Note 13)                      5.9        5.1        5.2
    Accounts receivable                          181.1      125.8      118.4
    Income taxes recoverable                      51.7        0.2        0.4
    Inventories                                1,179.4      984.0      879.7
    Prepaid expenses and other assets            212.0      104.2       91.1
    Current portion of future income
     tax assets                                    0.1       75.0       29.2
    -------------------------------------------------------------------------
                                               2,433.7    2,030.3    1,995.6

    Capital assets                               706.1      750.0      742.0
    Deferred charges                             201.7      208.6      205.0
    Future income tax assets                      27.7       20.6       24.9
    Other long-term assets                        31.6       35.3       34.2
    -------------------------------------------------------------------------
                                             $ 3,400.8  $ 3,044.8  $ 3,001.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current liabilities
    Accounts payable                         $   816.6  $   764.3  $   683.6
    Accrued liabilities                          425.0      442.5      438.6
    Income and other taxes payable                48.2       53.2       80.2
    Principal payments on long-term
     obligations due within one year (Note 4)     14.8      146.4       16.1
    Future income tax liabilities                  7.3          -          -
    -------------------------------------------------------------------------
                                               1,311.9    1,406.4    1,218.5

    Long-term obligations (Note 4)               353.6      356.4      356.0
    Accrued benefit liability (Note 12)          156.7      161.8      164.1
    Other long-term liabilities                  168.4      172.4      169.7
    -------------------------------------------------------------------------
                                               1,990.6    2,097.0    1,908.3
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Capital stock (Note 9)                        15.7       15.7       15.7
    Retained earnings                          1,328.5      932.3    1,077.7
    Accumulated other comprehensive income        66.0       (0.2)         -
    -------------------------------------------------------------------------
                                               1,410.2      947.8    1,093.4
    -------------------------------------------------------------------------
                                             $ 3,400.8  $ 3,044.8  $ 3,001.7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
    For the 13 and 39-week periods ended November 1, 2008 and September 29,
    2007

    Unaudited

                                      13-Week Period        39-Week Period
                                  --------------------- ---------------------
                                                  2007                  2007
    (in millions, except                     (Restated             (Restated
     per share amounts)                2008   - Note 1)      2008   - Note 1)
    -------------------------------------------------------------------------

    Total revenues                $ 1,442.2  $ 1,367.6  $ 4,116.9  $ 4,030.6
    -------------------------------------------------------------------------

    Cost of merchandise sold,
     operating, administrative
     and selling expenses (Note 2)  1,312.5    1,257.8    3,779.8    3,761.7
    Depreciation and amortization      31.5       34.8       95.5      107.1
    Interest expense, net               2.9        3.5        5.5       14.4
    Unusual items - gain (Note 5)      (1.6)     (77.2)     (38.8)     (86.4)
    -------------------------------------------------------------------------
    Earnings before income taxes       96.9      148.7      274.9      233.8
    -------------------------------------------------------------------------
    Income taxes expense (recovery)
      Current                          28.8       19.7      107.6       36.7
      Future                           (0.8)      25.0      (25.8)      36.5
    -------------------------------------------------------------------------
                                       28.0       44.7       81.8       73.2
    -------------------------------------------------------------------------
    Net earnings                  $    68.9  $   104.0  $   193.1  $   160.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings per share
     (Note 6)                     $    0.64  $    0.97  $    1.79  $    1.49
    -------------------------------------------------------------------------
    Diluted net earnings per
     share (Note 6)               $    0.64  $    0.97  $    1.79  $    1.49
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings                  $    68.9  $   104.0  $   193.1  $   160.6
    Other comprehensive income
     (loss), net of taxes, for
     the 13 and 39-week periods,
     respectively:
      Mark-to-market adjustment
       related to short-term
       investments, net of income
       taxes recovery of less
       than $0.1 and $0.1 (2007:
       less than $0.1)                    -       (0.1)      (0.1)      (0.2)
      Gain on derivatives
       designated as cash flow
       hedges, net of income taxes
       expense of $29.3 and $31.7      61.8          -       66.8          -
      Reclassification to net
       earnings of gain on
       derivatives designated as
       cash flow hedges, net of
       income taxes expense of
       $0.4 and $0.3                   (0.8)         -       (0.7)         -
    -------------------------------------------------------------------------
    Other comprehensive
     income (loss)                     61.0       (0.1)      66.0       (0.2)
    -------------------------------------------------------------------------
    Comprehensive income          $   129.9  $   103.9  $   259.1  $   160.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER
    COMPREHENSIVE INCOME
    For the 13 and 39-week periods ended November 1, 2008 and September 29,
    2007

    Unaudited

                                      13-Week Period        39-Week Period
                                  --------------------- ---------------------
                                                  2007                  2007
                                             (Restated             (Restated
    (in millions)                      2008   - Note 1)      2008   - Note 1)
    -------------------------------------------------------------------------
    Retained earnings
    Opening balance               $ 1,259.6  $   828.3  $ 1,077.7  $   769.3
    Adjustment to opening
     retained earnings resulting
     from adoption of new
     accounting standard for
     inventories, net of income
     taxes of $27.7 (Note 2)              -          -       57.7          -
    Adjustment to opening
     retained earnings resulting
     from adoption of new
     accounting standards for
     financial instruments,
     net of income taxes of
     $1.2 (Note 1)                        -          -          -        2.4
    Net earnings                  $    68.9      104.0      193.1      160.6
    -------------------------------------------------------------------------

    Closing balance               $ 1,328.5  $   932.3  $ 1,328.5  $   932.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Accumulated other
     comprehensive income
    Opening balance               $     5.0  $    (0.1) $       -  $       -
    Other comprehensive
     income (loss)                     61.0       (0.1)      66.0       (0.2)
    -------------------------------------------------------------------------

    Closing balance               $    66.0  $    (0.2) $    66.0  $    (0.2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Retained earnings and
     accumulated other
     comprehensive income         $ 1,394.5  $   932.1  $ 1,394.5  $   932.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the 13 and 39-week periods ended November 1, 2008 and September 29,
    2007

    Unaudited                         13-Week Period        39-Week Period
                                  --------------------- ---------------------
                                                  2007                  2007
                                             (Restated             (Restated
    (in millions)                      2008   - Note 1)      2008   - Note 1)
    -------------------------------------------------------------------------
    Cash flow generated from
     (used for) operating
     activities
      Net earnings                $    68.9  $   104.0  $   193.1  $   160.6
      Non-cash items included in
       net earnings, principally
       depreciation, pension
       expense, future income
       taxes and gain on sale of
       real estate and real estate
       joint ventures                  41.0       (7.3)      51.4       94.7
      Changes in non-cash working
       capital balances related
       to operations                  (50.4)     (17.9)    (257.4)    (288.4)
      Other, principally pension
       contributions and changes
       to long-term assets and
       liabilities                    (12.3)     (11.9)     (16.8)     (13.6)
    -------------------------------------------------------------------------
                                       47.2       66.9      (29.7)     (46.7)
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) investing
     activities
      Purchases of capital
       assets                         (22.5)     (28.5)     (66.7)     (48.9)
      Proceeds from sale of
       capital assets                   0.1       88.0       40.2      103.7
      Deferred charges                 (0.2)      (0.1)      (0.5)      (0.1)
      Changes in restricted cash
       (Note 13)                       (3.3)      (1.2)      (0.7)       5.0
      Acquisition, net of cash
       acquired (Note 3)                  -          -       (7.0)         -
      Purchases of investments            -       (3.0)         -       (3.0)
      Proceeds on sale of real
       estate joint venture, net
       of cash sold (Note 5)              -          -          -        5.2
    -------------------------------------------------------------------------
                                      (25.9)      55.2      (34.7)      61.9
    -------------------------------------------------------------------------

    Cash flow used for
     financing activities
      Repayment of long-term
       obligations (Note 4)            (0.8)      (0.9)      (3.7)      (2.1)
    -------------------------------------------------------------------------

    Increase (decrease) in cash
     and short-term investments        20.5      121.2      (68.1)      13.1
    Cash and short-term
     investments at beginning
     of period                        783.0      614.8      871.6      722.9
    -------------------------------------------------------------------------
    Cash and short-term
     investments at end of period $   803.5  $   736.0  $   803.5  $   736.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash at end of period         $    90.3  $   104.0  $    90.3  $   104.0
    Short-term investments at
     end of period                    713.2      632.0      713.2      632.0
    -------------------------------------------------------------------------
    Total cash and short-term
     investments at end of period $   803.5  $   736.0  $   803.5  $   736.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    SEARS CANADA INC.
    NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    NOVEMBER 1, 2008

    Unaudited

    1.  BASIS OF PRESENTATION

    These unaudited interim consolidated financial statements (the "Financial
    Statements") of Sears Canada Inc. (the "Company") have been prepared in
    accordance with Canadian generally accepted accounting principles
    ("GAAP") but do not contain all disclosures required by Canadian GAAP for
    annual financial statements. Accordingly, these Financial Statements
    should be read in conjunction with the most recently prepared audited
    annual consolidated financial statements for the 57-week period ended
    February 2, 2008 ("2007 Annual Financial Statements"). These Financial
    Statements for the third quarter ended November 1, 2008 follow the same
    accounting policies and methods of application as those used in the
    preparation of the 2007 Annual Financial Statements, except as described
    in Note 2 Accounting Policies and Estimates.

    The Company's operations are seasonal in nature. Accordingly, merchandise
    and service revenues, as well as performance payments received from
    JPMorgan Chase & Co, N.A. (Toronto Branch) ("JPMorgan Chase") under the
    long-term credit card marketing and servicing alliance, will vary by
    quarter based upon consumer spending behaviour. Historically, the
    Company's revenues and earnings are higher in the fourth quarter than in
    any of the other three quarters due to the holiday season. The Company is
    able to adjust certain variable costs in response to seasonal revenue
    patterns; however, costs such as occupancy are fixed, causing the Company
    to report a disproportionate level of earnings in the fourth quarter.
    This business seasonality results in quarterly performance that is not
    necessarily indicative of the year's performance.

    In 2007, the Company changed its fiscal year end to the Saturday closest
    to January 31. Prior to the change, the Company's fiscal year consisted
    of a 52 or 53-week period ending on the Saturday closest to December 31.
    The 2008 fiscal year is comprised of 52 weeks, with the first, second,
    third and fourth quarters ending on May 3, 2008, August 2, 2008,
    November 1, 2008 and January 31, 2009, respectively. The Company's 2007
    fiscal year, presented as comparatives herein, was a transition year
    comprised of 57 weeks ended February 2, 2008, with the first, second,
    third and fourth quarters ended on March 31, 2007, June 30, 2007,
    September 29, 2007 and February 2, 2008, respectively ("2007").

    Certain comparative figures have been reclassified to conform to the
    current period's presentation. Also, as explained in Note 15 Financial
    Instruments, certain figures from the prior year have been restated as a
    result of the retrospective application of a change in accounting policy,
    as required under the Canadian Institute of Chartered Accountants
    ("CICA") Handbook Section 1506 "Accounting Changes" ("Section 1506"). As
    a result of this retrospective restatement, the fiscal 2007 opening
    retained earnings adjustment, related to the adoption of CICA Handbook
    Section 3855 "Financial Instruments - Recognition and Measurement"
    ("Section 3855"), reported in Note 1 of the 2007 Annual Financial
    Statements, has been restated to reflect a credit of $2.8 million.
    Consequently, the restated Section 3855 adjustment to 2007 opening
    retained earnings is a total credit of $2.4 million, net of taxes of
    $1.2 million. In addition to the adjustment to 2007 opening retained
    earnings, the following table summarizes the increase (decrease) to the
    2007 comparative figures contained herein as at and for the 13 and 39-
    week periods ended September 29, 2007 and the year ended February 2, 2008
    from figures previously reported:

                                             As at and  As at and  As at and
                                               for the    for the    for the
                                               13-week    39-week    57-week
                                                Period     Period     Period
                                                 Ended      Ended      Ended
                                             September  September   February
    (increase (decrease) in millions)         29, 2007   29, 2007    2, 2008
    -------------------------------------------------------------------------
    Prepaid expenses and other assets        $   (10.3) $   (10.3) $       -
    Current portion of future income
     tax assets                                    3.6        3.6       (1.4)
    Accrued liabilities                              -          -       (0.4)
    Income and other taxes payable                   -          -       (1.3)
    Net earnings                                  (1.2)      (9.5)      (2.5)
    Opening retained earnings                     (5.5)       2.8        2.8
    Closing retained earnings                     (6.7)      (6.7)       0.3
    -------------------------------------------------------------------------


    2.  ACCOUNTING POLICIES AND ESTIMATES

    New Policies:

    These Financial Statements follow the same accounting policies and
    methods of application as the 2007 Annual Financial Statements, with the
    following exceptions:

    Inventories

    On February 3, 2008, the Company adopted CICA Handbook Section 3031
    "Inventories" ("Section 3031"), which replaced Section 3030
    "Inventories". The new standard applies to interim and annual financial
    statements relating to fiscal years beginning on or after January 1, 2008
    and provides guidance on the determination of cost and requires
    inventories to be measured at the lower of cost and net realizable value.
    The new standard also requires additional disclosures, including the
    accounting policies adopted in measuring inventories, amount of
    inventories recognized as an expense during the period, the amount of any
    write-downs and reversal of any write-downs during the period and the
    carrying amount of inventories pledged as security for liabilities.

    According to the new standard, the cost of inventories should be
    determined using the first-in, first-out or weighted average cost method.
    Techniques for the measurement of the costs of inventories, such as the
    retail method or the standard cost method, are permitted if the results
    approximate cost. Reversal of previous write-downs to net realizable
    value is now required when there is a subsequent increase in the value of
    inventories.

    For those companies that are required to adopt a new inventory
    measurement policy as a result of Section 3031, transitional provisions
    in Section 3031 allow companies to either report opening inventory in
    accordance with the new standard, with the difference in inventory
    measurement treated as a retrospective adjustment to opening retained
    earnings without restatement of prior periods, or report opening
    inventory in accordance with the new standard and apply the change in
    measurement retrospectively with a restatement of prior periods.

    The Company has adopted this new standard retrospectively, without
    restatement of prior period amounts. The initial impact of measuring
    inventories under the new standard is an increase to the carrying amount
    of opening inventories as at February 3, 2008 of $85.4 million. Opening
    retained earnings has been adjusted by $57.7 million, equal to the change
    in opening inventories net of taxes of $27.7 million.

    Following adoption of Section 3031, the Company values its inventories at
    the lower of cost and net realizable value. Cost is determined using the
    weighted average cost method, based on individual items. The cost of
    inventories is comprised of the purchase price plus other costs incurred
    in bringing the inventories to their present location and condition, such
    as freight and is reduced by the value of rebates and allowances received
    from vendors. Costs that do not contribute to bringing inventories to
    their present location and condition, such as storage and administrative
    overheads, are specifically excluded from the cost of inventories and are
    expensed in the period incurred.

    The amount of inventories recognized as an expense during the 13 and 39-
    week periods ended November 1, 2008 totals $718.5 million and
    $2,075.0 million, respectively, including $22.9 million and $65.3 million
    related to write-downs. A negligible amount of write-downs were reversed
    during the 13 and 39-week periods ended November 1, 2008. The entire
    carrying amount of inventories has been pledged as security for the
    Company's credit facility and outstanding medium-term notes, as described
    in Note 6 to the 2007 Annual Financial Statements.

    With the exception of $27.1 million of inventories from the Company's
    parts and service and home improvement businesses, the Company's entire
    inventories balance consists of merchandise finished goods. As a result
    of the Company's change in accounting policy for inventories, the
    inventories balances on the consolidated statements of financial position
    as at November 1, 2008 and September 29, 2007 are not comparable.

    Financial Instruments

    As explained in Note 15 Financial Instruments, the Company discontinued
    the recognition of certain embedded derivatives on February 3, 2008, as a
    result of a change in accounting policy made in accordance with Section
    1506.

    On February 3, 2008, the Company adopted CICA Handbook Section 3862
    "Financial Instruments - Disclosures" ("Section 3862") and Section 3863
    "Financial Instruments - Presentation" ("Section 3863"). These two new
    sections replaced Section 3861 "Financial Instruments - Disclosure and
    Presentation" ("Section 3861"). The disclosure requirements in Section
    3862 revise and enhance the disclosure requirements of Section 3861,
    prior to that section being superseded, with particular focus on
    additional disclosure surrounding risk and risk management of financial
    instruments. Section 3863 contains the standards for presentation of
    financial instruments and non-financial derivatives and is essentially
    consistent with the presentation requirements previously found in Section
    3861. These two new sections apply to interim and annual financial
    statements relating to fiscal years beginning on or after October 1,
    2007. All new disclosure required under Section 3862 has been included in
    Note 15 Financial Instruments, contained herein. The adoption of Section
    3863 has had no significant impact on the Company's Financial Statements.

    Capital Disclosures

    On February 3, 2008, the Company adopted CICA Handbook Section 1535
    "Capital Disclosures" ("Section 1535"). Section 1535 applies to interim
    and annual financial statements relating to fiscal years beginning on or
    after October 1, 2007. This new guidance establishes standards for
    disclosing information about an entity's capital and how it is managed.
    This section requires the disclosure of an entity's objectives, policies
    and processes for managing capital and information regarding an entity's
    compliance or non-compliance with any capital requirements. The new
    disclosure required under Section 1535 has been included in Note 14
    Capital Disclosures, contained herein. The adoption of Section 1535 has
    had no significant impact on the Company's Financial Statements.

    Embedded Foreign Currency Derivatives

    In January 2008, the CICA issued CICA Emerging Issues Committee ("EIC")
    EIC-169 "Embedded Foreign Currency Derivatives" ("EIC-169"). Guidance in
    EIC-169 should be applied retrospectively to embedded foreign currency
    derivatives in host contracts that are not financial instruments
    accounted for in accordance with Section 3855 in financial statements
    issued for interim and annual periods ending on or after March 15, 2008.
    This new EIC assists in the interpretation of the phrase "routinely
    denominated" as used in Section 3855 and also assists in determining what
    factors can be used to determine whether a contract for the purchase or
    sale of a non-financial item such as a commodity is routinely denominated
    in a particular currency in commercial transactions around the world.
    This EIC has had no affect on these Financial Statements as the Company
    does not have any embedded foreign currency derivatives.

    Future Accounting Policies:

    Goodwill

    In February 2008, the CICA issued CICA Handbook Section 3064 "Goodwill
    and Intangible Assets" ("Section 3064"), which is effective for interim
    and annual financial statements issued for fiscal years beginning on or
    after October 1, 2008. This new standard replaces Section 3062 "Goodwill
    and Other Intangible Assets" and Section 3450 "Research and Development
    Costs". The primary reason for the issuance of this new standard is to
    provide clarity on the recognition and treatment of internally developed
    intangibles. Section 3064 reinforces a principle-based approach to the
    recognition of cost as assets in accordance with the definition of an
    asset and criteria for the recognition of an asset in CICA Handbook
    Section 1000 "Financial Statement Concepts". The Company is currently
    evaluating the effect this standard will have on financial statements for
    future periods.

    International Financial Reporting Standards ("IFRS")

    The Canadian Accounting Standards Board confirmed, in February 2008, that
    it will require all public companies to adopt IFRS for interim and annual
    financial statements relating to fiscal years beginning on or after
    January 1, 2011. In the year of adoption, companies will be required to
    provide comparative information as if IFRS had been used in the preceding
    fiscal year. The transition from Canadian GAAP to IFRS will be applicable
    to the Company's first quarter of operations for fiscal 2011, at which
    time the Company will prepare both its fiscal 2011 and fiscal 2010
    comparative financial information using IFRS. The Company expects the
    transition to IFRS to impact financial reporting, business processes,
    internal controls and information systems. The Company is currently
    assessing the impact of the transition to IFRS on these areas and will
    continue to invest in training and resources throughout the transition
    period to facilitate a timely conversion.

    3.  ACQUISITION

    On February 24, 2008, the Company acquired the assets of Excell Duct
    Cleaning Inc. and 1150681 Ontario Inc., two related, privately-held
    companies based in Ontario. As a result of this $7.0 million acquisition,
    net of cash acquired of Nil, assets with a fair value of $0.4 million and
    goodwill in the amount of $6.6 million were recorded on the Company's
    statement of financial position during the first quarter of 2008.

    4.  LONG-TERM OBLIGATIONS

    Interest expense on long-term debt for the 13 and 39-week periods ended
    November 1, 2008 amounted to $7.2 million (2007: $10.0 million) and
    $21.7 million (2007: $30.8 million), respectively. The Company's cash
    payments for interest on long-term debt in the 13 and 39-week periods
    ended November 1, 2008 totalled $5.2 million (2007: $5.9 million) and
    $19.4 million (2007: $26.4 million), respectively. The majority of the
    Company's long-term debt consists of secured medium-term notes with fixed
    interest rates and payment terms. See the 2007 Annual Financial
    Statements for more information.

    In the 13 and 39-week periods ended November 1, 2008, the Company
    recorded $4.3 million (2007: $6.5 million) and $16.2 million (2007:
    $16.4 million), respectively, of interest revenue, net of short-term
    interest expense, primarily related to cash and short-term investments.
    The Company received cash in the amount of $6.5 million and $18.2 million
    in respect of short-term interest revenue, net of short-term interest
    expense, during the 13 and 39-week periods ended November 1, 2008,
    respectively (2007: $5.5 million and $15.3 million).

    During the third quarter of 2007, the Company disposed of its interest in
    a real estate joint venture. As part of this transaction, the purchaser
    assumed the associated long-term debt in the amount of $14.9 million.

    During the first quarter of 2007, the Company disposed of its interest in
    a real estate joint venture. As part of this transaction, the purchaser
    assumed associated long-term debt totalling $22.5 million.

    As at November 1, 2008, there were Nil borrowings from the revolving
    $200.0 million credit facility other than letters of credit issued under
    the Company's offshore merchandise purchasing program of $100.8 million.

    5.  UNUSUAL ITEMS

    The Company recorded a pre-tax gain of $1.6 million (2007: $77.2 million)
    and $38.8 million (2007: $86.4 million) related to unusual items in the
    13 and 39-week periods ended November 1, 2008, respectively. The unusual
    items are as follows:

                                    13-Week    13-Week    39-Week    39-Week
                                     Period     Period     Period     Period
                                      Ended      Ended      Ended      Ended
                                   November  September   November  September
    (in millions)                   1, 2008   29, 2007    1, 2008   29, 2007
    -------------------------------------------------------------------------
    Restructuring activities      $     1.6  $       -  $     1.6  $       -
    Sale of real estate                   -       74.0       37.2       74.0
    Sale of real estate
     joint venture                        -        3.2          -       12.5
    Sale of corporate airplane            -          -          -        3.5
    Settlement of lawsuit                 -          -          -       (3.6)
    -------------------------------------------------------------------------
    Total unusual items - gain    $     1.6  $    77.2  $    38.8  $    86.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Sale of real estate

    In February 2008, the Company completed the sale of property in Calgary,
    Alberta where it operated a full-line store, receiving proceeds of
    approximately $40.0 million. A pre-tax gain of $37.2 million, net of
    transaction costs, was recorded in the first quarter of 2008.

    During the third quarter ended September 29, 2007, the Company sold the
    property where its Hamilton, Ontario Full-line is located and its head
    office property in Toronto, Ontario for the total combined proceeds of
    $88.0 million, net of transaction costs, resulting in a pre-tax gain of
    $74.0 million. Concurrently, the Company entered into agreements to
    leaseback the properties for periods not exceeding thirty-six months. The
    leaseback arrangement for Hamilton has ended and the Company expects the
    leaseback arrangement for the head office property to end within the next
    5 months.

    Sale of real estate joint venture

    During the third quarter of 2007, the Company sold its interest in a real
    estate joint venture for proceeds of Nil, resulting in a pre-tax gain of
    $3.2 million. As part of this transaction, the Company disposed of total
    assets and liabilities in the amount of $14.8 million and $18.0 million,
    respectively, including long-term debt assumed by the purchaser of
    $14.9 million.

    During the first quarter of 2007, the Company sold its interest in a real
    estate joint venture for proceeds of $5.2 million, net of cash sold of
    $0.9 million, resulting in a pre-tax gain of $9.3 million. As part of
    this transaction, the Company disposed of total assets and liabilities in
    the amount of $20.4 million and $23.6 million, respectively, including
    long-term debt assumed by the purchaser of $22.5 million.

    Sale of corporate airplane

    During the second quarter of 2007, the Company recorded pre-tax gain of
    $3.5 million on the sale of its corporate airplane.

    Settlement of lawsuit

    During the second quarter of 2007, the Company expensed $5.0 million to
    settle a lawsuit relating to a commercial dispute. Of the total
    settlement, a pre-tax expense of $3.6 million is included in unusual
    items as $1.4 million was accrued in prior years.

    Restructuring activities

    During the 13 and 39-week periods ended November 1, 2008, the Company
    reversed $1.6 million of severance expense which had been accrued in a
    prior year. Pre-tax restructuring charges for the 39-week period ended
    September 29, 2007 were Nil. A summary by fiscal year of the changes in
    the accrued liability related to restructuring activities in prior
    periods ("restructuring accrual") is presented in Note 9 of the 2007
    Annual Financial Statements. As at February 2, 2008, the restructuring
    accrual had a balance of $1.6 million. As at November 1, 2008, the
    restructuring accrual has a balance of Nil.

    6.  NET EARNINGS PER SHARE

    A reconciliation of the number of shares used in the net earnings per
    share calculation is as follows:

                              13-Week      13-Week      39-Week      39-Week
                               Period       Period       Period       Period
                                Ended        Ended        Ended        Ended
                             November    September     November    September
    (number of shares)        1, 2008     29, 2007      1, 2008     29, 2007
    -------------------------------------------------------------------------
    Average number of
     shares per basic
     net earnings per
     share calculation    107,620,995  107,620,995  107,620,995  107,620,995
    Effect of dilutive
     instruments
     outstanding                2,595       27,246        7,628       27,078
    -------------------------------------------------------------------------
    Average number of
     shares per diluted
     net earnings per
     share calculation    107,623,590  107,648,241  107,628,623  107,648,073
    -------------------------------------------------------------------------

    For the 13 and 39-week periods ended November 1, 2008, 163,251 options
    (2007: 177,431) and 159,291 options (2007: 177,431), respectively, were
    excluded from the calculation of diluted net earnings per share as they
    were anti-dilutive.

    7.  SEGMENTED INFORMATION

    Segmented Statements of Earnings
    -------------------------------------------------------------------------
                                               13-Week               39-Week
                                                Period                Period
                                    13-Week      Ended    39-Week      Ended
                                     Period  September     Period  September
                                      Ended   29, 2007      Ended   29, 2007
                                   November  (Restated   November  (Restated
    (in millions)                   1, 2008   - Note 1)   1, 2008   - Note 1)
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Total revenues
      Merchandising               $ 1,431.0  $ 1,355.1  $ 4,081.7  $ 3,990.5
      Real Estate Joint Ventures       11.2       12.5       35.2       40.1
    -------------------------------------------------------------------------
      Total revenues              $ 1,442.2  $ 1,367.6  $ 4,116.9  $ 4,030.6
    -------------------------------------------------------------------------
    Earnings before interest,
     unusual items and income taxes
      Merchandising               $    93.2  $    69.3  $   225.7  $   143.6
      Real Estate Joint Ventures        5.0        5.7       15.9       18.2
    -------------------------------------------------------------------------
    Earnings before interest,
     unusual items and income taxes    98.2       75.0      241.6      161.8
      Interest expense, net             2.9        3.5        5.5       14.4
      Unusual items - gain             (1.6)     (77.2)     (38.8)     (86.4)
      Income taxes                     28.0       44.7       81.8       73.2
    -------------------------------------------------------------------------
    Net earnings                  $    68.9  $   104.0  $   193.1  $   160.6
    -------------------------------------------------------------------------


    Segmented Statements of Capital Employed(1)
    -------------------------------------------------------------------------
                                                            As at      As at
                                                        September   February
                                                 As at    29 2007    2, 2008
                                              November  (Restated  (Restated
    (in millions)                              1, 2008   - Note 1)  - Note 1)
    -------------------------------------------------------------------------
    Merchandising                            $ 1,673.9  $ 1,348.1  $ 1,366.7
    Real Estate Joint Ventures                   104.7      102.5       98.8
    -------------------------------------------------------------------------
    Total                                    $ 1,778.6  $ 1,450.6  $ 1,465.5
    -------------------------------------------------------------------------
    (1) Capital Employed represents the total of long-term obligations,
        including principal payments on long-term obligations due within one
        year, and shareholders' equity, which includes capital stock,
        retained earnings and accumulated other comprehensive income
        ("AOCI").


    Segmented Statements of Total Assets
    -------------------------------------------------------------------------
                                                            As at      As at
                                                        September   February
                                                 As at   29, 2007    2, 2008
                                              November  (Restated  (Restated
    (in millions)                              1, 2008   - Note 1)  - Note 1)
    -------------------------------------------------------------------------
    Merchandising                            $ 3,290.5  $ 2,930.6  $ 2,893.2
    Real Estate Joint Ventures                   110.3      114.2      108.5
    -------------------------------------------------------------------------
    Total                                    $ 3,400.8  $ 3,044.8  $ 3,001.7
    -------------------------------------------------------------------------

    8.  INCOME TAXES

    The Company's total net cash payments of income taxes in the 13 and 39-
    week periods ended November 1, 2008 were $52.6 million (2007:
    $7.0 million) and $186.6 million (2007: $39.8 million), respectively.

    In the ordinary course of business, the Company is subject to ongoing
    audits by tax authorities. While the Company is of the view that its tax
    filing positions are appropriate and supportable, periodically, certain
    matters are challenged by tax authorities. As the Company routinely
    evaluates and provides for potentially unfavourable outcomes with respect
    to any tax audits, the Company believes that the final disposition of tax
    audits will not have a material adverse effect on its liquidity,
    consolidated financial position or results of operations. If the result
    of a tax audit materially differs from the associated provision, the
    Company's effective tax rate and its net earnings may be affected
    positively or negatively in the period in which the tax audits are
    completed.

    9.  CAPITAL STOCK

    As at November 1, 2008, 107,620,995 common shares were issued and
    outstanding. Sears Holdings Corporation, the controlling shareholder of
    the Company, is the beneficial holder of 77,057,990, or 71.6%, of the
    common shares of the Company as at November 1, 2008

    As at February 2, 2008, 107,620,995 common shares were issued and
    outstanding, and Sears Holdings Corporation was the beneficial holder of
    75,572,390, or 70.2% common shares at that date.

    10. STOCK-BASED COMPENSATION

    Details of the Company's stock-based compensation plans are contained in
    Note 8 to the Company's 2007 Annual Financial Statements.

    Since the last grant in 2004, the Company discontinued the granting of
    options and Special Incentive Shares and Options under the Employees
    Stock Plan (the "Plan"). The Plan expired during the first quarter of
    2008, however, the expiration of the Plan does not affect the rights of
    current option-holders under the Plan. Options expire ten years from the
    grant date. As there have been no options granted since February 2004,
    options that are currently outstanding will expire before or in February
    2014. As at November 1, 2008, there were 210,716 stock options, Nil
    Special Incentive Shares and Options and Nil DSUs outstanding under the
    Employees Stock Plan.

    At the end of each fiscal period, the Company records a liability for
    tandem awards equal to the amount by which the market price of its shares
    at the end of the period exceeds the exercise price of the vested tandem
    awards. Compensation expense is recorded to adjust the liability for
    changes in the market price of the Company's shares and for awards
    exercised in the period. During the 13 and 39-week periods ended
    November 1, 2008, a credit of $0.1 million (2007: an expense of
    $0.1 million) and $0.2 million (2007: expense of $0.2 million),
    respectively were recorded related to tandem awards.

    Cash payments for stock appreciation rights made during the 13 and 39-
    week periods ended November 1, 2008 were Nil (2007: less than
    $0.1 million) and less than $0.1 million (2007: $0.2 million),
    respectively.

    11. GUARANTEES

    The Company has provided the following significant guarantees to third
    parties:

    Sub-lease agreements

    The Company has entered into a number of agreements to sub-lease premises
    to third parties. The Company retains ultimate responsibility to the
    landlord for payment of amounts under the lease agreements should the
    sub-lessee fail to pay. The total future minimum lease payments under
    such agreements are $21.4 million.

    Other indemnification agreements

    In the ordinary course of business the Company has provided
    indemnification commitments to counterparties in transactions such as
    leasing transactions, royalty agreements, service arrangements,
    investment banking agreements, director and officer indemnification
    agreements and indemnification of trustees under indentures for
    outstanding public debt. The Company has also provided certain
    indemnification agreements in connection with the sale of the Credit and
    Financial Services operations in November 2005. The foregoing
    indemnification agreements require the Company to compensate the
    counterparties for costs incurred as a result of changes in laws and
    regulations or as a result of litigation claims or statutory claims or
    statutory sanctions that may be suffered by a counterparty as a
    consequence of the transaction. The terms of these indemnification
    agreements will vary based on the contract and typically do not provide
    for any limit on the maximum potential liability. Historically, the
    Company has not made any significant payments under such indemnifications
    and no amount has been accrued in the Financial Statements with respect
    to these indemnification commitments.

    12. ASSOCIATE FUTURE BENEFITS

    Information about the Company's post-retirement plans is contained in
    Note 5 of the Company's 2007 Annual Financial Statements. The net expense
    for the plans for the 13 and 39-week periods ended November 1, 2008 was
    $7.5 million (2007: $6.7 million) and $19.2 million (2007:
    $21.5 million), respectively. The Company contributed a total of
    $16.2 million (2007: $16.2 million) and $18.0 million (2007:
    $19.6 million), respectively, to its post-retirement plans during the 13
    and 39-week periods ended November 1, 2008.

    13. COMMITMENTS AND CONTINGENCIES

    As discussed in Note 11 of the Company's 2007 Annual Financial
    Statements, the Company was named in three class action lawsuits in the
    provinces of Quebec, Saskatchewan and Ontario in 2005 arising out of the
    Company's pricing of tires. The Company believes these allegations are
    without merit. The outcome of these actions is indeterminable, and the
    monetary damages, if any, cannot be reliably estimated. Therefore, the
    Company has not made a provision for any potential liability.

    In addition, the Company is involved in various legal proceedings
    incidental to the normal course of business. The Company is of the view
    that although the outcome of such litigation cannot be predicted with
    certainty, the final disposition is not expected to have a material
    adverse effect on the Company's consolidated financial position or
    results of operations.

    Restricted Cash

    Cash is considered to be restricted when it is subject to contingent
    rights of a third party customer, vendor, or government agency. As at
    November 1, 2008, the Company recorded $5.9 million (2007: $5.1 million)
    of restricted cash, under current assets, representing funds held in
    trust in accordance with regulatory requirements governing advance ticket
    sales related to Sears Travel. As at February 2, 2008, the Company
    recorded $5.2 million of restricted cash.

    14. CAPITAL DISCLOSURES

    The Company's objectives when managing capital are:

    -   Maintain financial flexibility thus allowing the Company to preserve
        its ability to meet financial objectives and continue as a going
        concern;
    -   Provide an appropriate return to shareholders; and
    -   Maintain a capital structure that allows the Company to obtain
        financing should the need arise.

    The Company manages and makes adjustments to its capital structure, when
    necessary, in light of changes in economic conditions, the objectives of
    its shareholders, the cash requirements of the business and the condition
    of capital markets. In order to maintain or adjust the capital structure
    the Company may pay a dividend or return capital to shareholders,
    increase/decrease debt or sell assets.

    The Company defines capital as follows:

    -   Long-term obligations, including the current portion ("Long-term
        obligations"); and
    -   Shareholders' equity.

    The following table presents summary quantitative data with respect to
    the Company's capital:

    -------------------------------------------------------------------------
                                                            As at      As at
                                                        September   February
                                                 As at   29, 2007    2, 2008
                                              November  (Restated  (Restated
    (in millions)                              1, 2008   - Note 1)  - Note 1)
    -------------------------------------------------------------------------
    Long-term obligations                    $   368.4  $   502.8  $   372.1
    Shareholders' equity                       1,410.2      947.8    1,093.4
    -------------------------------------------------------------------------
                                             $ 1,778.6  $ 1,450.6  $ 1,465.5
    -------------------------------------------------------------------------

    The Company's $200.0 million revolving credit facility, which will mature
    in December 2008, contains financial and non-financial covenants which
    can impact the Company's ability to draw funds and determines the cost of
    those funds. The Company monitors and manages its capital structure to
    ensure it remains in compliance with its Fixed Charge, Debt to EBITDA and
    Liquidity ratios on a quarterly basis. As at November 1, 2008, the
    Company was in compliance with all applicable covenants under this credit
    facility.

    The Company's secured $200 million revolving credit facility will expire
    in December 2008. Since its inception, the facility has solely supported
    the Company's offshore merchandise purchasing program and the Company has
    never had to draw upon the facility to fund working capital requirements.
    The Company is currently investigating alternative arrangements which
    maximize flexibility while minimizing expenses in light of the current
    credit environment. The Company does not anticipate any difficulties in
    making alternative arrangements.

    The Company has a corporate credit rating of BB from Dominion Bond
    Ratings Service and Standard and Poor's and a corporate family rating of
    Ba1 from Moody's Investors Service, Inc.

    15. FINANCIAL INSTRUMENTS

    Financial instrument fair values

    The following two tables summarize the classification and fair value
    ("FV" or "fair value") of certain financial instruments as at the end of
    the third quarter of 2008 and 2007 and the pre-tax change in fair value
    of those instruments during the 13 and 39-week periods ended November 1,
    2008 and September 29, 2007, the offset of which is included in either
    other comprehensive income ("OCI") or net earnings. The Company
    determines the classification of a financial instrument when it is
    originally recorded, based on the underlying purpose of the instrument.


                                                 13-week          39-week
                                               Period Ended    Period Ended
                                                November 1,     November 1,
                                                   2008            2008
                                             --------------------------------
    (in millions)                            Pre-tax change in FV included in
    -------------------------------------------------------------------------
                               As at    As at
                 Balance    November February
    Classif-     Sheet             1,       2,            Net             Net
    ication      Category       2008     2008    OCI earnings    OCI earnings
    -------------------------------------------------------------------------
    Available
     for sale

    Short-term   Cash and
     investments  short-term
                  invest-
                  ments(2)    $713.2  $806.9  $  0.1  $    -  $  0.2  $    -
    -------------------------------------------------------------------------

    Held for
     trading

    Cash and     Cash and
     cash         short-term
     equivalents  investments   90.3    64.7       -       -       -       -

    Cash         Restricted
                  cash           5.9     5.2       -       -       -       -
    U.S. $
     derivative  Prepaid
     contracts    expenses &
                  other assets
                  (accrued
                  liabilities)  94.5    (0.2)  (89.9)    3.3   (97.4)    2.7
    Fixed price  Accrued
     energy       liabilities      -    (0.1)      -       -       -    (0.1)
     contracts
    -------------------------------------------------------------------------
                                              $(89.8)   $3.3  $(97.2)   $2.6
                                              -------------------------------


                                                 13-week         39-week
                                               Period Ended    Period Ended
                                               September 29,   September 29,
                                                   2007            2007
                                             --------------------------------
    (in millions)                            Pre-tax change in FV included in
    -------------------------------------------------------------------------
                               As at    As at
                 Balance   September December
    Classif-     Sheet            29,      30,            Net             Net
    ication      Category       2007     2006    OCI earnings    OCI earnings
    -------------------------------------------------------------------------
    Available
     for sale

    Short-term   Cash and
     investments  short-term
                  invest-
                  ments(2)    $632.0  $627.9  $  0.1  $    -  $  0.2  $    -
    -------------------------------------------------------------------------

    Held for
     trading

    Cash and     Cash and
     cash         short-term
     equivalents  investments  104.0    95.0       -       -       -       -
    Cash         Restricted
                  cash           5.1    10.1       -       -       -       -
    U.S. $
     derivative  Prepaid
     contracts    expenses &
                  other assets
                  (accrued
                  liabilities) (13.6)    4.2       -     3.0       -    17.8
    Fixed price  Accrued
     energy       liabilities   (0.4)   (0.6)      -       -       -    (0.2)
     contracts
    -------------------------------------------------------------------------
                                              $  0.1  $  3.0  $  0.2  $ 17.6
                                              -------------------------------
    (2) Interest revenue related to short-term investments is disclosed in
        Note 4 Long-term Obligations.


    All other assets that are financial instruments, excluding asset-backed
    commercial paper ("ABCP"), as discussed below, have been classified as
    "loans and receivables" and all other financial instrument liabilities
    have been classified as "other liabilities" and are measured at amortized
    cost on the consolidated statements of financial position. The carrying
    value of these financial instruments, with the exception of long-term
    obligations, approximates fair value. Long-term obligations with a
    carrying value of $365.0 million, including the portion due within one
    year, but excluding all capital lease obligations, have a fair value at
    November 1, 2008 of $372.6 million. The fair value of the Company's
    proportionate share of long-term debt of joint ventures, with a carrying
    value of $65.0 million at November 1, 2008, was calculated using a
    valuation technique based on assumptions that are not supported by
    observable market prices or rates. The term and interest rate applicable
    to each joint venture's debt together with management's estimate of a
    risk-adjusted discount rate were used to determine the fair value of
    $68.8 million. The fair value of the Company's medium term notes, with a
    carrying value of $300.0 million at November 1, 2008, is $303.8 million
    and was determined with reference to observable market prices and rates.
    Included in other long-term assets on the consolidated statement of
    financial position is an investment in ABCP, with an original cost of
    $3.0 million and a fair value as at November 1, 2008 of $2.2 million,
    which has been classified as available for sale. The November 1, 2008
    fair value has been calculated using a valuation technique based on
    assumptions that are not supported by observable market prices or rates.
    Information disclosed in the Pan-Canadian Investors Committee for Third-
    Party Structured Asset Backed Commercial Paper June 5, 2008 Second
    Amended Plan of Compromise and Arrangements, together with management's
    estimates based thereon regarding interest rate, risk-adjusted discount
    rate and term of the various classes of restructured notes, resulted in a
    $0.4 million reduction in the investment's fair value during the 39-week
    period ended November 1, 2008. The Company does not intend to dispose of
    the investment within the next year.

    Financial instrument risk management

    The Company's adoption of Section 3862 and Section 3863 on February 3,
    2008 has resulted in additional disclosure relating to the Company's
    exposure to risks arising from financial instruments. The Company is
    exposed to credit, liquidity and market risk as a result of holding
    financial instruments. Market risk consists of foreign exchange and
    interest rate risk. The nature of the Company's risks and the financial
    instruments used to manage its exposures have not changed from those
    disclosed in Note 15 of the Company's 2007 Annual Financial Statements,
    except as described herein under the heading "Foreign exchange risk".

    Credit risk

    Credit risk refers to the possibility that the Company can suffer
    financial losses due to failure of the Company's counterparties to meet
    their payment obligations. Exposure to credit risk exists for derivative
    instruments, short-term investments and accounts receivable.

    As at November 1, 2008, the Company's only exposure to counterparty risk
    as it relates to derivative instruments is represented by the fair value
    of the foreign exchange derivative contracts of $94.5 million. These
    contracts are placed with approved financial institutions with secure
    credit ratings.

    Short-term investments of $713.2 million also expose the Company to
    credit risk should the borrower default on maturity of the investment.
    The Company manages this exposure through policies that require borrowers
    to have a minimum credit rating of A and limiting investments with
    individual borrowers at maximum levels based on credit rating.

    The Company is exposed to minimal credit risk from customers as a result
    of ongoing credit evaluations and review of accounts receivable
    collectability. As at November 1, 2008, approximately 20% of the
    Company's accounts receivable are due from a single customer. The
    customer is in good standing and the accounts receivable are secured by
    the inventory sold to the customer.

    Liquidity risk

    Liquidity risk is the risk that the Company may not have cash available
    to satisfy financial liabilities as they come due. The Company actively
    maintains access to adequate funding sources to ensure it has sufficient
    available funds to meet current and foreseeable financial requirements at
    a reasonable cost.

    The following table summarizes the carrying amount and the contractual
    maturities of both the interest and principal portion of significant
    financial liabilities as at November 1, 2008:


                                  Contractual Cash Flow Maturities
                       ------------------------------------------------------
    (in      Carrying                Within  1 year to 3 years to     Beyond
    millions)  Amount      Total     1 year    3 years    5 years    5 years
    -------------------------------------------------------------------------
    Accounts
     payable $  816.6  $   816.6  $   816.6  $       -  $       -  $       -
    Accrued
     liabi-
     lities     425.0      425.0      425.0          -          -          -
    Long-term
     oblig-
     ations     368.4      434.8       42.4      357.7        9.4       25.3
    Operating
     lease
     oblig-
     ations(3)      -      749.4      110.7      185.5      144.3      308.9
    -------------------------------------------------------------------------
             $1,610.0  $ 2,425.8  $ 1,394.7  $   543.2  $   153.7  $   334.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (3) Operating lease obligations are not reported on the consolidated
        statement of financial position.

    Management believes that cash on hand, future cash flows generated from
    operations and availability of current and future funding will be
    adequate to support these financial liabilities. See Note 14 for
    information regarding the Company's plans for future funding.

    Market risk

    Market risk exists as a result of the potential for losses caused by
    changes in market factors such as interest rates and foreign currency
    exchange rates.

    Interest rate risk

    There has been no change in the Company's exposure to interest rate risk
    from that disclosed in the 2007 Annual Financial Statements.

    Foreign exchange risk

    There has been no change in the Company's exposure to foreign exchange
    risk from that disclosed in the 2007 Annual Financial Statements.
    However, as described below, the instruments used to manage foreign
    exchange risk have changed since the February 2, 2008 fiscal year end.

    Concurrent with the implementation of hedge accounting, the Company
    discontinued the recognition of certain embedded derivatives as a result
    of a change in accounting policy made in accordance with Section 1506 and
    retrospectively restated the 2007 fiscal year results (Note 1 Basis of
    Presentation). The Company believes this change in accounting policy
    results in more relevant net earnings and OCI, as the change in market
    value of the hedged item is now recognized consistent with the change in
    market value of the hedging item.

    While the notional principal amounts of these outstanding financial
    instruments are not recorded on the consolidated statements of financial
    position, the fair value of the contracts is included on the consolidated
    statements of financial position in one of the following categories,
    depending on the derivative's maturity and value: prepaid expenses and
    other assets, other long-term assets, accrued liabilities or other long-
    term liabilities. Changes in fair value of those contracts designated as
    hedges are included in OCI for cash flow hedges to the extent the hedges
    continue to be effective. Amounts previously included in OCI are
    reclassified to net earnings in the same period in which the hedged item
    impacts net earnings.

    As at November 1, 2008, there were option contracts outstanding with a
    notional value of U.S. $547.4 million and a combined carrying value of
    $94.5 million, included in prepaid expenses and other assets. These
    option contracts have settlement dates extending to August 2010 and have
    been designated for hedge accounting treatment under CICA Handbook
    Section 3865 "Hedges". These contracts are intended to reduce the foreign
    exchange risk with respect to anticipated purchases of U.S. dollar
    denominated goods and services, including goods purchased for resale
    ("hedged item").

    Based on historic movements and volatilities in foreign exchange and
    interest rates and management's current assessment of the financial
    markets, the Company believes the following variations are reasonably
    possible over a 12 month period:

    -   A foreign exchange rate variation of +10% (appreciation of the
        Canadian $) and -10% (depreciation of the Canadian $) against the
        U.S. $ from a period end rate of 0.8302 U.S. $ to Canadian $.
    -   A variation of +1%/-1% in the interest rates applicable to the
        Company's cash and short-term investments.

    If the above estimated variations were to occur, the annualized impact on
    consolidated net earnings would be as follows:

    Cash and short-term investments totalling $803.5 million earn interest
    income and are therefore sensitive to changes in interest rates. Movement
    in interest rates of +/-1% would cause a variance in net earnings in the
    amount of $5.5 million.

    Cash and short-term investments, accounts receivable and accounts payable
    include U.S. $ denominated balances which net to an insignificant
    balance, therefore, any changes in the U.S./Canadian dollar exchange
    rates would have an immaterial impact on net earnings.

    Financial instrument policies

    The following policies were adopted on December 31, 2006:

        Transaction costs - The Company has a policy of recognizing all
        transaction costs related to financial assets and liabilities as a
        reduction to net earnings in the period in which the costs were
        incurred.

        Hedge accounting - The Company formally identifies, designates and
        documents all relationships between hedging instruments and hedged
        items, as well as its risk assessment objective and strategy for
        undertaking various hedge transactions. The Company assesses, both at
        the hedge's inception and on an ongoing basis, whether the
        derivatives that are used in hedging transactions are highly
        effective in offsetting changes in fair values or cash flows of
        hedged items. When such derivative instruments cease to exist or be
        effective as hedges, or when designation of a hedging relationship is
        terminated, any associated deferred gains or losses are recognized in
        net earnings in the same period as the corresponding gains or losses
        associated with the hedged item. When a hedged item ceases to exist,
        any associated deferred gains or losses are recognized in net
        earnings in the period the hedged item ceases to exist. Changes in
        the fair value of the Company's derivatives are non-cash transactions
        and are therefore not recognized in the consolidated statement of
        cash flows.
For further information: Contact for Media: Vincent Power, Sears Canada,
Corporate Communications, (416) 941-4422, vpower@sears.ca