Reitmans (Canada) Limited announces its results for the six months ended August 2, 2008



    MONTREAL, Sept. 4 /CNW Telbec/ - Sales for the six months ended August 2,
2008 decreased 0.9% to $517,820,000 as compared with $522,637,000 for the
six months ended August 4, 2007. Comparable store sales decreased 4.7% in a
challenging retail environment characterized by unseasonable weather
conditions, reduced customer traffic and reduced consumer confidence.
Operating earnings before depreciation and amortization (EBITDA(1)) for the
period increased 9.1% to $103,319,000 as compared with $94,691,000 last year.
A stronger Canadian dollar and tight inventory management positively impacted
operating margins. Higher depreciation expenses due to an increased number of
stores in operation and lower investment income negatively affected earnings
before tax. Net earnings increased 6.7% to $53,821,000 compared to $50,461,000
while diluted earnings per share increased 8.6% to $0.76 per share compared to
$0.70 per share for last year. The Company had 970 stores in operation at the
end of this period compared to 935 stores at the same time last year.
    Sales for the second quarter ended August 2, 2008 decreased 0.8% to
$289,502,000, as compared with $291,942,000 for the second quarter ended
August 4, 2007. Same store sales for the comparable 13 weeks decreased 4.5%.
Operating earnings before depreciation and amortization (EBITDA(1)) for the
period increased 6.7% to $63,982,000 as compared with $59,941,000 last year.
Net earnings and diluted earnings per share increased to $35,385,000 or
$0.50 per share as compared to $32,077,000 or $0.44 per share for the same
period last year.
    The Company adopted the Canadian Institute of Chartered Accountants new
standard relating to the accounting for inventory costs (section 3031 -
Inventories) in the first quarter of fiscal 2009 retrospectively, without
restatement of prior periods. The adoption of this new standard resulted in an
increase in operating earnings of $2,746,000 for the three month period ended
August 2, 2008. In the first quarter of this year, this accounting change
reduced operating earnings by $2,721,000 such that the net effect of this
accounting change for the six month year to date period was a $25,000 increase
in operating income.
    Sales for the month of August (four weeks ended August 30, 2008), as a
result of the continuing difficult retail environment, increased 0.7% with
comparable store sales decreasing 2.3%.
    During the second quarter, the Company opened 10 new stores comprised of
4 Reitmans, 2 RW & CO., 2 Thyme Maternity, 1 Penningtons and 1 Addition Elle;
4 stores were closed. Accordingly, at August 2, 2008, there were 970 stores in
operation, consisting of 377 Reitmans, 164 Smart Set, 57 RW & CO., 75 Thyme
Maternity, 14 Cassis, 163 Penningtons and 120 Addition Elle. An additional
21 stores are scheduled to open this year, 20 stores will be remodeled and
6 stores will be closed.
    At the Board of Directors meeting held on September 4, 2008, a quarterly
cash dividend (constituting eligible dividends) of $0.18 per share on all
outstanding Class A non-voting and Common shares of the Company was declared,
payable October 30, 2008 to shareholders of record on October 16, 2008.

    Financial statements are attached.


    Montreal, September 4, 2008

    Jeremy H. Reitman, President

    Tel: (514) 385-2630
    Corporate Website: www.reitmans.ca

    All of the statements contained herein, other than statements of fact
that are independently verifiable at the date hereof, are forward-looking
statements. Such statements, based as they are on the current expectations of
management, inherently involve numerous risks and uncertainties, known and
unknown, many of which are beyond the Company's control. Such risks include
but are not limited to: the impact of general economic conditions, general
conditions in the retail industry, seasonality, weather and other risks
included in public filings of the Company. Consequently, actual future results
may differ materially from the anticipated results expressed in
forward-looking statements. The reader should not place undue reliance on the
forward-looking statements included herein. These statements speak only as of
the date made and the Company is under no obligation and disavows any
intention to update or revise such statements as a result of any event,
circumstances or otherwise, except to the extent required under applicable
securities law.

    
    (1) This release includes reference to certain Non-GAAP Financial
        Measures such as operating earnings before depreciation and
        amortization and EBITDA, which are defined as earnings before
        interest, taxes, depreciation and amortization and investment income.
        The Company believes such measures provide meaningful information on
        the Company's performance and operating results. However, readers
        should know that such Non-GAAP financial measures have no
        standardized meaning as prescribed by GAAP and may not be comparable
        to similar measures presented by other companies. Accordingly, these
        should not be considered in isolation.


    CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

    (in thousands       For the six months ended  For the three months ended
     except per           August 2,     August 4,     August 2,     August 4,
     share amounts)           2008          2007          2008          2007


    Sales                $ 517,820     $ 522,637     $ 289,502     $ 291,942
    Cost of goods
     sold and selling,
     general and
     administrative
     expenses (note 2)     414,501       427,946       225,520       232,001
                         ----------    ----------    ----------    ----------
                           103,319        94,691        63,982        59,941
    Depreciation and
     amortization           28,782        23,838        14,817        12,140
                         ----------    ----------    ----------    ----------
    Operating earnings
     before the
     undernoted             74,537        70,853        49,165        47,801

    Investment
     income (note 8)         4,257         7,049         2,066         2,729
    Interest on
     long-term debt            469           504           232           250
                         ----------    ----------    ----------    ----------
    Earnings before
     income taxes           78,325        77,398        50,999        50,280

    Income taxes:
      Current               25,859        29,837        16,862        20,190
      Future                (1,355)       (3,817)       (1,248)       (2,450)
                         ----------    ----------    ----------    ----------
                            24,504        26,020        15,614        17,740
      Québec tax
       reassessments -
       current                   -           917             -           463
                         ----------    ----------    ----------    ----------
                            24,504        26,937        15,614        18,203
                         ----------    ----------    ----------    ----------
    Net earnings         $  53,821     $  50,461     $  35,385     $  32,077
                         ----------    ----------    ----------    ----------
                         ----------    ----------    ----------    ----------

    Earnings per share:
      Basic              $    0.76     $    0.71     $    0.50     $    0.45
      Diluted            $    0.76          0.70     $    0.50          0.44


    The accompanying notes are an integral part of these consolidated
    financial statements.


    CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

                        For the six months ended  For the three months ended
                          August 2,     August 4,     August 2,     August 4,
    (in thousands)            2008          2007          2008          2007

    CASH FLOWS
     (USED IN)
     FROM OPERATING
     ACTIVITIES
      Net earnings       $  53,821     $  50,461     $  35,385     $  32,077
      Adjustments for:
        Depreciation
         and
         amortization       28,782        23,838        14,817        12,140
        Future income
         taxes              (1,355)       (3,817)       (1,248)       (2,450)
        Stock-based
         compensation          369           524           195           268
        Amortization of
         deferred lease
         credits            (2,562)       (2,230)       (1,283)       (1,146)
        Deferred lease
         credits             3,636         3,090         1,742         1,738
        Pension
         contribution         (179)            -           (89)            -
        Pension expense        820           800           410           400
        Gain on sale
         of marketable
         securities              -        (2,006)            -           (10)
        Unrealized
         foreign
         exchange
         loss                  225            97           480            41
      Changes in
       non-cash working
       capital items
       relating to
       operations          (40,466)      (37,693)        4,447        17,975
                         ----------    ----------    ----------    ----------
                            43,091        33,064        54,856        61,033

    CASH FLOWS
     (USED IN) FROM
     INVESTING
     ACTIVITIES
      Proceeds on sale
       of marketable
       securities                -        11,596             -           534
      Additions to
       capital assets      (26,883)      (39,143)      (13,809)      (20,919)
                         ----------    ----------    ----------    ----------
                           (26,883)      (27,547)      (13,809)      (20,385)


    CASH FLOWS
     (USED IN) FROM
     FINANCING
     ACTIVITIES
      Dividends paid       (25,485)      (22,832)      (12,720)      (11,420)
      Purchase of
       Class A
       non-voting
       shares for
       cancellation         (4,073)            -        (4,073)            -
      Repayment of
       long-term debt         (564)         (530)         (284)         (267)
      Proceeds from
       issue of
       share capital           178         1,322            54            72
                         ----------    ----------    ----------    ----------
                           (29,944)      (22,040)      (17,023)      (11,615)

    EFFECT OF FOREIGN
     EXCHANGE ON CASH
     AND CASH
     EQUIVALENTS              (225)          (97)         (480)          (41)

    NET (DECREASE)
     INCREASE IN CASH
     AND CASH
     EQUIVALENTS           (13,961)      (16,620)       23,544        28,992

    CASH AND CASH
     EQUIVALENTS,
     BEGINNING OF
     THE PERIOD            214,301       188,491       176,796       142,879
                         ----------    ----------    ----------    ----------

    CASH AND CASH
     EQUIVALENTS,
     END OF THE
     PERIOD              $ 200,340     $ 171,871     $ 200,340     $ 171,871
                         ----------    ----------    ----------    ----------
                         ----------    ----------    ----------    ----------

    Supplemental disclosure of cash flow information (note 8)

    Cash and cash equivalents consist of cash balances with banks and
    investments in short-term deposits.

    The accompanying notes are an integral part of these consolidated
    financial statements.


    CONSOLIDATED BALANCE SHEETS (Unaudited)

                                                                     Audited
                                            August 2,   August 4, February 2,
    (in thousands)                              2008        2007        2008

    ASSETS
    CURRENT ASSETS
      Cash and cash
       equivalents (note 8)                $ 200,340   $ 171,871   $ 214,301
      Marketable securities (note 8)          30,543      42,721      30,053
      Accounts receivable                      3,536       3,337       3,546
      Income taxes recoverable                    45           -           -
      Merchandise inventories (note 2)        73,512      72,911      52,441
      Prepaid expenses                        26,812      24,775      22,847
      Future income taxes                        420       3,666       1,772
                                           ----------  ----------  ----------
        Total Current Assets                 335,208     319,281     324,960

    CAPITAL ASSETS                           246,297     239,955     247,963

    GOODWILL                                  42,426      42,426      42,426

    FUTURE INCOME TAXES                        7,230       5,058       5,611
                                           ----------  ----------  ----------

                                           $ 631,161   $ 606,720   $ 620,960
                                           ----------  ----------  ----------
                                           ----------  ----------  ----------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Accounts payable and accrued
       items                               $  63,848   $  72,864   $  69,189
      Income taxes payable                         -      27,309      16,546
      Future income taxes                          -       1,802         761
      Current portion of long-term
       debt (note 6)                           1,182       1,110       1,146
                                           ----------  ----------  ----------
        Total Current Liabilities             65,030     103,085      87,642

    DEFERRED LEASE CREDITS                    22,540      21,718      21,466

    LONG-TERM DEBT (note 6)                   13,351      14,533      13,951

    FUTURE INCOME TAXES                            -           -         261

    ACCRUED PENSION LIABILITY                  3,162       2,095       2,521

    SHAREHOLDERS' EQUITY
      Share capital                           23,892      22,981      23,777
      Contributed surplus                      4,326       3,771       4,001
      Retained earnings (note 2)             499,469     438,842     468,374
      Accumulated other comprehensive
       loss                                     (609)       (305)     (1,033)
                                           ----------  ----------  ----------
                                             498,860     438,537     467,341
                                           ----------  ----------  ----------
        Total Shareholders' Equity           527,078     465,289     495,119
                                           ----------  ----------  ----------
                                           $ 631,161   $ 606,720   $ 620,960
                                           ----------  ----------  ----------
                                           ----------  ----------  ----------

    The accompanying notes are an integral part of these consolidated
    financial statements.


    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

                        For the six months ended  For the three months ended
                          August 2,     August 4,     August 2,     August 4,
    (in thousands)            2008          2007          2008          2007

    SHARE CAPITAL
    Balance, beginning
     of the period       $  23,777     $  21,323     $  23,932     $  22,866
      Cash consideration
       on exercise of
       stock options           178         1,322            54            72
      Ascribed value
       credited to share
       capital from
       exercise of stock
       options                  44           336            13            43
      Cancellation of
       shares pursuant
       to stock purchase
       program                (107)            -          (107)            -
                         ----------    ----------    ----------    ----------
    Balance, end of the
     period                 23,892        22,981        23,892        22,981
                         ----------    ----------    ----------    ----------

    CONTRIBUTED SURPLUS
    Balance, beginning of
     the period              4,001         3,583         4,144         3,546
      Stock option
       compensation costs      369           524           195           268
      Ascribed value
       credited to share
       capital from
       exercise of stock
       options                 (44)         (336)          (13)          (43)
                         ----------    ----------    ----------    ----------
    Balance, end of the
     period                  4,326         3,771         4,326         3,771
                         ----------    ----------    ----------    ----------

    RETAINED EARNINGS
    Balance, beginning
     of the period         468,374       411,213       480,770       418,185
      Adjustment to
       opening retained
       earnings due to
       adoption of
       new accounting
       standard (net
       of tax of
       $3,121) (note 2)      6,725             -             -             -
      Net earnings          53,821        50,461        35,385        32,077
      Dividends            (25,485)      (22,832)      (12,720)      (11,420)
      Premium on purchase
       of Class A
       non-voting           (3,966)            -        (3,966)            -
                         ----------    ----------    ----------    ----------
    Balance, end of the
     period                499,469       438,842       499,469       438,842
                         ----------    ----------    ----------    ----------

    ACCUMULATED OTHER
     COMPREHENSIVE
     INCOME (LOSS)
    Balance, beginning
     of the period          (1,033)            -          (597)          (81)
      Adjustment to
       opening balance
       due to the new
       accounting
       policies adopted
       regarding
       financial
       instruments
       (net of tax
       of $523)                  -         2,883             -             -
      Net unrealized
       gain (loss)
       on available-
       for-sale financial
       assets arising
       during the
       period (net of
       tax of $66 for
       the six months
       and $(4) for
       the three
       months ended
       August 2, 2008;
       $250 for the six
       months and $11
       for the three
       months ended
       August 4, 2007)         424        (1,451)          (12)         (206)
      Reclassification
       adjustment for
       net gains
       included in net
       earnings (net of
       tax of $331)              -        (1,737)            -           (18)
                         ----------    ----------    ----------    ----------
    Balance, end of
     the period(1)            (609)         (305)         (609)         (305)
                         ----------    ----------    ----------    ----------

    Total Shareholders'
     Equity              $ 527,078     $ 465,289     $ 527,078     $ 465,289
                         ----------    ----------    ----------    ----------
                         ----------    ----------    ----------    ----------

    (1) Available-for-sale financial investments constitute the sole item in
        accumulated other comprehensive income (loss).

    The accompanying notes are an integral part of these consolidated
    financial statements.


    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

                        For the six months ended  For the three months ended
                          August 2,     August 4,     August 2,     August 4,
    (in thousands)            2008          2007          2008          2007

    Net earnings         $  53,821     $  50,461     $  35,385     $  32,077
    Other comprehensive
     income (loss):
      Net unrealized
       gain (loss) on
       available-for-
       sale financial
       assets arising
       during the
       period (net of
       tax of $66 for
       the six months
       and $(4) for
       the three
       months ended
       August 2, 2008;
       $250 for the
       six months and
       $11 for the
       three months ended
       August 4, 2007)         424        (1,451)          (12)         (206)
      Reclassification
       adjustment for
       net gains
       included in net
       earnings (net of
       tax of $331 for
       the six months
       and $19 for the
       three months ended
       August 4, 2007)           -        (1,737)            -           (18)
                         ----------    ----------    ----------    ----------
                               424        (3,188)          (12)         (224)
                         ----------    ----------    ----------    ----------
    Comprehensive income $  54,245     $  47,273     $  35,373     $  31,853
                         ----------    ----------    ----------    ----------
                         ----------    ----------    ----------    ----------

    The accompanying notes are an integral part of these consolidated
    financial statements.


    NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
    (all amounts in thousands except per share amounts)

    1. BASIS OF PRESENTATION

    These unaudited interim consolidated financial statements (the "financial
statements") have been prepared in accordance with Canadian generally accepted
accounting principles for interim financial information and include all normal
and recurring entries that are necessary for a fair presentation of the
statements. Accordingly, they do not include all of the information and
footnotes required by Canadian generally accepted accounting principles for
annual financial statements. These financial statements should be read in
conjunction with the most recently prepared annual financial statements for
the 52 week period ended February 2, 2008. The Company applied the same
accounting policies in the preparation of the financial statements as
disclosed in note 4 of its annual consolidated financial statements in the
Company's fiscal 2008 Annual Report except as described below in note 2 -
Adoption of new accounting standard.
    The Company's business is seasonal and due to the geographical spread of
the Company's stores and range of products it offers, the Company has
experienced quarterly fluctuations in operating results. The business
seasonality results in performance for the 13 weeks ended August 2, 2008,
which is not necessarily indicative of performance for the balance of the
year.
    All amounts in the attached footnotes are unaudited unless specifically
identified.

    2. ADOPTION OF NEW ACCOUNTING STANDARD

    In June 2007, the CICA issued Section 3031, Inventories, which replaces
Section 3030 and harmonizes the Canadian standards related to inventories with
International Financial Reporting Standards ("IFRS"). This section provides
changes to the measurement and more extensive guidance on the determination of
cost, including allocation of overhead; narrows the permitted cost formulas;
requires impairment testing and expands the disclosure requirements to
increase transparency. This section applies to interim and annual financial
statements for fiscal years beginning on or after January 1, 2008. The Company
adopted this standard in the first quarter of fiscal 2009 retrospectively,
without restatement of prior periods.
    Merchandise inventories are valued at the lower of cost, determined
principally on an average basis using the retail inventory method and net
realizable value. Costs include the cost of purchase, transportation costs
that are directly incurred to bring inventories to their present location and
condition and certain distribution centre costs related to inventories. The
Company estimates net realizable value as the amount that inventories are
expected to be sold taking into consideration fluctuations of retail prices
due to seasonality. Inventories are written down to net realizable value when
the cost of inventories is not estimated to be recoverable due to declining
selling prices. The transitional adjustments resulting from the implementation
of Section 3031 were recognized in the first quarter of fiscal 2009 opening
balance of retained earnings and prior periods have not been restated. Upon
implementation of these requirements, an increase in opening inventories of
$9,846, an increase in taxes payable of $3,121 and an increase of $6,725 to
opening retained earnings were recorded on the consolidated balance sheet
resulting from the application of this new standard. The cost of inventory
recognized as an expense and included in cost of goods sold and selling,
general and administrative expenses for the six months ended August 2, 2008
was $164,948. During the quarter, the Company recorded $3,170 of write-downs
of inventory as a result of net realizable value being lower than cost and no
inventory write-downs recognized in previous periods were reversed. The
retrospective impact on net earnings for the six months ended August 2, 2008
was a reduction of $17.

    3. RECENT ACCOUNTING PRONOUNCEMENTS

    CICA Section 3064 - Goodwill and Intangible Assets

    In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible
Assets, and amends Section 1000, Financial Statement Concepts. The new section
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill and other intangible assets subsequent to its initial
recognition. Standards concerning goodwill are unchanged from the standards
included in the previous Section 3062. This new standard is applicable to
fiscal years beginning on or after October 1, 2008. The Company has evaluated
the new section and determined that there is no impact of its adoption on its
consolidated financial statements.

    International Financial Reporting Standards

    The Canadian Accounting Standards Board has confirmed that the use of IFRS
will be required for publicly accountable profit-oriented enterprises. IFRS
will replace Canada's current GAAP for those enterprises. These new standards
are applicable to fiscal years beginning on or after January 1, 2011.
Companies will be required to provide comparative IFRS information for the
previous fiscal year. The Company will implement this standard in its first
quarter of fiscal year ending January 28, 2012 and is currently evaluating the
impact of their adoption on its consolidated financial statements. The Company
expects the transition to IFRS to impact financial reporting, business
processes and information systems. The Company is assessing the impact of the
transition to IFRS and will continue to invest in training and resources
throughout the transition period to facilitate a timely conversion.

    4. SHARE CAPITAL

    The Company has authorized an unlimited number of Class A non-voting
shares.
    The following table summarizes changes in Class A non-voting shares
outstanding:

                           For the                 For the
                      six months ended       three months ended      Audited
                    August 2,   August 4,   August 2,   August 4, February 2,
                        2008        2007        2008        2007        2008

    Balance at
     beginning of
     the period       57,473      57,817      57,491      57,925      57,817
    Shares issued
     pursuant to
     exercise of
     stock options        30         118          12          10         217
    Shares purchased
     under issuer bid   (275)          -        (275)          -        (561)
                     --------    --------    --------    --------    --------
    Balance at end
     of the period    57,228      57,935      57,228      57,935      57,473
                     --------    --------    --------    --------    --------
                     --------    --------    --------    --------    --------

    The Company has authorized an unlimited number of Common shares. At August
2, 2008, there were 13,440 common shares issued (August 4, 2007 - 13,440;
February 2, 2008 - 13,440) with a value of $482 (August 4, 2007 - $482;
February 2, 2008 - $482).

    5. STOCK-BASED COMPENSATION

    The Company has a share option plan as described in note 10 c) to the
consolidated financial statements contained in the 2008 Annual Report. During
the quarter ended August 2, 2008, ten thousand options were granted and no
options were cancelled.
    Compensation cost related to stock option awards granted during the
quarter under the fair value based approach was calculated using the following
assumptions:

        Expected option life                                 4.1 years
        Risk-free interest rate                             3.55%
        Expected stock price volatility                    31.54%
        Average dividend yield                              3.94%
        Weighted average fair value of options granted     $3.76

    6. LONG-TERM DEBT

                                                                     Audited
                                            August 2,   August 4, February 2,
                                                2008        2007        2008

    Mortgage bearing interest at 6.40%,
     payable in monthly instalments
     of principal and interest of
     $172, due November 2017 and
     secured by the Company's
     distribution centre                   $  14,533   $  15,643   $  15,097
    Less current portion                       1,182       1,110       1,146
                                           ----------  ----------  ----------
                                           $  13,351   $  14,533   $  13,951
                                           ----------  ----------  ----------
                                           ----------  ----------  ----------

    7. EARNINGS PER SHARE

    The number of shares used in the earnings per share calculation is as
follows:

                        For the six months ended  For the three months ended
                          August 2,     August 4,     August 2,     August 4,
                              2008          2007          2008          2007

    Weighted average
     number of shares
     per basic earnings
     per share
     calculations           70,871        71,327        70,825        71,370
    Effect of dilutive
     options outstanding       376           769           353           781
                         ----------    ----------    ----------    ----------
    Weighted average
     number of shares
     per diluted
     earnings per share
     calculations           71,247        72,096        71,178        72,151
                         ----------    ----------    ----------    ----------
                         ----------    ----------    ----------    ----------

    As at August 2, 2008, 223 stock options (2007 - nil) were excluded from
the calculation of diluted earnings per share as these were deemed to be
anti-dilutive, because the exercise prices were greater than the average
market price of the shares during the quarter.

    8. SUPPLEMENTARY INFORMATION

                                                                     Audited
                                            August 2,   August 4, February 2,
                                                2008        2007        2008

    Balance with banks
     (overdraft)                           $  (3,851)  $   3,447   $   2,474
    Short-term deposits, bearing interest
     at 3.0% (August 4, 2007 - 4.5%;
     February 2, 2008 - 4.0%)                204,191     168,424     211,827
                                           ----------  ----------  ----------
    Cash and cash equivalents              $ 200,340   $ 171,871   $ 214,301
                                           ----------  ----------  ----------
                                           ----------  ----------  ----------
    Marketable securities:
      Fair value                           $  30,543   $  42,721   $  30,053
      Cost                                    31,249      43,084      31,249

    Non-cash transactions:
      Capital asset additions included
       in accounts payable                 $   1,562   $   1,320   $   1,329


                           For the                 For the
                      six months ended       three months ended      Audited
                    August 2,   August 4,   August 2,   August 4, February 2,
                        2008        2007        2008        2007        2008

    Cash paid
     during the
     period for:
      Income taxes $  45,584   $  46,279   $  15,217   $  14,166   $  73,305
      Interest           475         552         236         252       1,045

    Investment
     income:
      Available-
       for-sale
       financial
       assets:
        Interest
         income    $      22   $      40   $      11   $      21   $      62
        Dividends        823       1,247         404         562       2,398
        Realized
         gain on
         disposal          -       2,006           -          10         474
      Held-for-
       trading
       financial
       assets:
        Interest
         income        3,412       3,756       1,651       2,136       8,194
                   ----------  ----------  ----------  ----------  ----------
                   $   4,257   $   7,049   $   2,066   $   2,729   $  11,128
                   ----------  ----------  ----------  ----------  ----------
                   ----------  ----------  ----------  ----------  ----------

    9. FINANCIAL INSTRUMENTS

    The Company's significant financial instruments consist of cash and cash
equivalents along with marketable securities. Financial instruments that are
exposed to concentrations of credit risk consist primarily of cash
equivalents. The Company uses its cash resources to fund ongoing store
construction and renovations along with working capital needs. The Company
reduces its credit risks by investing available cash in bank bearer deposit
notes and bank term deposits with major Canadian chartered banks. The Company
closely monitors its risk with respect to short-term cash investments.
Marketable securities consist primarily of preferred shares of Canadian public
companies. The Company has gradually been reducing the size of its investment
portfolio and managing its cash on a short-term basis.
    The Company early adopted the requirements of the CICA Handbook Section
3862 at February 2, 2008, Financial Instruments - Disclosures, which apply to
fiscal years beginning on or after October 1, 2007. This new Handbook section
requires disclosures to enable users to evaluate the significance of financial
instruments for the entity's financial position and performance, and the
nature and extent of an entity's exposure to risks arising from financial
instruments, including how the entity manages those risks. Disclosures
relating to exposure to risks, in particular credit risk, liquidity risk,
foreign currency risk, interest rate risk and equity price risk were provided
in the Company's Annual Report for the year ended February 2, 2008 and there
have been no significant changes in the Company's risk exposures in the first
six months of fiscal 2009.


    MANAGEMENT'S DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    FOR THE PERIOD ENDED AUGUST 2, 2008

    The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") of Reitmans (Canada) Limited ("Reitmans" or
the "Company") should be read in conjunction with the unaudited consolidated
financial statements for the period ended August 2, 2008 and the audited
consolidated financial statements of Reitmans for the fiscal year ended
February 2, 2008 and the notes thereto which are available at www.sedar.com.
This MD&A is dated September 4, 2008.
    All financial information contained in this MD&A and Reitmans'
consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"), except for certain
information referred to as Non-GAAP financial measures discussed below. All
amounts in this report are in Canadian dollars, unless otherwise noted. The
consolidated financial statements and this MD&A were reviewed by Reitmans'
Audit Committee and were approved by its Board of Directors on September 4,
2008.
    Additional information about Reitmans, including the Company's 2008 Annual
Information Form, is available on the Company's website at www.reitmans.ca, or
on the SEDAR website at www.sedar.com.

    FORWARD-LOOKING STATEMENTS

    All of the statements contained herein, other than statements of fact that
are independently verifiable at the date hereof, are forward-looking
statements. Such statements, based as they are on the current expectations of
management, inherently involve numerous risks and uncertainties, known and
unknown, many of which are beyond the Company's control. Such risks include
but are not limited to: the impact of general economic conditions, general
conditions in the retail industry, seasonality, weather and other risks
included in public filings of the Company. Consequently, actual future results
may differ materially from the anticipated results expressed in
forward-looking statements. The reader should not place undue reliance on the
forward-looking statements included herein. These statements speak only as of
the date made and the Company is under no obligation and disavows any
intention to update or revise such statements as a result of any event,
circumstances or otherwise, except to the extent required under applicable
securities law.

    NON-GAAP FINANCIAL MEASURES

    This MD&A includes references to certain Non-GAAP financial measures such
as operating earnings before depreciation and amortization, which is defined
as earnings before interest, taxes, depreciation and amortization and
investment income and adjusted net earnings and adjusted earnings per share,
which are defined on page 5. The Company believes such measures provide
meaningful information on the Company's performance and operating results.
However, readers should know that such Non-GAAP financial measures have no
standardized meaning as prescribed by GAAP and may not be comparable to
similar measures presented by other companies. Accordingly, these should not
be considered in isolation.

    CORPORATE OVERVIEW

    Reitmans is a Canadian ladies wear specialty apparel retailer. The Company
has seven banners: Reitmans, Smart Set, RW & CO., Thyme Maternity,
Penningtons, Addition Elle and Cassis. Each banner is focused on a particular
niche in the retail marketplace. Each banner has a distinct marketing program
as well as a specific website thereby allowing the Company to continue to
enhance its brands and strengthen customer loyalty. The Company has several
competitors in each niche, including local, regional and national chains of
specialty stores and department stores as well as foreign based competitors.
The Company's stores are located in malls, strip plazas, retail power centres
and major shopping streets across Canada. The Company continues to grow all
areas of its business by investing in stores, technology and people. The
Company's growth has been driven by continuing to offer Canadian consumers
affordable fashions and accessories at the best value reflecting price and
quality.
    The Company embarked on an e-commerce initiative in its plus-size banners
and launched an e-commerce website for these banners in November 2007. The
Company is encouraged with the acceptance shown by customers using the
e-commerce website and anticipates that this initiative will represent an
opportunity for the Company to enhance sales while offering customers the
convenience of online purchasing.

    CONSOLIDATED OPERATING RESULTS FOR THE SIX MONTHS ENDED AUGUST 2, 2008
    ("year to date") AND COMPARISON TO CONSOLIDATED OPERATING RESULTS FOR THE
    SIX MONTHS ENDED AUGUST 4, 2007 ("year to date fiscal 2008")

    Sales for the year to date decreased 0.9% to $517,820,000 as compared with
$522,637,000 for the year to date fiscal 2008. Same store sales decreased
4.7%. The continued weakness in the US economy and sharp increases in the
price of certain commodities in Canada, most notably oil and gas, continued to
impact consumer confidence, which led to reduced traffic in malls, power
centres and street store locations as consumers cut back on spending for
apparel. Particularly unfavourable weather conditions yielded close to
historical records for snowfall which persisted into the spring in Central and
Eastern Canada, contributing to a softening in the demand for spring
merchandise as customers delayed their purchases. Unseasonable weather
continued throughout Canada during the months of May, June and July with
higher than average levels of rainfall and below normal temperatures. This
impacted traditional buying patterns as consumers delayed purchases resulting
in the Company's merchandise being more heavily promoted to manage inventory
levels.
    Operating earnings before depreciation and amortization for the year to
date increased 9.1% to $103,319,000 as compared with $94,691,000 for the year
to date fiscal 2008. The Company adopted a new accounting standard (as
explained below in "Adoption of New Accounting Standard") with respect to the
accounting for inventory costs which on a year to date basis had no
significant impact on operating earnings before depreciation and amortization.
The Company improved its gross margin despite a very competitive and highly
promotional environment. Gross margin improved 326 basis points prior to
giving effect to a 178 basis point reduction in gross margin attributable to
the inclusion of transportation costs and certain distribution centre costs.
The strength of the Canadian dollar continued to favourably impact the gross
margin for the year to date. Spot prices for $1.00 US for the year to date
ranged between a high of $1.03 and a low of $0.97 Canadian ($1.19 and $1.03
respectively for the year to date fiscal 2008). The Company continued to focus
on managing its inventory levels while ensuring that customers were provided
with a broad selection of quality fashion merchandise. Despite consumer demand
softening in the year to date, which resulted in all banners taking more
markdowns to sell the merchandise, improvements in gross margin contributed
significantly to improved operating earnings before depreciation and
amortization.
    Depreciation and amortization expense for the year to date was $28,782,000
compared to $23,838,000 for the same period last year. This increase reflects
the increased new store construction and store renovation activities of the
Company. As well, it includes $2,074,000 of write-offs as a result of closed
and renovated stores, compared to $996,000 for the same period last year.
    Investment income for the year to date decreased 39.6% to $4,257,000 as
compared to $7,049,000 for the same period last year. Dividend income for the
year to date was $823,000 as compared to $1,247,000 for the year to date
fiscal 2008, while there were no net capital gains for the year to date as
compared to $2,006,000 for the same period last year. Interest income
decreased for the year to date to $3,434,000 as compared to $3,796,000 for the
year to date fiscal 2008 due to lower rates of interest. The Company
maintained larger cash balances while continuing to reduce the size of its
investment portfolio and managing the resulting cash on a short-term basis.
    Interest expense on long-term debt decreased to $469,000 for the year to
date from $504,000 for the year to date fiscal 2008. This decrease reflects
the continued repayment of the mortgage on the Company's distribution centre.
    Income tax expense for the year to date amounted to $24,504,000, for an
effective tax rate of 31.3%. For the same period last year, income tax expense
was $26,937,000, for an effective tax rate of 34.8%. This decrease in income
tax is due to a reduction in the federal basic income tax rate along with the
income tax expense recorded in the prior year related to the retroactive
income tax re-assessments issued in connection with Bill 15 enacted by the
Québec National Assembly.
    Net earnings for the year to date increased 6.7% to $53,821,000
($0.76 diluted earnings per share) as compared with $50,461,000 ($0.70 diluted
earnings per share) for the year to date fiscal 2008.
    The Company in its normal course of business makes long lead time
commitments for a significant portion of its merchandise purchases, in some
cases as long as eight months. Most of these purchases must be paid for in
US dollars. In the year to date, these merchandise purchases exceeded
$103,000,000 US. The Company uses a variety of strategies designed to fix the
cost of its continuing US dollar long-term commitments at the lowest possible
cost, while at the same time allowing itself the opportunity to take advantage
of an increase in the value of the Canadian dollar. For the year to date,
these strategies increased the Company's gross margin as the Canadian dollar
remained strong.
    During the year to date, the Company opened 24 stores comprised of
11 Reitmans, 2 Smart Set, 4 RW & CO., 3 Thyme Maternity, 2 Penningtons, and
2 Addition Elle; 12 stores were closed. Accordingly, at August 2, 2008, there
were 970 stores in operation, consisting of 377 Reitmans, 164 Smart Set, 57 RW
& CO., 75 Thyme Maternity, 14 Cassis, 163 Penningtons and 120 Addition Elle as
compared with a total of 935 stores last year.
    Store closings take place for a variety of reasons as the viability of
each store and its location is constantly monitored and assessed for
continuing profitability. In most cases when a store is closed, merchandise at
that location is sold off in the normal course of business and any unsold
merchandise remaining at the closing date is generally transferred to other
stores operating under the same banner for sale in the normal course of
business.

    CONSOLIDATED OPERATING RESULTS FOR THE THREE MONTHS ENDED AUGUST 2, 2008
    ("second quarter") AND COMPARISON TO CONSOLIDATED OPERATING RESULTS FOR
    THE THREE MONTHS ENDED AUGUST 4, 2007 ("second quarter of fiscal 2008")

    Sales for the second quarter decreased 0.8% to $289,502,000 as compared
with $291,942,000 for the second quarter of fiscal 2008. Same store sales
decreased 4.5%. The continued weakness in the US economy and sharp increases
in the price of certain commodities in Canada, most notably oil and gas,
continued to impact consumer confidence, which led to reduced traffic in
malls, power centres and street store locations as consumers cut back on
spending for apparel. Unseasonable weather continued throughout Canada during
the months of May, June and July with higher than average levels of rainfall
and temperatures below normal. This impacted traditional buying patterns as
consumers delayed purchases resulting in the Company's merchandise being more
heavily promoted to manage its inventory levels.
    Operating earnings before depreciation and amortization for the second
quarter increased 6.7% to $63,982,000 as compared with $59,941,000 for the
second quarter of fiscal 2008. The Company adopted a new accounting standard
(as explained below in "Adoption of New Accounting Standard") with respect to
the accounting for inventory costs which resulted in an increase of $2,746,000
in operating earnings before depreciation and amortization for the second
quarter. The Company improved its gross margin during the quarter despite a
very competitive and highly promotional environment. Gross margin improved
223 basis points prior to giving effect to a 59 basis point reduction in gross
margin primarily attributable to the inclusion of transportation costs and
certain distribution centre costs. The strength of the Canadian dollar
continued to favourably impact the gross margin for the second quarter. Spot
prices for $1.00 US for the second quarter ranged between a high of $1.03 and
a low of $0.98 Canadian ($1.11 and $1.03 respectively for the second quarter
of fiscal 2008). The Company continued to focus on managing its inventory
levels while ensuring that customers were provided with a broad selection of
quality fashion merchandise. Despite consumer demand softening in the second
quarter, which resulted in all banners taking more markdowns to sell the
merchandise, improvements in gross margin contributed significantly to
improved operating earnings before depreciation and amortization.
    Depreciation and amortization expense for the second quarter was
$14,817,000 compared to $12,140,000 for the same period last year. This
increase reflects the increased new store construction and store renovation
activities of the Company. As well, it includes $1,278,000 of write-offs as a
result of closed and renovated stores, compared to $294,000 in the same period
last year.
    Investment income for the second quarter decreased 24.3% to $2,066,000 as
compared to $2,729,000 in the same period last year. Dividend income for the
second quarter was $404,000 as compared to $562,000 for the second quarter of
fiscal 2008, while there were no net capital gains for the second quarter as
compared to $10,000 for the same period last year. Interest income decreased
for the second quarter to $1,662,000 as compared to $2,157,000 for the second
quarter of fiscal 2008 due to lower rates of interest. The Company maintained
larger cash balances while continuing to reduce the size of its investment
portfolio and managing the resulting cash on a short-term basis.
    Interest expense on long-term debt decreased to $232,000 in the second
quarter from $250,000 in the second quarter of fiscal 2008. This decrease
reflects the continued repayment of the mortgage on the Company's distribution
centre.
    Income tax expense for the second quarter amounted to $15,614,000, for an
effective tax rate of 30.6%. For the same period last year, income tax expense
was $18,203,000, for an effective tax rate of 36.2%. This decrease in income
tax is due to a reduction in the federal basic income tax rate along with the
income tax expense recorded in the prior year related to the retroactive
income tax re-assessments issued in connection with Bill 15 enacted by the
Québec National Assembly.
    Net earnings for the second quarter increased 10.3% to $35,385,000
($0.50 diluted earnings per share) as compared with $32,077,000 ($0.44 diluted
earnings per share) for the second quarter of fiscal 2008.
    The Company in its normal course of business makes long lead time
commitments for a significant portion of its merchandise purchases, in some
cases as long as eight months. Most of these purchases must be paid for in
US dollars. In the second quarter, these merchandise purchases exceeded
$44,000,000 US. The Company uses a variety of strategies designed to fix the
cost of its continuing US dollar long-term commitments at the lowest possible
cost, while at the same time allowing itself the opportunity to take advantage
of an increase in the value of the Canadian dollar. For the second quarter,
these strategies helped the Company's gross margin as the Canadian dollar
remained strong.
    During the second quarter, the Company opened 10 stores comprised of
4 Reitmans, 2 RW & CO., 2 Thyme Maternity, 1 Penningtons and 1 Addition Elle;
4 stores were closed. Accordingly, at August 2, 2008, there were 970 stores in
operation, consisting of 377 Reitmans, 164 Smart Set, 57 RW & CO., 75 Thyme
Maternity, 14 Cassis, 163 Penningtons and 120 Addition Elle as compared with a
total of 935 stores last year.
    Store closings take place for a variety of reasons as the viability of
each store and its location is constantly monitored and assessed for
continuing profitability. In most cases when a store is closed, merchandise at
that location is sold off in the normal course of business and any unsold
merchandise remaining at the closing date is generally transferred to other
stores operating under the same banner for sale in the normal course of
business.

    SUMMARY OF QUARTERLY RESULTS

    The table below sets forth selected consolidated financial data for the
eight most recently completed quarters. This unaudited quarterly information
has been prepared on the same basis as the annual consolidated financial
statements. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period.
    To measure the Company's performance from one period to the next, without
the variations caused by the impact of the retroactive Québec income tax
reassessments as discussed on page 6, the Company uses adjusted net earnings
and adjusted earnings per share (basic and diluted), which are calculated as
net earnings and earnings per share (basic and diluted) excluding this item.
While the inclusion of this item is required by Canadian GAAP, the Company
believes that the exclusion of this item allows for better comparability of
its financial results and understanding of trends in business performance.

    -------------------------------------------------------------------------
    (in thousands,
     except per share amounts)                            Earnings per share
                                                                ("EPS")

                                               Net
                                  Sales     Earnings       Basic     Diluted
                       ------------------------------------------------------

    August 2, 2008             $ 289,502   $  35,385    $   0.50    $   0.50

    May 3, 2008                  228,318      18,436        0.26        0.26

    February 2, 2008             269,618      37,047        0.52        0.52

    November 3, 2007             265,465      27,394        0.39        0.38

    August 4, 2007               291,942      32,077        0.45        0.44

    May 5, 2007                  230,695      18,384        0.26        0.26

    February 3, 2007(*)          282,110      22,957        0.32        0.32

    October 28, 2006             258,602      23,390        0.33        0.33
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    (in thousands,
     except per share amounts)                             Adjusted Earnings
                                                           per share ("EPS")

                                            Adjusted
                                               Net
                                            Earnings       Basic     Diluted
                       ------------------------------------------------------

    August 2, 2008                         $  35,385    $   0.50    $   0.50

    May 3, 2008                               18,436        0.26        0.26

    February 2, 2008                          28,506        0.40        0.40

    November 3, 2007                          27,869        0.40        0.39

    August 4, 2007                            32,540        0.46        0.45

    May 5, 2007                               18,838        0.27        0.27

    February 3, 2007(*)                       23,433        0.33        0.33

    October 28, 2006                          23,823        0.34        0.33
    -------------------------------------------------------------------------
    (*) Results for the fourth quarter ended February 3, 2007 include
        14 weeks instead of the normal 13 weeks.

    The retail business is seasonal and due to the geographical diversity of
the Company's stores and product offerings, the Company experiences quarterly
fluctuations in operating results. Sales have traditionally been higher in the
fourth quarter compared to other quarterly periods due to consumer holiday
buying patterns. However, with the growth of the Company's plus-size and
maternity businesses, second and third quarters' merchandise sales have been
positively impacted resulting in higher sales revenues relative to the fourth
quarter. Management assumes that this trend will continue in the future.

    BALANCE SHEET

    Cash and cash equivalents amounted to $200,340,000 or 16.6% higher than
$171,871,000 last year as the Company continued to reduce its investment
portfolio and manage the resulting cash on a short-term basis. The Company
does not hold any asset backed commercial paper. Marketable securities held by
the Company consist primarily of preferred shares of Canadian public
companies. At August 2, 2008, marketable securities (reported at fair value)
amounted to $30,543,000 as compared with $42,721,000 last year. The Company
has been gradually reducing the size of its investment portfolio and managing
the resulting cash on a short-term basis, and in particular, reducing its
investments in income trusts. Accounts receivable are $3,536,000 or $199,000
higher than last year. The Company's accounts receivable are essentially the
credit card sales from the last few days of the fiscal quarter. Merchandise
inventories this year were $73,512,000 or $601,000 higher than last year, due
to the Company adopting a new accounting standard as described below in
"Adoption of New Accounting Standard". The adoption of this new standard
increased the inventory at the end of the second quarter by $9,871,000. The
favourable impact of the Canadian dollar on inventory offset this increase in
inventory. As a result of the Company's change in accounting policy for
inventories, the inventory balance as at August 2, 2008 is not comparable with
August 4, 2007. Prepaid expenses, the majority of which represent prepaid
rent, are $26,812,000 or approximately $2,037,000 higher than last year,
principally due to rent and related costs from more stores.
    Income taxes recoverable are $45,000 as compared to an income tax payable
of $27,309,000 last year. The reduction of the tax liability is attributed to
the payment by the Company of $12,905,000 in March 2008 to settle all matters
related to the retroactive income tax re-assessments issued in connection with
Bill 15 enacted by the Québec National Assembly, along with increased
instalments that resulted in the current year's taxes recoverable. For
additional information on the retroactive tax re-assessments, refer to
note 9 a) of the consolidated financial statements for the year ended
February 2, 2008.
    The Company invested $26,883,000 in additions to capital assets in the
year to date and $13,809,000 in the second quarter. This included $23,520,000
(2008 - $31,556,000) in new store construction and existing store renovation
costs and $3,363,000 (2008 - $7,587,000) in the Sauvé Street office and
distribution centre asset additions.
    Accounts payable and accrued items are $63,848,000, or $9,016,000 less
than last year. The reduction in the liabilities is primarily due to lower
trade payables, which is a function of the timing of receipt of goods and
lower employee incentive bonus costs related to the Company employee
performance incentive plan. The Company's accounts payable consist largely of
trade payables and liabilities for unredeemed gift certificates and credit
vouchers.
    In addition to its defined benefit plan, the Company has a Supplemental
Executive Retirement Plan ("SERP") for certain senior executives. An actuarial
calculation was made in fiscal 2007 to determine the estimated liability the
Company incurred with respect to the provisions of the plan. An amount of
$820,000 (2008 - $800,000) was expensed in the year to date with respect to
this plan. The plan is unfunded. When the obligation arises to make any
payment called for under the plan (e.g. when an eligible plan member retires
and begins receiving payments under the plan), the payments will reduce the
accrual amount as the payments are actually made.

    COMPARISON OF CONSOLIDATED FINANCIAL POSITION AS AT AUGUST 2, 2008 WITH
    THE CONSOLIDATED FINANCIAL POSITION AS AT FEBRUARY 2, 2008

    Cash and cash equivalents amounted to $200,340,000 or 6.5% lower than
$214,301,000 as at February 2, 2008, largely due to the timing of payments for
summer merchandise receipts in the second quarter. Marketable securities
(reported at fair value) amounted to $30,543,000 as compared with $30,053,000
at February 2, 2008. Marketable securities held by the Company consist
primarily of preferred shares of Canadian public companies. The Company has
been gradually reducing the size of its investment portfolio and managing the
resulting cash on a short-term basis, and in particular, reducing its
investments in income trusts. Accounts receivable were $3,536,000 or $10,000
less than the fiscal year ended February 2, 2008. The Company's accounts
receivable are essentially the credit card sales from the last few days of the
fiscal quarter. Merchandise inventories were $73,512,000 or $21,071,000 higher
than the fiscal year ended February 2, 2008. This increase is due to the
build-up of inventory for the fall selling season in the second quarter. The
Company adopted a new accounting standard as described below in "Adoption of
New Accounting Standard". The adoption of this new standard increased the
inventory at the end of the second quarter by $9,871,000. As a result of the
Company's change in accounting policy for inventories, the inventory balance
as at August 2, 2008 is not comparable with February 2, 2008. Prepaid
expenses, the majority of which represent prepaid rent, are $26,812,000 or
$3,965,000 higher than the fiscal year ended February 2, 2008, principally due
to rent and related costs from more stores. Income taxes recoverable are
$45,000 as compared to an income tax payable of $16,546,000 at February 2,
2008. The reduction of the tax liability is attributed to the payment by the
Company of $12,905,000 in March 2008 to settle all matters related to the
retroactive income tax re-assessments issued in connection with Bill 15
enacted by the Québec National Assembly, along with increased instalments that
resulted in the current year's taxes recoverable. For additional information
on the retroactive tax re-assessments, refer to note 9 a) of the consolidated
financial statements for the year ended February 2, 2008.
    Accounts payable and accrued items are $63,848,000, or $5,341,000 lower
than the fiscal year ended February 2, 2008. The reduction in the liabilities
is attributable to lower trade payables, which is a function of the timing of
receipt of goods and a lower gift certificate and credit voucher liability due
to the timing of gift certificate and credit voucher redemptions. The
Company's accounts payable consist largely of trade payables and liabilities
for unredeemed gift certificates and credit vouchers.

    LIQUIDITY, CASH FLOWS AND CAPITAL RE

SOURCES Shareholders' equity at August 2, 2008 amounted to $527,078,000 or $7.46 per share as compared to $465,289,000 or $6.52 per share last year (February 2, 2008 - $495,119,000 or $6.98 per share). The Company continues to be in a strong financial position. The Company's principal sources of liquidity are its cash, cash equivalents and investments in marketable securities (reported at fair value) of $230,883,000 as compared with $214,592,000 last year ($244,354,000 as at February 2, 2008). Short-term cash is conservatively invested in bank bearer deposit notes and bank term deposits with major Canadian chartered banks. The Company closely monitors its risk with respect to short-term cash investments and does not hold any asset backed commercial paper. The Company has borrowing and working capital credit facilities (unsecured) available of $125,000,000. As at August 2, 2008, $62,018,000 (August 4, 2007 - $63,347,000; February 2, 2008 - $48,274,000) of the operating line of credit was committed for documentary and standby letters of credit. These credit facilities are used principally for US dollar letters of credit to satisfy offshore third party vendors, which require such backing before confirming purchase orders issued by the Company. The Company rarely uses such credit facilities for other purposes. The Company has granted standby letters of credit, issued by highly-rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at August 2, 2008, the maximum potential liability under these guarantees was $5,778,000. The standby letters of credit mature at various dates during fiscal 2009. The Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for these items. The Company is self-insured on a limited basis with respect to certain property risks and also purchases excess insurance coverage from financially stable third-party insurance companies. The Company maintains comprehensive loss prevention programs aimed at mitigating the financial impact of operational risks. The Company continued repayment on its long-term debt, relating to the mortgage on the distribution centre, paying down $564,000 in the year to date. The Company paid dividends amounting to $25,485,000 in the year to date compared to $22,832,000 in the year to date fiscal 2008. In the year to date, the Company invested $26,883,000 on new and renovated stores, the distribution centre and the Sauvé Street office. The Company has committed approximately $2,000,000 to complete repairs and ongoing renovation of its Sauvé Street office. These expenditures, together with ongoing store construction and renovation programs, the payment of cash dividends and the repayments related to the Company's bank credit facility and long-term debt obligations, are expected to be funded by the Company's existing financial resources and funds derived from its operations. FINANCIAL COMMITMENTS The following table sets forth the Company's financial commitments as at August 2, 2008, the details of which are described in the previous commentary. Payments Due by Period ------------------------------------------------------------ Contractual Within 2 to 4 5 years Obligations Total 1 year years and over ------------------------------------------------------------ Long-term debt $ 14,533,000 $ 1,182,000 $ 4,029,000 $ 9,322,000 Store leases and equipment 457,744,000 101,025,000 214,380,000 142,339,000 ------------------------------------------------------------ Total contractual obligations $ 472,277,000 $ 102,207,000 $ 218,409,000 $ 151,661,000 ------------------------------------------------------------ ------------------------------------------------------------ OFF-BALANCE SHEET ARRANGEMENTS Derivative Financial Instruments The Company in its normal course of business must make long lead time commitments for a significant portion of its merchandise purchases, in some cases as long as eight months. Most of these purchases must be paid for in US dollars. The Company uses a variety of strategies, such as foreign exchange option contracts, designed to fix the cost of its continuing US dollar commitments at the lowest possible cost, while at the same time allowing itself the opportunity to take advantage of an increase in the value of the Canadian dollar vis-à-vis the US dollar. A foreign exchange option contract represents an option to buy a foreign currency from a counterparty at a predetermined date and amount. Credit risks exist in the event of failure by a counterparty to fulfill its obligations. The Company reduces this risk by dealing only with highly rated counterparties, normally Canadian chartered banks. The Company does not use derivative financial instruments for speculative purposes. Foreign exchange option contracts are entered into with maturities not exceeding three months. As at August 2, 2008, August 4, 2007 and February 2, 2008, the Company had no outstanding foreign exchange option contracts. Included in the determination of the Company's net earnings for the three months and six months ended August 2, 2008 are foreign exchange gains of $134,000 and $413,000 respectively (losses of $391,000 and $1,188,000 for the three months and six months ended August 4, 2007 respectively). RELATED PARTY TRANSACTIONS The Company leases two retail locations which are owned by a related party. The leases for such premises were entered into on commercial terms similar to those for leases entered into with third parties for similar premises. The year to date rent expense under these leases is, in the aggregate, approximately $95,000 (year to date fiscal 2008 - $95,000). The Company incurred fees of $162,000 in the year to date (year to date fiscal 2008 - $173,000) with a law firm, of which two of the Company's outside directors are partners. The Company believes that such remuneration was based on normal terms for transactions between unrelated parties. These transactions are recorded at the amount of consideration paid as established and agreed to by the related parties. FINANCIAL INSTRUMENTS The Company's significant financial instruments consist of cash and cash equivalents along with marketable securities. Financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents. The Company uses its cash resources to fund ongoing store construction and renovations along with working capital needs. The Company reduces its credit risks by investing available cash in bank bearer deposit notes and bank term deposits with major Canadian chartered banks. The Company closely monitors its risk with respect to short-term cash investments. Marketable securities consist primarily of preferred shares of Canadian public companies. The Company has gradually been reducing the size of its investment portfolio and managing its cash on a short-term basis. For the year ended February 2, 2008 the Company early adopted the requirements of the CICA Handbook Section 3862, Financial Instruments - Disclosures. This new Handbook section requires disclosures to enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of an entity's exposure to risks arising from financial instruments, including how the entity manages those risks. Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, interest rate risk and equity price risk were provided at February 2, 2008 and there have been no significant changes in the Company's risk exposures in the year to date. CRITICAL ACCOUNTING ESTIMATES Inventory Valuation The Company uses the retail inventory method in arriving at cost. Merchandise inventories are valued at the lower of cost and net realizable value. Excess or slow moving items are identified and a provision is taken using management's best estimate. In addition, a provision for shrinkage and sales returns are also recorded using historical rates experienced. Given that inventory and cost of sales are significant components of the consolidated financial statements, any changes in assumptions and estimates could have a material impact on the Company's financial position and results of operations. Stock-Based Compensation The Company accounts for stock-based compensation and other stock-based payments using the fair value method. Stock options granted result in an expense over their vesting period based on their estimated fair values on the date of grant, determined using the Black-Scholes option pricing model. In computing the compensation cost related to stock option awards granted during the year under the fair value approach, various assumptions are used to determine the expected option life, risk-free interest rate, expected stock price volatility and average dividend yield. The use of different assumptions could result in a stock compensation expense that differs from that which the Company has recorded. Pension The Company maintains a contributory, defined benefit plan and sponsors a SERP. The costs of the defined benefit plan and SERP are determined periodically by independent actuaries. Pension expense is included annually in operations. Assumptions used in developing the net pension expense and projected benefit obligation include a discount rate, rate of increase in salary levels and expected long-term rate of return on plan assets. The use of different assumptions could result in a pension expense that differs from that which the Company has recorded. The defined benefit plan is fully funded and solvent and the SERP is an unfunded pay as you go plan. Goodwill Goodwill is not amortized but rather is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the Company determines in the future that impairment has occurred, the Company would be required to write-off the impaired portion of goodwill. Gift Certificates and Credit Vouchers Gift certificates sold are recorded as a liability and revenue is recognized when the gift certificate is redeemed. Customers may receive a credit voucher in exchange for returned goods. Credit vouchers are recorded as a liability until redeemed. The Company, for each reporting period, reviews the gift certificate and credit voucher liability and assesses its adequacy. In its review, the Company estimates expected usages and evaluates specific trends and patterns, which can result in an adjustment to the liability for unredeemed gift certificates and/or credit vouchers. INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board has confirmed that the use of International Financial Reporting Standards ("IFRS") will be required for publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for those enterprises. These new standards are applicable to fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative IFRS information for the previous fiscal year. The Company will implement these standards in its first quarter of fiscal year ending January 28, 2012 and is currently evaluating the impact of their adoption on its consolidated financial statements. The Company expects the transition to IFRS to impact financial reporting, business processes and information systems. The Company is assessing the impact of the transition to IFRS and will continue to invest in training and resources throughout the transition period to facilitate a timely conversion. ADOPTION OF NEW ACCOUNTING STANDARD In June 2007, the CICA issued Section 3031, Inventories, which replaces Section 3030 and harmonizes the Canadian standards related to inventories with IFRS. This section provides changes to the measurement and more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing and expands the disclosure requirements to increase transparency. This section applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2008. The Company adopted this standard in the first quarter of fiscal 2009 retrospectively, without restatement of prior periods. Merchandise inventories are valued at the lower of cost, determined principally on an average basis using the retail inventory method and net realizable value. Costs include the cost of purchase, transportation costs that are directly incurred to bring inventories to their present location and condition and certain distribution centre costs related to inventories. The Company estimates net realizable value as the amount that inventories are expected to be sold taking into consideration fluctuations of retail prices due to seasonality. Inventories are written down to net realizable value when the cost of inventories is not estimated to be recoverable due to declining selling prices. The transitional adjustments resulting from the implementation of Section 3031 are recognized in the first quarter of fiscal 2009 opening balance of retained earnings and prior periods have not been restated. Upon implementation of these requirements, an increase in opening inventories of $9,846,000, an increase in taxes payable of $3,121,000 and an increase of $6,725,000 to opening retained earnings were recorded on the consolidated balance sheet resulting from the application of this new standard. The cost of inventory recognized as an expense and included in cost of goods sold and selling, general and administrative expenses for the six months ended August 2, 2008 was $164,948,000. For the year to date, the Company recorded $3,170,000 of write-downs of inventory as a result of net realizable value being lower than cost and no inventory write-downs recognized in previous periods were reversed. The retrospective impact on net earnings for the six months ended August 2, 2008 was a reduction of $17,000. OUTSTANDING SHARE DATA At September 4, 2008, 13,440,000 Common shares of the Company and 57,227,806 Class A non-voting shares of the Company were issued and outstanding. Each Common share entitles the holder thereof to one vote at meetings of shareholders of the Company. The Company has reserved 5,520,000 Class A non-voting shares for issuance under its Share Option Plan of which 925,000 Class A non-voting shares remained authorized for future issuance. The Company had 1,637,250 options outstanding at an average exercise price of $12.75. Each stock option entitles the holder to purchase one Class A non-voting share of the Company at an exercise price established based on the market price of the shares at the date the option was granted. In November 2007, the Company received approval from the Toronto Stock Exchange to proceed with a normal course issuer bid. Under the bid, the Company may purchase up to 2,870,615 Class A non-voting shares of the Company, representing 5% of the issued and outstanding Class A non-voting shares as at November 9, 2007. The average daily trading volume for the six month period preceding November 9, 2007 is 127,150 shares. In accordance with the Toronto Stock Exchange requirements, a maximum daily repurchase of 25% of this average may be made. The bid commenced on November 28, 2007 and may continue to November 27, 2008. The shares will be purchased on behalf of the Company by a registered broker through the facilities of the Toronto Stock Exchange. The price paid for the shares will be the market price at the time of acquisition, and the number of shares purchased and the timing of any such purchases will be determined by the Company's management. All shares purchased by the Company will be cancelled. The Company purchased for cancellation 275,000 Class A non-voting shares at prevailing market prices pursuant to its Share Repurchase Program (normal course issuer bid) for a total cash consideration of $4,073,000 in June 2008. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, has designed internal controls over financial reporting, as defined in Multilateral Instrument 52-109. There were no changes to the Company's internal controls over financial reporting during the six months ended August 2, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. TRENDS, UNCERTAINTIES AND RISKS The Company is principally engaged in the sale of women's apparel through 970 leased retail outlets operating under seven banners located across Canada. The Company's business is seasonal and is also subject to a number of factors, which directly impact retail sales of apparel over which it has no control, namely fluctuations in weather patterns, swings in consumer confidence and buying habits and the potential of rapid changes in fashion preferences. The Company depends on the efficient operation of its sole distribution centre such that any significant disruption in the operation thereof (e.g. natural disaster, system failures, destruction or major damage by fire) could materially delay or impair its ability to replenish its stores on a timely basis causing a loss of future sales, which could have a significant effect on the Company's results of operations. The Company is structured in a manner that management considers to be most effective to conduct its business in every Canadian province and territory and is therefore subject to all manner of material and adverse changes that can take place in any one or more of these jurisdictions as they might impact income and sales, taxation, duties, quota impositions or re-impositions and other legislated or government regulated matters. As well, there is no effective barrier to entry into the Canadian apparel retailing marketplace by any potential competitor, foreign or domestic, and in fact the Company has witnessed the arrival over the past few years of a number of foreign-based competitors now operating in virtually all the Company's Canadian retail sectors. Additionally, Canadian women have a significant number of e-commerce shopping alternatives available to them on a global basis. The Company depends on information systems to manage its operations, including a full range of retail, financial, merchandising and inventory control, planning, forecasting, reporting and distribution systems. The Company regularly invests to upgrade, enhance, maintain and replace these systems. Any significant disruptions in the performance of these systems could have a material adverse impact on the Company's operations and financial results. To mitigate these risk exposures, each banner is directed to and focused on a different niche in the Canadian women's apparel market. Virtually all the Company's merchandise is private label. In the first six months of fiscal 2009, no supplier represented more than 10% of the Company's purchases (in dollars and/or units) and there are a variety of alternative sources (both domestic and offshore) for virtually all the Company's merchandise. When merchandise is sourced offshore and must be paid for in US dollars, the Company uses a variety of strategies to fix the cost of US dollars to ensure it is protected against any material adverse fluctuations in the value of the Canadian dollar between the time the relevant merchandise is ordered and when it must be paid for. Geographically, the Company's stores are located generally according to Canada's population. About 27% of RW & CO.'s merchandise is young menswear. Menswear sales account for approximately 3% of all apparel sales made by the Company. The Company has good relationships with its landlords and suppliers and has no reason to believe that it is exposed to any material risk that would operate to prevent the Company from acquiring, distributing and/or selling merchandise on an ongoing basis. OUTLOOK The Company believes that it is well positioned for the future. The Reitmans banner has continued to successfully expand its offerings in off-mall, lower cost locations, while serving its target market in larger stores with a deeper merchandise assortment. The Company's more youth-oriented banners, namely Smart Set and RW & CO., are positioned for further growth. The Company also believes that the Cassis banner will be successful and that the e-commerce website will enhance sales as it continues to grow. The Company continues to close marginal or unprofitable stores as appropriate. The Company's Hong Kong office continues to serve the Company well, with over 110 full-time employees dedicated to seeking out the highest quality, affordable and fashionable apparel for all our banners. On an annual basis, the Company directly imports approximately 80% of its merchandise, largely from China. The Company has a strong balance sheet, with excellent liquidity and borrowing capacity. Its systems, including merchandise procurement, inventory control, planning, allocation and distribution, distribution centre management, point-of-sale, financial management and information technology are fully integrated. The Company is committed to continue to invest in training for all levels of its employees. %SEDAR: 00002316EF

For further information:

For further information: Jeremy H. Reitman, President, (514) 385-2630;
Corporate Website: www.reitmans.ca


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