Sears Canada Reports Second Quarter Earnings

TORONTO, Aug. 17 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its unaudited second quarter results. Total revenues for the 13-week period ended July 31, 2010 were $1.213 billion compared to $1.250 billion for the 13 weeks ended August 1, 2009, a decrease of 3.0%. Same store sales decreased 2.4%.

Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the quarter this year was $74.3 million versus $108.7 million in the same 13-week period last year. Net earnings for the second quarter were $31.9 million or 29 cents per share compared to $49.1 million or 45 cents per share in the second quarter last year. There were no non-operating activities in the quarter this year or last year.

Total revenues for the 26-week period ended July 31, 2010 were $2.280 billion compared to $2.366 billion for the 26-week period last year, which ended August 1, 2009, a decrease of 3.6%. Same store sales decreased 2.2%.

Operating EBITDA for the first half of the year was $120.9 million versus $171.0 million for the same period last year. Net earnings for the 26 weeks ended July 31, 2010 were $39.1 million or 36 cents per share compared to $59.4 million or 55 cents per share for the same 26-week period last year. There were no non-operating activities in the 26-week period ending July 31, 2010, however last year's comparable period included a pre-tax restructuring charge of $9.3 million. Therefore, operating net earnings for the first 26 weeks of 2010 were $39.1 million or 36 cents per share compared to $65.9 million or 61 cents per share for same 26-week period last year.

Commenting on the second quarter and first half, Dene Rogers, President and Chief Executive Officer, Sears Canada Inc. said, "Our results reflect a continuing downward trend in consumer confidence caused by high unemployment and other factors. In response to these economic conditions and the competitive marketplace, we are offering outstanding value with unique programs such as:

    
    -   Sears has the best financing terms for cost-conscious customers
        including zero interest, payment deferral for up to 36 months along
        with Sears Club loyalty points and a host of other benefits
    -   The new "modern shop", which has new brands including Kensie, Mac &
        Jac, and Guess in addition to Sears private brands such as Attitude
        and Nevada, is rolling out across the country this fall
    -   Sears offers custom furniture with thousands of options for customers
        to design sofas, tables and other home furnishings according to their
        own tastes and preferences, at no additional cost versus stocked
        models at other retailers."
    

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 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 197 corporate stores, 241 dealer stores, 31 home improvement showrooms, over 1,800 catalogue merchandise pick-up locations, 108 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.
    CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
    For the 13 and 26-week periods ended July 31, 2010 and August 1, 2009

    Unaudited

                                       13-Week Period        26-Week Period
    (in millions, except          --------------------- ---------------------
     per share amounts)                2010       2009       2010       2009
    -------------------------------------------------------------------------

    Total revenues                $ 1,212.8  $ 1,250.0  $ 2,279.8  $ 2,366.5
    -------------------------------------------------------------------------
    Cost of merchandise sold,
     operating, administrative
     and selling expenses           1,138.5    1,141.3    2,158.9    2,204.8
    Depreciation and amortization      25.1       28.8       50.8       58.9
    Interest expense, net (Note 5)      1.8        5.8        7.7       11.9
    -------------------------------------------------------------------------
    Earnings before income taxes       47.4       74.1       62.4       90.9
    -------------------------------------------------------------------------
    Income tax expense (recovery)
      Current                          17.3       28.2       24.2       34.6
      Future                           (1.8)      (3.2)      (0.9)      (3.1)
    -------------------------------------------------------------------------
                                       15.5       25.0       23.3       31.5
    -------------------------------------------------------------------------
    Net earnings                  $    31.9  $    49.1  $    39.1  $    59.4
    -------------------------------------------------------------------------
    Net earnings per share
     (Note 6)                     $    0.29  $    0.45  $    0.36  $    0.55
    -------------------------------------------------------------------------
    Diluted net earnings per
     share (Note 6)               $    0.29  $    0.45  $    0.36  $    0.55
    -------------------------------------------------------------------------
    Net earnings                  $    31.9  $    49.1  $    39.1  $    59.4
    Other comprehensive income
     (loss), net of taxes:
      Mark-to-market adjustment
       related to short-term
       investments, net of income
       tax recovery of Nil and
       $0.1 (2009: $0.1 and Nil)          -       (0.2)      (0.2)      (0.1)
      Gain (Loss) on foreign
       exchange derivatives
       designated as cash flow
       hedges, net of income tax
       expense of $3.0 and recovery
       of $1.5 (2009: recovery of
       $11.0 and $15.6)                 5.6      (24.0)      (3.2)     (33.9)
      Reclassification to net
       earnings of gain on foreign
       exchange derivatives
       designated as cash flow
       hedges, net of income tax
       expense of $0.6 and $0.9
       (2009: $4.4 and $8.7)           (0.3)      (9.3)      (1.9)     (18.6)
      Gain on fuel derivatives
       designated as cash flow
       hedges, net of income tax
       expense of Nil and Nil
       (2009: less than $0.1
       and $0.1)                          -        0.2          -        0.2
    -------------------------------------------------------------------------
    Other comprehensive income
     (loss)                             5.3      (33.3)      (5.3)     (52.4)
    -------------------------------------------------------------------------
    Comprehensive income          $    37.2  $    15.8  $    33.8  $     7.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    AND ACCUMULATED OTHER COMPREHENSIVE INCOME
    For the 13 and 26-week periods ended July 31, 2010 and August 1, 2009

    Unaudited

                                       13-Week Period        26-Week Period
                                  --------------------- ---------------------
    (in millions)                      2010       2009       2010       2009
    -------------------------------------------------------------------------
    Retained earnings
    Opening balance               $ 1,641.0  $ 1,409.4  $ 1,633.8  $ 1,399.1
    Dividend declared                (376.7)         -     (376.7)         -
    Net earnings                       31.9       49.1       39.1       59.4
    -------------------------------------------------------------------------
    Closing balance               $ 1,296.2  $ 1,458.5  $ 1,296.2  $ 1,458.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive income
    Opening balance               $    (2.6) $    49.3  $     8.0  $    68.4
    Other comprehensive income
     (loss)                             5.3      (33.3)      (5.3)     (52.4)
    -------------------------------------------------------------------------
    Closing balance               $     2.7  $    16.0  $     2.7  $    16.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Retained earnings and
     accumulated other
     comprehensive income         $ 1,298.9  $ 1,474.5  $ 1,298.9  $ 1,474.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA

    Unaudited

                                     Second Quarter(1)      Year-to-Date(1)
    (in millions, except          -------------------------------------------
     per share amounts)               2010       2009       2010       2009
    -------------------------------------------------------------------------
    Net earnings                  $    31.9  $    49.1  $    39.1  $    59.4
    -------------------------------------------------------------------------
    Non-operating activities,
     net of taxes
      Restructuring expense               -          -          -        6.5
    -------------------------------------------------------------------------
    Operating net earnings(2)     $    31.9  $    49.1  $    39.1  $    65.9
    -------------------------------------------------------------------------
    Depreciation and amortization      25.1       28.8       50.8       58.9
    Interest expense, net               1.8        5.8        7.7       11.9
    Income tax expense excluding
     operating adjustments             15.5       25.0       23.3       34.3
    -------------------------------------------------------------------------
    Operating EBITDA(2)           $    74.3  $   108.7  $   120.9  $   171.0
    -------------------------------------------------------------------------
    Net earnings per share        $    0.29  $    0.45  $    0.36  $    0.55
    Operating net earnings
     per share                    $    0.29  $    0.45  $    0.36  $    0.61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) The second quarter of 2010 and 2009 represent the 13 and 26-week
        periods ended July 31, 2010 and August 1, 2009, respectively.

    (2) Operating net earnings and Operating EBITDA are non-GAAP measures
        which exclude non-operating gains and losses and are used by
        management to better assess the Company's underlying performance.



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                                         Unaudited    Unaudited      Audited
                                             As at        As at        As at
                                           July 31,    August 1,  January 30,
    (in millions)                             2010         2009         2010
    -------------------------------------------------------------------------

    ASSETS
    Current Assets
    Cash and short-term investments
     (Note 3)                            $   716.3    $   782.0    $ 1,381.8
    Restricted cash and investments
     (Note 13)                                 5.8        113.1         15.8
    Accounts receivable                      130.0        136.0        131.1
    Income taxes recoverable                  41.2         51.6          6.0
    Inventories (Note 4)                     910.9        952.9        852.3
    Prepaid expenses and other assets         83.2         94.5         74.7
    Current portion of future income
     tax assets                               29.4         29.7         29.7
    -------------------------------------------------------------------------
                                           1,916.8      2,159.8      2,491.4

    Capital assets                           583.6        652.1        620.2
    Deferred charges                         177.4        177.9        179.2
    Intangible assets                         23.2         16.9         22.6
    Goodwill                                  11.2         11.2         11.2
    Future income tax assets                  35.7         34.7         32.0
    Other long-term assets                    46.9         46.1         48.2
    -------------------------------------------------------------------------
                                         $ 2,794.8    $ 3,098.7    $ 3,404.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current Liabilities
    Accounts payable                     $   632.4    $   522.1    $   647.7
    Accrued liabilities                      324.1        366.5        342.1
    Income and other taxes payable            40.7         32.6         72.7
    Principal payments on long-term
     obligations due within one year
     (Note 5 and 15)                         105.8        239.3        314.2
    -------------------------------------------------------------------------
                                           1,103.0      1,160.5      1,376.7

    Long-term obligations (Note 5)            35.8        122.4         36.5
    Accrued benefit liability (Note 12)      177.0        163.1        167.7
    Future income tax liabilities              4.4          4.2          4.3
    Other long-term liabilities              160.0        158.3        162.1
    -------------------------------------------------------------------------
                                           1,480.2      1,608.5      1,747.3
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Capital stock (Note 9)                    15.7         15.7         15.7
    Retained earnings                      1,296.2      1,458.5      1,633.8
    Accumulated other comprehensive
     income                                    2.7         16.0          8.0
    -------------------------------------------------------------------------
                                           1,314.6      1,490.2      1,657.5
    -------------------------------------------------------------------------
                                         $ 2,794.8    $ 3,098.7    $ 3,404.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the 13 and 26-week periods ended July 31, 2010 and August 1, 2009

    Unaudited

                                       13-Week Period        26-Week Period
                                  --------------------- ---------------------
    (in millions)                      2010       2009       2010       2009
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) operating
     activities
      Net earnings                $    31.9  $    49.1  $    39.1  $    59.4
      Non-cash items included in
       net earnings, principally
       depreciation and pension
       expense                         32.0       27.1       64.9       63.6
      Changes in non-cash working
       capital balances related
       to operations                  (40.3)     (37.7)    (168.5)    (157.0)
      Other, principally pension
       contributions and changes
       to long-term assets and
       liabilities                     (3.3)      (0.9)      (5.7)      (5.2)
    -------------------------------------------------------------------------
                                       20.3       37.6      (70.2)     (39.2)
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) investing
     activities
      Purchases of capital assets      (7.9)     (16.2)     (19.8)     (34.5)
      Proceeds from sale of
       capital assets                   0.1        0.4        0.3        0.8
      Changes in restricted cash
       and investments                 14.0       17.9       10.0       38.0
    -------------------------------------------------------------------------
                                        6.2        2.1       (9.5)       4.3
    -------------------------------------------------------------------------

    Cash flow used for financing
     activities
      Repayment of long-term
       obligations                   (207.6)      (2.7)    (209.1)      (2.9)
      Dividend payment               (376.7)         -     (376.7)         -
    -------------------------------------------------------------------------
                                     (584.3)      (2.7)    (585.8)      (2.9)
    -------------------------------------------------------------------------

    (Decrease) increase in cash
     and short-term investments      (557.8)      37.0     (665.5)     (37.8)
    Cash and short-term
     investments at beginning
     of period                      1,274.1      745.0    1,381.8      819.8
    -------------------------------------------------------------------------
    Cash and short-term
     investments at end of
     period                       $   716.3  $   782.0  $   716.3  $   782.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash at end of period         $    47.4  $    74.3  $    47.4  $    74.3
    Short-term investments at
     end of period                    668.9      707.7      668.9      707.7
    -------------------------------------------------------------------------
    Total cash and short-term
     investments at end of
     period                       $   716.3  $   782.0  $   716.3  $   782.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    JULY 31, 2010

    Unaudited

    1.  BASIS OF PRESENTATION

    These unaudited interim consolidated financial statements (the "Financial
    Statements") of Sears Canada Inc. (the "Company") have been prepared in
    accordance with Canadian Generally Accepted Accounting Principles
    ("GAAP") but do not contain all disclosures required by Canadian GAAP for
    annual financial statements. Accordingly, these Financial Statements
    should be read in conjunction with the most recently prepared audited
    annual consolidated financial statements for the 52-week period ended
    January 30, 2010 ("2009 Annual Financial Statements"). These Financial
    Statements for the second quarter ended July 31, 2010 follow the same
    accounting policies and methods of application as those used in the
    preparation of the 2009 Annual Financial Statements.

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

    2.  ACCOUNTING POLICIES AND ESTIMATES

    Future Accounting Policies:

    International Financial Reporting Standards ("IFRS")

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

    Multiple Deliverable Revenue Arrangements

    In December 2009, the EIC issued EIC-175, "Multiple Deliverable Revenue
    Arrangements" to amend EIC-142, "Revenue Arrangements with Multiple
    Deliverables". This requires consideration at inception to be allocated
    using the relative selling price method and prohibiting the residual
    method. This abstract is to be applied prospectively to revenue
    arrangements with multiple deliverables entered into or materially
    modified in the first annual fiscal period beginning on or after
    January 1, 2011. Early adoption is permitted and should be applied
    retroactively from the beginning of the entity's fiscal period of
    adoption. EIC-142 is effective until adoption of EIC-175. The Company is
    continuing to evaluate whether or not to early adopt this EIC in 2010.

    Business Combinations

    In January 2009, the CICA issued Handbook Sections; 1582, "Business
    Combinations"; 1601, "Consolidated Financial Statements"; and 1602, "Non-
    controlling Interests" which are based on the IASB, IFRS 3, "Business
    Combinations". The new standards replace the existing guidance on
    Business Combinations ("Section 1581") and Consolidated Financial
    Statements ("Section 1600"). The new standards were issued to harmonize
    Canadian accounting for business combinations with the international and
    U.S. accounting standards. The new standards are to be applied
    prospectively to business combinations for which the acquisition date is
    on or after the beginning of the first annual reporting period beginning
    on or after January 1, 2011, with earlier adoption permitted. Assets and
    liabilities that arose from business combinations whose acquisition dates
    preceded the application of the new standards shall not be adjusted upon
    application of these new standards. The new sections should be applied
    retrospectively except for certain items. The Company is evaluating the
    future impact of these sections on its operations, financial position and
    disclosures and continues to assess whether it will early adopt the new
    sections.

    Estimates:

    Capital Assets

    During the first quarter ended May 1, 2010 the Company conducted a review
    of its capital asset depreciation estimates. As a result of the review, a
    revision of the estimates of the useful lives of its roofing assets and
    heating, ventilation, and air conditioning assets was made. The impact
    was a decrease in the depreciation expense resulting in a net increase to
    the carrying value of the capital assets and pre-tax earnings of
    $2.5 million and $5.0 million for the 13 and 26-week periods ending
    July 31, 2010, due to the increase in useful lives of the assets.

    3.  CASH AND SHORT-TERM INVESTMENTS

    The components of cash and short-term investments were as follows:

                                             As at        As at        As at
                                           July 31,    August 1,  January 30,
    (in millions)                             2010         2009         2010
    -------------------------------------------------------------------------
    Cash                                 $    47.4    $    74.3    $    56.5
    Short-term investments
      Government treasury bills              611.4        689.7      1,265.5
      Bank term deposits                      57.5         18.0         59.8
    -------------------------------------------------------------------------
    Total                                $   716.3    $   782.0    $ 1,381.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    4.  INVENTORIES

    The amount of inventories recognized as an expense during the 13 and
    26-week periods ended July 31, 2010 was $635.0 million (2009:
    $651.8 million) and $1,183.3 million (2009: $1,232.7 million),
    respectively, including $26.6 million (2009: $15.7 million) and
    $44.8 million (2009: $42.6 million), related to write-downs. A negligible
    amount of write-downs to net realizable value were reversed during the
    period ended July 31, 2010. These expenses are included in "Cost of
    merchandise sold, operating, administrative and selling expenses" in the
    Consolidated Statements of Earnings and Comprehensive Income.

    5.  LONG-TERM OBLIGATIONS

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

    On May 10, 2010, the Company repaid upon maturity $200.0 million, 7.45%
    unsecured medium-term notes. As at July 31, 2010, $100.0 million, 7.05%
    unsecured medium-term notes were outstanding and were included in
    "Principal payments on long-term obligations due within one year" in the
    Consolidated Statements of Financial Position. This $100.0 million is due
    to be repaid on September 20, 2010. The Company is not subject to any
    financial covenants and the Company's remaining debt consists of
    unsecured medium-term notes with a fixed interest rate and payment terms
    and its proportionate share of the long-term debt of its joint venture
    interests.

    As at July 31, 2010, the Company had outstanding letters of credit of
    U.S. $9.3 million (2009: U.S. $13.1 million) used to support the
    Company's offshore merchandise purchasing program with restricted cash
    and investments pledged as collateral.

    Interest expense on long-term debt including the current portion and the
    Company's proportionate share of interest on long-term debt of joint
    ventures for the 13 and 26-week periods ended July 31, 2010 totalled
    $2.6 million (2009: $6.2 million) and $9.2 million (2009: $13.2 million).
    Interest revenue primarily related to cash and short-term investments for
    the 13 and 26-week periods ended July 31, 2010 totalled $0.8 million
    (2009: $0.4 million) and $1.5 million (2009: $1.3 million).

    The Company's cash payments for interest on long-term debt including the
    current portion and the Company's proportionate share of interest on
    long-term debt of joint ventures for the 13 and 26-week periods ended
    July 31, 2010 totalled $7.9 million (2009: $8.1 million) and
    $12.5 million (2009: $13.1 million). The Company received cash related to
    interest revenue for the 13 and 26-week periods totalling $0.8 million
    (2009: $0.4 million) and $1.3 million (2009: $1.8 million).

    6.  NET EARNINGS PER SHARE

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

                           13-week       13-week       26-week       26-week
                      Period Ended  Period Ended  Period Ended  Period Ended
    (Number of             July 31,     August 1,      July 31,     August 1,
     shares)                  2010          2009          2010          2009
    -------------------------------------------------------------------------
    Average number of
     shares per basic
     net earnings
     per share
     calculation       107,620,995   107,620,995   107,620,995   107,620,995
    Effect of dilutive
     instruments
     outstanding             9,285         4,374         9,965         3,815
    -------------------------------------------------------------------------
    Average number of
     shares per diluted
     net earnings
     per share
     calculation       107,630,280   107,625,369   107,630,960   107,624,810
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For both the 13 and 26-week periods ended July 31, 2010, 31,740 options
    (2009: 39,980 options) were included in the calculation of diluted net
    earnings per share as they were dilutive. For both the 13 and 26-week
    periods ended July 31, 2010, Nil options (2009: 126,081 options) were
    excluded from the calculation of diluted net earnings per share as they
    were anti-dilutive.

    7. SEGMENTED INFORMATION

    Segmented Statements of Earnings

                           13-week       13-week       26-week       26-week
                      Period Ended  Period Ended  Period Ended  Period Ended
                           July 31,     August 1,      July 31,     August 1,
    (in millions)             2010          2009          2010          2009
    -------------------------------------------------------------------------
    Total revenues
      Merchandising    $   1,201.3   $   1,237.4   $   2,255.4   $   2,342.2
      Real Estate
       Joint Ventures         11.5          12.6          24.4          24.3
    -------------------------------------------------------------------------
    Total revenues     $   1,212.8   $   1,250.0   $   2,279.8   $   2,366.5
    -------------------------------------------------------------------------
    Segmented operating
     profit
      Merchandising    $      45.2   $      74.7   $      60.5   $      92.6
      Real Estate
       Joint Ventures          4.0           5.2           9.6          10.2
    Interest
     expense, net              1.8           5.8           7.7          11.9
    Income taxes              15.5          25.0          23.3          31.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings       $      31.9   $      49.1   $      39.1   $      59.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Segmented Statements of Capital Employed(1)

                                           As at         As at         As at
                                         July 31,     August 1,   January 30,
    (in millions)                           2010          2009          2010
    -------------------------------------------------------------------------
    Merchandising                    $   1,360.3   $   1,750.3   $   1,916.9
    Real Estate Joint Ventures              95.9         101.6          91.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total                            $   1,456.2   $   1,851.9   $   2,008.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Capital Employed represents the total of long-term obligations,
        including principal payments on long-term obligations due within one
        year, and shareholders' equity, which includes capital stock,
        retained earnings and accumulated other comprehensive income
        ("AOCI").


    Segmented Statements of Total Assets

                                           As at         As at         As at
                                         July 31,     August 1,   January 30,
    (in millions)                           2010          2009          2010
    -------------------------------------------------------------------------
    Merchandising                    $   2,694.4   $   2,986.9   $   3,302.9
    Real Estate Joint Ventures             100.4         111.8         101.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total                            $   2,794.8   $   3,098.7   $   3,404.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    8.  INCOME TAXES

    The Company's total net cash payments of income taxes in the 13 and
    26-week periods ended July 31, 2010 were $28.9 million (2009:
    $30.8 million) and $67.3 million (2009: $69.7 million).

    In the ordinary course of business, the Company is subject to ongoing
    audits by tax authorities. While the Company believes that its tax filing
    positions are appropriate and supportable, periodically, certain matters
    are challenged by tax authorities. As the Company routinely evaluates and
    provides for potentially unfavourable outcomes with respect to any tax
    audits, the Company believes that the final disposition of tax audits
    will not have a material adverse effect on its liquidity, consolidated
    financial position or results of operations. If the result of a tax audit
    materially differs from the existing provisions, the Company's effective
    tax rate and its net earnings may be affected positively or negatively in
    the period in which the tax audits are completed. Included in other
    long-term assets are receivables of $20.9 million (2009: $20.9 million)
    related to payments made by the Company for tax assessments that are
    being disputed.

    9.  CAPITAL STOCK

    On June 4, 2010, the Company paid an extraordinary cash dividend
    totalling $376.7 million to shareholders of record as at May 31, 2010.

    The Company has filed a Normal Course Issuer Bid to permit the Company to
    purchase for cancellation up to 5% of its issued and outstanding common
    shares equivalent to 5,381,049 common shares. Purchases were allowed to
    commence on May 25, 2010 and must terminate by May 24, 2011 or on such
    earlier date as the Company may complete its purchases pursuant to the
    Normal Course Issuer Bid filed with the TSX.

    The Company may not purchase common shares under the Normal Course Issuer
    Bid if such shares cannot be purchased at prices that the Company
    considers attractive and decisions regarding the timing of purchases will
    also be based on market conditions and other factors. Therefore, there is
    no assurance that any common shares will be purchased under the Normal
    Course Issuer Bid and the Company may elect to suspend or discontinue the
    bid at any time.

    As at July 31, 2010, no shares have been purchased under the Normal
    Course Issuer Bid.

    As at July 31, 2010, 107,620,995 common shares were issued and
    outstanding. Sears Holdings Corporation, the controlling shareholder of
    the Company, is the beneficial holder of 97,341,670, or 90.4% (2009:
    73.1%), of the common shares of the Company as at July 31, 2010. The
    number of outstanding common shares and stated value did not change from
    the end of fiscal 2009.

    10. STOCK-BASED COMPENSATION

    The Employees Stock Plan expired on April 19, 2008; however, the
    expiration of the plan does not affect the rights of current option
    holders. Options were last granted in 2004 which are exercisable within
    10 years from the grant date. All options currently outstanding will
    expire by February 2014. As at July 31, 2010, there were 31,740 stock
    options outstanding under the Employees Stock Plan.

    11. GUARANTEES

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

    Sub-Lease Agreements

    The Company has a number of sub-lease agreements with 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 $15.0 million
    (2009: $18.3 million).

    Royalty License Agreements

    The Company pays royalties under various merchandise license agreements,
    which are generally based on sales of products under these agreements.
    The Company currently has license agreements for which it pays royalties
    regardless of sales, as guarantee royalties under these license
    agreements. Total future minimum royalty payments under such agreements
    are $3.2 million (2009: $5.6 million).

    Other Indemnification Agreements

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

    12. ASSOCIATE FUTURE BENEFITS

    The expense for the defined benefit, defined contribution and other
    benefit plans for the 13-week period ended July 31, 2010 was $2.2 million
    (2009: $0.4 million), $2.9 million (2009: $4.0 million) and $2.9 million
    (2009: $2.5 million), respectively. The expense for the defined benefit,
    defined contribution and other benefit plans for the 26-week period ended
    July 31, 2010 was $4.3 million (2009: $0.8 million), $5.3 million (2009:
    $8.7 million) and $5.9 million (2009: $5.1 million), respectively.

    13. COMMITMENTS AND CONTINGENCIES

    In addition to the class action suits described in the 2009 Annual
    Financial Statements, the Company is involved in various legal
    proceedings incidental to the normal course of business. The Company
    believes that, while the outcome of such legal proceedings 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 and Investments

    Cash and investments are considered to be restricted when they are
    subject to contingent rights of a third party customer, vendor, or
    government agency. As at July 31, 2010, the Company recorded $5.8 million
    (2009: $15.8 million) of restricted cash and investments as current
    assets. The restricted cash and investments represent cash and
    investments pledged as collateral for letter of credit obligations issued
    under the Company's offshore merchandise purchasing program of
    $1.3 million (2009: $5.2 million) the Canadian equivalent of U.S.
    $1.2 million (2009: U.S. $4.8 million), current cash deposits pledged as
    collateral with counterparties related to outstanding derivative
    contracts of $1.3 million (2009: $6.4 million) and funds held in trust in
    accordance with regulatory requirements governing advance ticket sales
    related to Sears Travel of $3.2 million (2009: $4.2 million).

    14. CAPITAL DISCLOSURES

    The Company's objectives when managing capital are:

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

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

    The Company defines capital as follows:

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

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

                                           As at         As at         As at
                                         July 31,     August 1,   January 30,
    (in millions)                           2010          2009          2010
    -------------------------------------------------------------------------
    Long-term obligations            $     141.6   $     361.7   $     350.7
    Shareholders' equity                 1,314.6       1,490.2       1,657.5
    -------------------------------------------------------------------------
    Total                            $   1,456.2   $   1,851.9   $   2,008.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at July 31, 2010, the Company is not subject to any financial
    covenants or ratios and the outstanding notes are unsecured. The Company
    has a U.S. $20.0 million letter of credit facility with restricted cash
    and investments pledged as collateral against a portion of the
    outstanding credit facility. As at July 31, 2010, the Company had
    outstanding letters of credit of U.S. $9.3 million (2009: U.S.
    $13.1 million) used to support the Company's offshore merchandise
    purchasing program with restricted cash and investments pledged as
    collateral.

    15. FINANCIAL INSTRUMENTS

    In the ordinary course of business, the Company enters into financial
    agreements with banks and other financial institutions to reduce
    underlying risks associated with interest rates and foreign currency. The
    Company does not hold or issue derivative financial instruments for
    trading or speculative purposes.

    Financial Instrument Risk Management

    The Company is exposed to credit, liquidity and market risk as a result
    of holding financial instruments. Market risk consists of foreign
    exchange and interest rate risk.

    Credit Risk

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

    As at July 31, 2010, the Company's only exposure to counterparty risk as
    it relates to derivative instruments is represented by the fair value of
    the derivative asset of $3.0 million (2009: $9.9 million). These
    contracts are placed with financial institutions with secure credit
    ratings.

    Cash and short-term investments, restricted cash and investments and
    other long-term assets of $723.4 million (2009: $1,398.9 million) also
    expose the Company to credit risk should the borrower default on maturity
    of the investment. The Company manages this exposure through policies
    that require borrowers to have a minimum credit rating of A, and limiting
    investments with individual borrowers at maximum levels based on credit
    rating.

    The Company is exposed to minimal credit risk from customers as a result
    of ongoing credit evaluations and review of accounts receivable
    collectability. As at July 31, 2010, approximately 47% of the Company's
    accounts receivable are due from two customers who are both in good
    standing.

    Liquidity Risk

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

    The following table summarizes the carrying amount and the contractual
    maturities of both the interest and principal portion of significant
    financial liabilities as at July 31, 2010:

                                    Contractual Cash Flow Maturities
                            -------------------------------------------------
                                                  1 year   3 years
                  Carrying              Within        to        to    Beyond
    (in millions)   Amount     Total    1 year   3 years   5 years   5 years
    -------------------------------------------------------------------------
    Accounts
     payable      $  632.4  $  632.4  $  632.4         -         -         -
    Accrued
     liabilities     324.1     324.1     324.1         -         -         -
    Long-term
     obligations
     and payments
     due within
     1 year          141.6     156.8     111.9      13.7      12.1      19.1
    Operating lease
     obligations(2)      -     625.3     103.9     180.2     121.0     220.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                  $1,098.1  $1,738.6  $1,172.3  $  193.9  $  133.1  $  239.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (2) Operating lease obligations are not reported on the consolidated
        statement of financial position.

    Of the $625.3 million of operating lease commitments disclosed in the
    table above, $10.4 million relates to the Company's proportionate share
    of the commitments of its Real Estate Joint Ventures.

    Management believes that cash on hand, future cash flows generated from
    operations and availability of current and future funding will be
    adequate to support these financial liabilities.

    Market Risk

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

    Foreign Exchange Risk

    The Company enters into foreign exchange contracts to reduce the foreign
    exchange risk with respect to U.S. dollar denominated assets,
    liabilities, goods or services.

        -   As at July 31, 2010, there were option contracts with a notional
            value of U.S $429.0 million (2009: U.S. $303.6 million) and a
            carrying value of $3.0 million (2009: $9.9 million) included in
            prepaid expenses and other assets which have been designated as
            cash flow hedges for hedge accounting treatment under CICA
            Handbook Section 3865, "Hedges" ("Section 3865"). These option
            contracts have settlement dates extending to August 2011. These
            contracts are intended to reduce the foreign exchange risk with
            respect to anticipated purchases of U.S. dollar denominated goods
            and services, including goods purchased for resale ("hedged
            item"). As at July 31, 2010, all hedges were considered effective
            with no ineffectiveness recognized in income.

        -   As at July 31, 2010, there were swap contracts outstanding with a
            notional value of U.S. $1.0 million (2009: U.S. $4.8 million) and
            a carrying value of Nil (2009: less than $0.1 million included in
            accrued liabilities). These contracts are intended to reduce the
            foreign exchange risk on U.S. dollar denominated short-term
            investments pledged as collateral for letter of credit
            obligations issued under the Company's offshore merchandise
            purchasing program.

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

    For the 13 and 26-week periods ended July 31, 2010, the Company recorded
    a loss of $0.9 million (2009: gain of $0.8 million) and a loss of
    $1.0 million (2009: gain of $0.5 million), relating to the translation or
    settlement of U.S. dollar denominated monetary items consisting of cash,
    accounts receivable, accounts payable, excluding the reclassification
    from other comprehensive income of the gain on foreign exchange
    derivatives designated as cash flow hedges.

    Based on historic movements, volatilities in foreign exchange and
    management's current assessment of the financial markets, the Company
    believes a variation of +10% (appreciation of the Canadian dollar) and -
    10% (depreciation of the Canadian dollar) in foreign exchange rate
    against the U.S. dollar is reasonably possible over a 12 month period.
    The period end rate was 0.9725 U.S. dollar to Canadian dollar. A 10%
    appreciation or depreciation of the U.S./Canadian dollar exchange rate
    was determined to have an immaterial impact on net earnings for U.S.
    dollar denominated balances included in cash and short-term investments,
    accounts receivable and the unhedged portion of accounts payable.

    Interest Rate Risk

    From time to time the Company enters into interest rate swap contracts
    with Canadian domestic financial institutions to manage exposure to
    interest rate risks. As at July 31, 2010, the Company had no interest
    rate swap contracts in place.

    Interest rate risk reflects the sensitivity of the Company's financial
    condition to movements in interest rates. Financial assets and
    liabilities which do not bear interest or bear interest at fixed rates
    are classified as non-interest rate sensitive. Based on historic
    movements, volatilities in interest rates and management's current
    assessment of the financial markets, the Company believes a variation of
    +/-0.25% in the interest rates applicable to the Company's cash and
    short-term investments and restricted cash and investments are reasonably
    possible over a 12 month period.

    Cash and short-term investments and restricted cash and investments are
    subject to interest rate risk. The total subject to interest rate risk as
    at July 31, 2010 was $720.2 million (2009: $1,394.7 million). A movement
    in interest rate of +/-0.25% would cause a variance in net earnings in
    the amount of $0.3 million.

    Classification and Fair Value of Financial Instruments

    The estimated fair values of financial instruments as at July 31, 2010,
    January 30, 2010 and August 1, 2009 are based on relevant market prices
    and information available at those dates. The following table summarizes
    the classification and fair value of certain financial instruments as at
    July 31, 2010, January 30, 2010 and August 1, 2009. The Company
    determines the classification of a financial instrument when it is
    originally recorded, based on the underlying purpose of the instrument.
    As a significant number of the Company's assets and liabilities,
    including inventories and capital assets, do not meet the definition of
    financial instruments, values in the tables below do not reflect the fair
    value of the Company as a whole.

    The fair value of financial instruments are classified and measured
    according to the following three levels based on the following fair value
    hierarchy.

        -   Level 1: Quoted prices in active markets for identical assets or
                     liabilities
        -   Level 2: Inputs other than quoted prices in active markets that
                     are observable for the asset or liability either
                     directly (i.e. prices) or indirectly (i.e. derived from
                     prices)
        -   Level 3: Inputs for the asset or liability that are not based on
                     observable market data

    (in millions)
    -------------------------------------------------------------------------
                                          Fair     As at     As at     As at
                      Balance Sheet      Value   July 31,   August   January
    Classification    Category       Hierarchy      2010   1, 2009  30, 2010
    -------------------------------------------------------------------------
    Available
     for sale

      Short-term      Cash and
       investments     short-term
                       investments(3)  Level 1  $  668.9  $  707.7  $1,325.3

    Held for
     trading

      Cash            Cash and
                       short-term
                       investments     Level 1      47.4      74.3      56.5
      Cash and        Restricted
       investments     cash and
                       investments(3)  Level 1       5.8     113.1      15.8
      U.S. $          Prepaid
       derivative      expenses
       contracts       & other
                       assets          Level 2       3.0      20.5       9.9
      Cash            Other long-
                       term assets     Level 1         -       0.7         -
      Commodity       Prepaid
       derivative     expenses
       contracts      & other
                      assets           Level 2         -       1.2       0.1
      Long-term       Other long-
       investments     term assets     Level 3       1.3       1.5       1.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (3) Interest revenue related to cash and short-term investments is
        disclosed in Long-term Obligations (Note 5)

    All other assets that are financial instruments have been classified as
    "loans and receivables" and all other financial instrument liabilities
    have been classified as "other liabilities" and are measured at amortized
    cost in the Consolidated Statements of Financial Position. The carrying
    value of these financial instruments, with the exception of long-term
    obligations, approximates fair value as they are short-term in nature.
    Long-term obligations with a carrying value of $139.9 million (2009:
    $348.5 million), including the portion due within one year, but excluding
    all capital lease obligations, have a fair value as at July 31, 2010 of
    $143.0 million (2009: $352.2 million). The fair value of the Company's
    proportionate share of long-term debt of joint ventures, with a carrying
    value of $39.9 million (2009: $48.5 million) as at July 31, 2010, was
    calculated using a valuation technique based on assumptions that are not
    supported by observable market prices or rates. The term and interest
    rate applicable to each joint venture's debt together with management's
    estimate of a risk-adjusted discount rate were used to determine the fair
    value of $42.4 million (2009: $47.6 million). The fair value of the
    Company's medium term notes, with a carrying value of $100.0 million
    (2009: $300.0 million) at July 31, 2010, is $100.6 million (2009:
    $304.6 million) and was determined with reference to observable market
    prices and rates.
    

SOURCE Sears Canada Inc.

For further information: For further information: Contact for Media: Vincent Power, Sears Canada, Corporate Communications, 416-941-4422, vpower@sears.ca


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