Sears Canada Reports First Quarter Earnings



    TORONTO, April 26 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced
its unaudited first quarter results. Total revenues for the 13 week period
ended March 31, 2007 were $1.219 billion compared to $1.222 billion for the 13
weeks ended April 1, 2006, a decrease of 0.2%. Higher merchandise sales and
credit revenues, which increased 0.8% and 2.8%, respectively, were offset by a
decline in service and other revenues. Same store sales, representing sales
generated through operations in full-line, Sears Home, Dealer and Corbeil
stores which were continuously open during the period this year and last year,
increased 1.6% and gross margins increased 69 basis points.
    Net earnings for the quarter, including unusual items, were $17.2 million
or 16 cents per share compared to a loss of $11.8 million or 11 cents per
share in the quarter last year. Net earnings for the quarter, excluding
unusual items, were $7.9 million or 7 cents per share compared to a loss of
$8.2 million or 8 cents per share in the quarter last year.
    Commenting on the quarter, Dene Rogers, President and Chief Executive
Officer, Sears Canada Inc. said, "We are pleased with our overall performance
in the quarter during which both same store sales and gross margins increased.
Most merchandise categories improved their sales during the first three months
of the year. Earnings before interest, taxes, depreciation and amortization
(EBITDA) before unusual items increased from $39.2 million in 2006 to
$56.6 million in 2007. We have continued to build product assortments and
provide services that improve the lives of our customers and their response
has been positive."
    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 196 corporate
stores, 178 dealer stores, 64 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 earnings before unusual items to net earnings
    (in millions, except per share amounts)

    Unaudited

    For the 13 week periods ended March 31, 2007 and April 1, 2006

                              -----------------------------------------------
                                                              Earnings (loss)
                                 Before tax      After tax       per share
    -------------------------------------------------------------------------
                                2007    2006    2007    2006    2007    2006
    -------------------------------------------------------------------------
    Earnings (loss) before
     unusual items            $ 13.6  $(10.2) $  7.9  $ (8.2) $ 0.07  $(0.08)
    -------------------------------------------------------------------------
      Sale of real estate
       joint venture             9.3       -     9.3       -    0.09       -
      Restructuring
       activities                  -    (5.5)      -    (3.6)      -   (0.03)
    -------------------------------------------------------------------------
    Net earnings (loss)       $ 22.9  $(15.7) $ 17.2  $(11.8) $ 0.16  $(0.11)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    Consolidated Statements of Financial Position

                                             As at        As at        As at
                                          March 31,     April 1, December 30,
    (in millions)                             2007         2006         2006
    -------------------------------------------------------------------------
                                        (Unaudited)  (Unaudited)    (Audited)
    ASSETS
    Current Assets
    Cash and short-term investments     $    404.0   $    367.6   $    722.9
    Restricted cash (Note 12)                  5.4          8.9         10.1
    Accounts receivable                      123.1        133.9        135.9
    Income taxes recoverable                   1.6          3.6          0.6
    Inventories                              871.2        852.9        804.5
    Prepaid expenses and other assets        120.1        137.5        120.0
    Current portion of future income
     tax assets                              115.5        131.9        121.2
    -------------------------------------------------------------------------
                                           1,640.9      1,636.3      1,915.2

    Capital assets                           824.5        953.3        874.3
    Deferred charges                         213.5        237.7        220.2
    Future income tax assets                  21.3         57.7         15.2
    Other long-term assets                    33.3         35.5         35.4
    -------------------------------------------------------------------------
                                        $  2,733.5   $  2,920.5   $  3,060.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current liabilities
    Accounts payable                    $    617.2   $    616.8   $    810.1
    Accrued liabilities                      431.0        449.8        480.0
    Income and other taxes payable            23.8         36.8        105.1
    Principal payments on long-term
     obligations due within
     one year (Note 3)                       146.6         19.8        146.7
    Future income tax liabilities                -            -          0.1
    -------------------------------------------------------------------------
                                           1,218.6      1,123.2      1,542.0

    Long-term obligations (Note 3)           372.6        832.6        395.6
    Accrued benefit liability (Note 11)      171.8        170.6        167.7
    Other long-term liabilities              168.7        167.0        170.0
    -------------------------------------------------------------------------
                                           1,931.7      2,293.4      2,275.3
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Capital stock (Note 8)                    15.7         15.7         15.7
    Retained earnings                        786.1        611.4        769.3
    Accumulated other comprehensive
     income (Note 14)                            -            -            -
    -------------------------------------------------------------------------
                                             801.8        627.1        785.0
    -------------------------------------------------------------------------
                                        $  2,733.5   $  2,920.5   $  3,060.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF EARNINGS
    For the 13 week periods ended March 31, 2007 and April 1, 2006

    Unaudited

    (in millions, except per share amounts)                2007         2006
    -------------------------------------------------------------------------

    Total revenues                                   $  1,219.1   $  1,221.6
    -------------------------------------------------------------------------
    Cost of merchandise sold, operating,
     administrative and selling expenses                1,162.5      1,182.4
    Depreciation and amortization                          37.1         38.6
    Interest expense, net                                   5.9         10.8
    Unusual items - (gain) expense (Note 4)                (9.3)         5.5
    -------------------------------------------------------------------------
    Earnings (loss) before income taxes                    22.9        (15.7)
    -------------------------------------------------------------------------
    Income taxes expense (recovery)
      Current                                               9.0          1.3
      Future                                               (3.3)        (5.2)
    -------------------------------------------------------------------------
                                                            5.7         (3.9)
    -------------------------------------------------------------------------
    Net earnings (loss)                              $     17.2   $    (11.8)
    Other comprehensive income (Note 14)                      -            -
    -------------------------------------------------------------------------
    Total comprehensive income (loss)                $     17.2   $    (11.8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings (loss) per share (Note 5)           $     0.16   $    (0.11)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Diluted net earnings (loss) per share (Note 5)   $     0.16   $    (0.11)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    For the 13 week periods ended March 31, 2007 and April 1, 2006

    Unaudited

    (in millions)                                          2007         2006
    -------------------------------------------------------------------------

    Opening balance                                  $    769.3   $    631.6
    Cumulative impact of adopting new financial
     instruments standards, net of income taxes
     of $0.2 (Note 2)                                      (0.4)           -
    Net earnings (loss)                                    17.2        (11.8)
    Dividends declared                                        -         (6.4)
    Notional dividends (Note 8)                               -         (2.0)
    -------------------------------------------------------------------------

    Closing balance                                  $    786.1   $    611.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the 13 week periods ended March 31, 2007 and April 1, 2006

    Unaudited

    (in millions)                                          2007         2006
    -------------------------------------------------------------------------

    Cash flow generated from (used for) operating
     activities
      Net earnings (loss)                            $     17.2   $    (11.8)
      Non-cash items included in net earnings,
       principally depreciation, pension expense,
       future income taxes and gain on sale of
       real estate joint venture                           35.5         49.1
      Changes in non-cash working capital balances
       related to operations                             (379.2)      (468.2)
      Other, principally pension contributions and
       changes to long-term assets and liabilities          1.3        (25.0)
    -------------------------------------------------------------------------
                                                         (325.2)      (455.9)
    -------------------------------------------------------------------------

    Cash flow generated from (used for) investing
     activities
      Purchases of capital assets                          (3.0)       (11.5)
      Proceeds from sale of capital assets                    -          0.1
      Proceeds on sale of real estate joint venture,
       net of cash sold (Note 4)                            5.2            -
      Changes in restricted cash (Note 12)                  4.7         (5.5)
    -------------------------------------------------------------------------
                                                            6.9        (16.9)
    -------------------------------------------------------------------------

    Cash flow generated from (used for) financing
     activities
      Repayment of long-term obligations (Note 3)          (0.6)      (200.6)
      Issuance of long-term obligations (Note 3)              -        300.0
      Deferred charges                                        -         (1.8)
      Dividends paid                                          -         (6.4)
    -------------------------------------------------------------------------
                                                           (0.6)        91.2
    -------------------------------------------------------------------------

    Decrease in cash and short-term investments          (318.9)      (381.6)
    Cash and short-term investments at beginning
     of period                                            722.9        749.2
    -------------------------------------------------------------------------
    Cash and short-term investments at end of
     period                                          $    404.0   $    367.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash at end of period                            $     96.9   $     85.0
    Short-term investments at end of period               307.1        282.6
    -------------------------------------------------------------------------
    Total cash and short-term investments at
     end of period                                   $    404.0   $    367.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Sears Canada Inc.
    Notes to the Interim Consolidated Financial Statements
    March 31, 2007

    Unaudited

    1.  DISCLOSURE

    These interim consolidated financial statements (the "financial
    statements") of Sears Canada Inc. (the "Company") do not contain all
    disclosures required by Canadian generally accepted accounting principles
    for annual financial statements and, accordingly, the financial
    statements should be read in conjunction with the most recently prepared
    annual consolidated financial statements for the 52-week period ended
    December 30, 2006. Figures for the 13-week periods ended March 31, 2007
    and April 1, 2006 and the balances as at those dates are unaudited.

    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"), 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 Sears 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.

    Historically, the Company's fiscal year consisted of a 52 or 53-week
    period ending on the Saturday closest to December 31. In order to end its
    year on a date which allows for a full seasonal cycle, including the
    liquidation of holiday merchandise, and to align itself with the fiscal
    year of Sears Holdings Corporation ("Sears Holdings"), the Company's
    board of directors has approved the change in the date of the fiscal year
    end to the Saturday closest to January 31, subject to approval from the
    Canada Revenue Agency. As a result, the Company's 2007 fiscal year will
    be a transition year comprised of 57 weeks ending February 2, 2008, with
    the first, second and third quarters ending on March 31, 2007, June 30,
    2007 and September 29, 2007, respectively.

    The 2008 fiscal year will comprise 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.

    2.  ACCOUNTING POLICIES AND ESTIMATES

    Vendor Rebates

    The Company has arrangements with its vendors that provide for
    discretionary rebates and rebates subject to binding agreements.
    Discretionary rebates are recognized as a reduction of purchases when
    paid by the vendor or when the vendor becomes obligated to pay. Rebates
    subject to binding agreements are recognized as a reduction of purchases
    for the period, provided the rebate is probable and reasonably estimable.

    The Company has recognized, for the 13-week period ended March 31, 2007,
    $0.4 million (2006 - $1.1 million) as an increase to net income related
    to binding agreements for which full entitlement has not yet been met but
    is probable.

    New Policies

    These financial statements follow the same accounting policies and
    methods of application as the most recent annual financial statements for
    the 52-week period ended December 30, 2006, with the following exception:

    (a) Financial Instruments, Hedges and Comprehensive Income

        On December 31, 2006, the Company adopted the Canadian Institute of
        Chartered Accountants ("CICA") Handbook Section 3855 "Financial
        Instruments - Recognition and Measurement", Section 3865 "Hedges",
        Section 1530 "Comprehensive Income", and Section 3251 "Equity". These
        sections apply to fiscal years beginning on or after October 1, 2006
        and provide for recognition and measurement of financial assets,
        financial liabilities and non-financial derivatives, and describe
        when and how hedge accounting may be applied. Section 1530 provides
        for the reporting and presentation of comprehensive income which
        represents the change in equity from transactions and other events
        and circumstances from non-owner sources. It includes all changes in
        equity during a period except those resulting from investments by
        owners and distributions to owners. Other comprehensive income
        comprises revenues, expenses, gains and losses that are recognized in
        comprehensive income, but which are excluded from net income, in
        conformity with generally accepted accounting principles. Section
        3251, which replaces Section 3250 "Surplus", requires the Company to
        report a new component in shareholders' equity called accumulated
        other comprehensive income, which comprises the accumulated balance
        of all components of other comprehensive income.

        Under the new standards, all financial assets must be classified as
        held for trading, held-to-maturity, loans and receivables or
        available-for-sale investments. All financial liabilities are
        classified as held for trading or other financial liabilities.
        Initially, all financial instruments are recorded on the consolidated
        balance sheet at fair value. After initial recognition, at each
        period end, all financial instruments are re-measured to their fair
        value, except for held-to-maturity investments, loans and receivables
        and other financial liabilities, which are measured at amortized
        cost. Any gain or loss arising from a change in the fair value of a
        financial asset or financial liability classified as held for trading
        is included in net income for the period in which it arises. The gain
        or loss resulting from a change in fair value of a financial asset
        classified as available-for-sale is recognized in other comprehensive
        income until the financial asset is derecognized through disposal or
        becomes impaired.

        The Company mitigates the risk of foreign currency fluctuations by
        entering into foreign exchange futures contracts and, since
        January 4, 2004, had designated such contracts as hedges under CICA
        Accounting Guideline 13 ("AcG-13") "Hedging Relationships". Upon
        adoption of Section 3855, these contracts were de-designated as
        hedges and were recorded at fair value. The Company also recorded at
        fair value embedded derivatives in U.S. dollar denominated purchase
        orders with non-U.S. based vendors and recorded at fair value fixed
        price energy contracts which were identified as non-financial
        derivatives. Any changes in fair value of these derivatives are
        reported in net income. The initial impact of measuring the above
        derivatives at fair value was a net unrealized loss of $0.4 million,
        net of tax, which was recorded in opening retained earnings.

        In addition, upon adoption of the new standards the Company
        classified its short-term investments as available-for-sale, accounts
        receivable as loans and receivables, and accounts payable, accrued
        liabilities, long-term obligations and other long-term liabilities as
        other financial liabilities. The initial impact of measuring the
        available-for-sale short-term investments at fair value was a net
        unrealized gain of less than $0.1 million, net of tax, which was
        recorded in opening accumulated other comprehensive income as at
        December 31, 2006.

    3.  LONG-TERM OBLIGATIONS

    The Company's cash interest payments in the 13-week period ended
    March 31, 2007 were $6.4 million (2006 - $13.1 million).

    Interest expense on long-term debt for the 13-week period ended March 31,
    2007 amounted to $10.5 million (2006 - $14.4 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 the associated long-term debt in the amount of $22.5 million.

    On March 15, 2006, the Company repaid the maturing $200.0 million 6.75%
    secured medium-term notes and drew the equivalent of Canadian
    $300.0 million on its secured U.S. $260.0 million term loan with a
    floating interest rate based on LIBOR plus 150 to 175 basis points. The
    U.S. term loan was repaid on September 29, 2006.

    4.  UNUSUAL ITEMS

    The Company recorded a pre-tax gain of $9.3 million (2006 - pre-tax
    expense of $5.5 million) in the 13-week period ended March 31, 2007. The
    unusual items are as follows:

                                                        13-Week      13-Week
                                                         Period       Period
                                                          Ended        Ended
                                                       March 31,     April 1,
    (in millions)                                          2007         2006
    -------------------------------------------------------------------------
    Sale of real estate joint venture                $      9.3   $        -
    Restructuring activities                                  -         (5.5)
    -------------------------------------------------------------------------
    Total unusual items - gain (expense)             $      9.3   $     (5.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Sale of real estate joint venture

    During the first quarter of 2007, the Company disposed of 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.

    Restructuring activities

    Pre-tax restructuring charges for the 13-week period ended March 31, 2007
    were Nil (2006 - $5.5 million). The charges relate to the implementation
    of various productivity improvement initiatives, previously announced in
    2005, which included strategic staffing decisions, rationalization of
    facilities, a review of sourcing and procurement practices and various
    other operational efficiency improvements. The expenses for the 13-week
    period ended April 1, 2006 relate primarily to severance and related
    charges resulting from a workforce reduction in the Company's logistics
    and transportation divisions.

    A summary of the changes in the accrued liability related to these
    activities is outlined below:

    -------------------------------------------------------------------------
                                                               Restructuring
    (in millions)                                                  Liability
    -------------------------------------------------------------------------
    Accrued liability January 1, 2005                             $      3.5
    Cash expense                                                        65.4
    Cash payments                                                      (51.7)
    -------------------------------------------------------------------------
    Accrued liability December 31, 2005                           $     17.2
    Cash expense                                                        19.8
    Cash payments                                                      (32.4)
    -------------------------------------------------------------------------
    Accrued liability December 30, 2006                           $      4.6
    Cash payments                                                       (1.4)
    -------------------------------------------------------------------------
    Accrued liability March 31, 2007                              $      3.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5.  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
                                                         Period       Period
                                                          Ended        Ended
                                                       March 31,     April 1,
    Number of shares                                       2007         2006
    -------------------------------------------------------------------------
    Average number of shares per basic net
     earnings per share calculation                 107,620,995  107,453,993
    Effect of dilutive instruments outstanding           31,821      195,508
    -------------------------------------------------------------------------
    Average number of shares per diluted net
     earnings per share calculation                 107,652,816  107,649,501
    -------------------------------------------------------------------------

    For the 13-week period ended March 31, 2007, 192,981 options were
    excluded from the calculation of diluted net earnings per share as they
    were anti-dilutive.

    6.  SEGMENTED INFORMATION

    Segmented Statements of Earnings

                                                        13-Week      13-Week
                                                         Period       Period
                                                          Ended        Ended
                                                       March 31,     April 1,
    (in millions)                                          2007         2006
    -------------------------------------------------------------------------

    Total revenues
      Merchandising(*)                               $  1,203.8   $  1,208.5
      Real Estate Joint Ventures                           15.3         13.1
    -------------------------------------------------------------------------
    Total revenues                                   $  1,219.1   $  1,221.6
    -------------------------------------------------------------------------
    Earnings (loss) before interest, unusual items
     and income taxes
      Merchandising(*)                               $     12.6   $     (5.2)
      Real Estate Joint Ventures                            6.9          5.8
    -------------------------------------------------------------------------
    Earnings before interest, unusual items and
     income taxes                                          19.5          0.6
      Interest expense, net                                 5.9         10.8
      Unusual items - (gain) expense                       (9.3)         5.5
      Income taxes                                          5.7         (3.9)
    -------------------------------------------------------------------------
    Net earnings (loss)                              $     17.2   $    (11.8)
    -------------------------------------------------------------------------

    (*) The Merchandising segment includes revenue and earnings from the
        alliance with JPMorgan Chase as follows: for the 13-week period ended
        March 31, 2007 - $17.2 million (2006 - $16.8 million) and
        $11.6 million (2006 - $11.5 million), respectively.


    Segmented Statements of Capital Employed(*)

                                             As at        As at        As at
                                          March 31,     April 1, December 30,
    (in millions)                             2007         2006         2006
    -------------------------------------------------------------------------
    Merchandising                       $  1,205.5   $  1,340.6   $  1,195.8
    Real Estate Joint Ventures               115.5        138.9        131.5
    -------------------------------------------------------------------------
    Total                               $  1,321.0   $  1,479.5   $  1,327.3
    -------------------------------------------------------------------------

    (*) Capital Employed represents the total of long-term obligations,
        including principal payments on long-term obligations due within one
        year, and shareholders' equity.


    Segmented Statements of Total Assets

                                             As at        As at        As at
                                          March 31,     April 1, December 30,
    (in millions)                             2007         2006         2006
    -------------------------------------------------------------------------
    Merchandising                       $  2,603.3   $  2,768.3   $  2,913.1
    Real Estate Joint Ventures               130.2        152.2        147.2
    -------------------------------------------------------------------------
    Total                               $  2,733.5   $  2,920.5   $  3,060.3
    -------------------------------------------------------------------------

    Included in the Real Estate Joint Ventures and Merchandising segments are
    assets and liabilities held for sale in the amount of $14.7 million and
    $18.0 million and $5.0 million and Nil, respectively.

    7.  INCOME TAXES

    The Company's total net cash payments of income taxes in the 13-week
    period ended March 31, 2007 were $23.2 million (2006 - $197.6 million).

    8.  CAPITAL STOCK

    As at March 31, 2007, 107,620,995 common shares were issued and
    outstanding. Sears Holdings is the beneficial holder of 75,572,390, or
    70.2%, of the common shares of the Company as at March 31, 2007.

    Cash received from the issuance of capital stock upon the exercise of
    options amounted to Nil (2006 - less than $0.1 million) in the 13-week
    period ended March 31, 2007.

    Under the Employees Stock Plan and the Directors' Share Purchase Plan,
    Deferred Share Units ("DSUs") are credited with notional dividend
    equivalents when dividends are paid on common shares by the Company.
    During the 13-week period ended March 31, 2007, the Company credited Nil
    (2006 - $2.0 million) to capital stock for notional dividend equivalents
    related to the quarterly dividends. As at March 31, 2007, Nil (2006 -
    75,317) DSUs were issued and outstanding.

    9.  STOCK-BASED COMPENSATION

    Details of the Company's stock-based compensation plans are contained in
    Note 10 "Stock-Based Compensation" to the Company's consolidated
    financial statements for the 52-week period ended December 30, 2006.

    Since the last grant in 2004, the Company has discontinued the granting
    of options and Special Incentive Shares under the Employees Stock Plan.
    No stock options have been granted under the Stock Option Plan for
    Directors since the last grant in 2003. Following the last grant in 2005,
    the Company has discontinued the granting of shares under the Directors'
    Share Purchase Plan.

    At the end of each fiscal period, the Company records a liability for
    previously issued 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-week period ended
    March 31, 2007, an expense of $0.2 million (2006 - credit of
    $0.2 million) was recorded related to tandem awards.

    Cash payments for stock appreciation rights made upon the exercise of
    previously issued tandem awards during the 13-week period ended March 31,
    2007 were $0.1 million (2006 - $0.1 million).

    10. 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 lease payments under such
    agreements are $21.1 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 interim consolidated financial
    statements with respect to these indemnification commitments.

    11. ASSOCIATE FUTURE BENEFITS

    Information about the Company's defined benefit plan is contained in
    Notes 7 and 19 of the Company's consolidated financial statements for the
    52-week period ended December 30, 2006. The net benefit plan expense for
    the 13-week period ended March 31, 2007 was $10.1 million (2006 -
    $14.6 million). The Company contributed a total of $1.2 million (2006 -
    $25.2 million) to its associate future benefit plans during the 13-week
    period ended March 31, 2007.

    On February 5, 2007, the Company announced amendments to its
    post-retirement program. Effective July 1, 2008, the Company will amend
    its pension plan by introducing a defined contribution component. The
    current defined benefit component will continue to accrue benefits
    related to future compensation increases although no further service
    credit will be earned. In addition, the Company will no longer provide
    medical, dental and life insurance benefits at retirement for associates
    who have not achieved the eligibility criteria for these post-retirement
    benefits as at December 31, 2008. These changes will not impact current
    retirees of the Company. The amendments to the post-retirement medical,
    dental and life insurance benefits, generate a one-time curtailment to
    the benefit plan obligation of approximately $87.0 million. There is no
    immediate recognition of the curtailment as the decrease in the accrued
    benefit obligation is fully offset by unamortized net actuarial losses.

    12. COMMITMENTS AND CONTINGENCIES

    As discussed in Note 13 of the Company's consolidated financial
    statements for the 52-week period ended December 30, 2006, the Company
    was named in three class action lawsuits in the provinces of Quebec,
    Saskatchewan and Ontario in 2005 arising out of Sears' 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. Sears 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
    March 31, 2007, the Company recorded $5.4 million (2006 - $8.9 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.

    13. FINANCIAL INSTRUMENTS

    On March 15, 2006, the Company entered into cross-currency interest rate
    swaps converting an aggregate notional principal amount of
    U.S. $260.0 million floating rate term loan into Canadian dollar fixed
    rate term debt. The fixed interest rate payable by the Company under
    these agreements was 4.75%. These swaps were settled on
    September 29, 2006.

    The Company holds available-for-sale equity investments which are valued
    at cost (Nil) due to the unavailability of a quoted market price.

    14. ACCUMULATED OTHER COMPREHENSIVE INCOME

    The opening balance and movement in accumulated other comprehensive
    income from the unrealized gain on available-for-sale investments for the
    13-week period ended March 31, 2007 is less than $0.1 million.

    15. COMPARATIVE FIGURES

    Certain comparative figures have been reclassified to conform to the
    current period's presentation.
    





For further information:

For further information: Media Relations Contact: Vincent Power, Sears
Canada Inc., (416) 941-4422, vpower@sears.ca


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