Sears Canada Third Quarter Operating Income Up 15% But Less Favourable Business Conditions Prevailing



    TORONTO, Oct. 25 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its
unaudited third quarter results. Total revenues for the 13-week period ended
September 29, 2007 were $1.368 billion compared to $1.409 billion for the
13 weeks ended September 30, 2006, a decrease of 2.9%. 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, decreased 3.6%. The Gross Margin rate was up slightly for
the quarter.
    Net earnings for the third quarter, including unusual items, were
$105.2 million or 98 cents per share compared to $37.8 million or 35 cents per
share in the same quarter last year, an increase in earnings of 178%. Net
earnings for the quarter, excluding unusual items, were $47.2 million or 45
cents per share compared to $41.1 million or 38 cents per share in the quarter
last year, an increase in earnings of 15%. Unusual items in the third quarter
of $58.0 million or 53 cents per share were principally related to previously
announced property transactions including the Company's headquarters building.
    Commenting on the third quarter, Dene Rogers, President and Chief
Executive Officer, Sears Canada Inc., said, "The quarter had less favourable
business conditions than we experienced at this time last year, most notably
the unseasonably warm weather which affected our apparel categories, and the
improvement in the value of the Canadian dollar in relation to the U.S. dollar
and the increased interest in cross-border shopping. Throughout the quarter,
our associates continued to focus on the customer and I thank them for their
contribution."
    Total revenues for the 39-week period ended September 29, 2007 were
$4.031 billion compared to $4.059 billion for the same period last year, a
decrease of 0.7%. Same store sales decreased 0.1%.
    Net earnings for the first nine months, including unusual items, were
$170.1 million or $1.58 per share compared to $44.1 million or 41 cents per
share for the same period last year. Net earnings for the nine months,
excluding unusual items, were $102.9 million or 96 cents per share compared to
$60.6 million or 56 cents per share for the same period last year.

    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. The Company intends the forward-looking information to speak only as
of the time made and does not undertake to update or revise this information
except as may be required by law.

    Sears Canada is a multi-channel retailer with a network of 196 corporate
stores, 179 dealer stores, 61 home improvement showrooms, over 1,800 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 September 29, 2007 and September 30, 2006

    
                            ------------------------------------------------
                                                                 Earnings
                                 Before tax      After tax   (loss) per share
    -------------------------------------------------------------------------
                                2007    2006    2007    2006    2007    2006
    -------------------------------------------------------------------------
    Earnings before unusual
     items                    $ 73.3  $ 66.8  $ 47.2  $ 41.1  $ 0.45  $ 0.38
    -------------------------------------------------------------------------
      Sale of real estate       74.0       -    55.9       -    0.51
      Sale of real estate
       joint venture             3.2       -     2.1       -    0.02       -
      Restructuring activities     -    (4.9)      -    (3.3)      -   (0.03)
    -------------------------------------------------------------------------
    Net earnings              $150.5  $ 61.9  $105.2  $ 37.8  $ 0.98  $ 0.35
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    For the 39-week periods ended September 29, 2007 and September 30, 2006


                             ------------------------------------------------
                                                                 Earnings
                                 Before tax      After tax   (loss) per share
    -------------------------------------------------------------------------
                                2007    2006    2007    2006    2007    2006
    -------------------------------------------------------------------------
    Earnings before unusual
     items                    $161.9  $108.3  $102.9  $ 60.6  $ 0.96  $ 0.56
      Sale of real estate       74.0       -    55.9       -    0.51       -
      Sale of real estate
       joint venture            12.5       -    11.4       -    0.11
      Sale of corporate
       airplane                  3.5       -     2.3       -    0.02       -
      Settlement of lawsuit     (3.6)      -    (2.4)      -   (0.02)      -
      Restructuring activities     -   (25.2)      -   (16.5)      -   (0.15)
    -------------------------------------------------------------------------
    Net earnings              $248.3  $ 83.1  $170.1  $ 44.1  $ 1.58  $ 0.41
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    Unaudited

                                                 As at      As at      As at
                                             September  September   December
    (in millions)                             29, 2007   30, 2006   30, 2006
    -------------------------------------------------------------------------

    ASSETS
    Current Assets
    Cash and short-term investments          $   736.0  $   353.1  $   722.9
    Restricted cash (Note 12)                      5.1        6.1       10.1
    Accounts receivable                          125.8      130.2      135.9
    Income taxes recoverable                       0.2        1.1        0.6
    Inventories                                  957.2      906.4      804.5
    Prepaid expenses and other assets            141.3      136.2      120.0
    Current portion of future income tax
     assets                                       71.4      120.5      121.2
    -------------------------------------------------------------------------
                                               2,037.0    1,653.6    1,915.2

    Capital assets                               750.0      896.2      874.3
    Deferred charges                             208.6      223.9      220.2
    Future income tax assets                      20.6       49.3       15.2
    Other long-term assets                        35.3       34.7       35.4
    -------------------------------------------------------------------------
                                             $ 3,051.5  $ 2,857.7  $ 3,060.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES
    Current Liabilities
    Accounts payable                         $   764.3  $   775.6  $   810.1
    Accrued liabilities                          442.5      446.4      480.0
    Income and other taxes payable                53.2       56.6      105.1
    Principal payments on long-term
     obligations due within one year
     (Note 3)                                    146.4       16.9      146.7
    Future income tax liabilities                    -          -        0.1
    -------------------------------------------------------------------------
                                               1,406.4    1,295.5    1,542.0

    Long-term obligations (Note 3)               356.4      530.7      395.6
    Accrued benefit liability (Note 11)          161.8      188.0      167.7
    Other long-term liabilities                  172.4      167.0      170.0
    -------------------------------------------------------------------------
                                               2,097.0    2,181.2    2,275.3
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Capital stock (Note 8)                        15.7       15.7       15.7
    Retained earnings                            939.0      660.8      769.3
    Accumulated other comprehensive
     loss (Note 14)                               (0.2)         -          -
    -------------------------------------------------------------------------
                                                 954.5      676.5      785.0
    -------------------------------------------------------------------------
                                             $ 3,051.5  $ 2,857.7  $ 3,060.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF EARNINGS
    For the 13 and 39-week periods ended September 29, 2007 and September 30,
    2006

    Unaudited
                                      13-Week Period        39-Week Period
                                   --------------------  --------------------
    (in millions, except per
     share amounts)                    2007       2006       2007       2006
    -------------------------------------------------------------------------

    Total revenues                $ 1,367.6  $ 1,408.8  $ 4,030.6  $ 4,058.8
    -------------------------------------------------------------------------
    Cost of merchandise sold,
     operating, administrative
     and selling expenses           1,256.0    1,284.2    3,747.2    3,793.6
    Depreciation and amortization      34.8       37.9      107.1      114.9
    Interest expense, net               3.5       19.9       14.4       42.0
    Unusual items - (gain)
     expense (Note 4)                 (77.2)       4.9      (86.4)      25.2
    -------------------------------------------------------------------------
    Earnings before income taxes      150.5       61.9      248.3       83.1
    -------------------------------------------------------------------------
    Income taxes expense
      Current                          19.7       20.5       36.7       24.2
      Future                           25.6        3.6       41.5       14.8
    -------------------------------------------------------------------------
                                       45.3       24.1       78.2       39.0
    -------------------------------------------------------------------------
    Net earnings                  $   105.2  $    37.8  $   170.1  $    44.1
    Other comprehensive loss
     (Note 14)                         (0.1)         -       (0.2)         -
    -------------------------------------------------------------------------
    Total comprehensive income    $   105.1  $    37.8  $   169.9  $    44.1
    -------------------------------------------------------------------------

    Net earnings per share
     (Note 5)                     $    0.98  $    0.35  $    1.58  $    0.41
    -------------------------------------------------------------------------
    Diluted net earnings per
     share (Note 5)               $    0.98  $    0.35  $    1.58  $    0.41
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    For the 13 and 39-week periods ended September 29, 2007 and September 30,
    2006

    Unaudited

                                      13-Week Period        39-Week Period
                                   --------------------  --------------------

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

    Opening balance               $   833.8  $   623.0  $   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                      105.2       37.8      170.1       44.1
    Dividends declared                    -          -          -      (12.9)
    Notional dividends (Note 8)           -          -          -       (2.0)
    -------------------------------------------------------------------------

    Closing balance               $   939.0  $   660.8  $   939.0  $   660.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the 13 and 39-week periods ended September 29, 2007 and September 30,
    2006

    Unaudited

                                      13-Week Period        39-Week Period
                                   --------------------  --------------------

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

    Cash flow generated from
     (used for) operating
     activities
      Net earnings                $   105.2  $    37.8  $   170.1  $    44.1
      Non-cash items included in
       net earnings, principally
       depreciation, pension
       expense, future income
       taxes and gain on sale of
       real estate joint venture
       and capital assets              (8.5)      63.1       85.2      181.9
      Changes in non-cash working
       capital balances related
       to operations                  (23.5)      24.5     (299.9)    (342.9)
      Other, principally pension
       contributions and changes
       to long-term assets and
       liabilities                    (11.9)      (2.2)     (13.6)     (27.8)
    -------------------------------------------------------------------------
                                       61.3      123.2      (58.2)    (144.7)
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) investing
     activities
      Purchases of capital assets     (22.9)     (12.8)     (37.4)     (31.8)
      Proceeds from sale of capital
       assets                          88.0        0.3      103.7        1.0
      Proceeds on sale of real
       estate joint venture,
       net of cash sold (Note 4)          -          -        5.2          -
      Investments                      (3.0)         -       (3.0)         -
      Changes in restricted cash
       (Note 12)                       (1.2)      (1.3)       5.0       (2.8)
      Deferred charges                 (0.1)         -       (0.1)      (0.5)
    -------------------------------------------------------------------------
                                       60.8      (13.8)      73.4      (34.1)
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) financing
     activities
      Repayment of long-term
       obligations (Note 3)            (0.9)    (299.8)      (2.1)    (501.8)
      Issuance of long-term
       obligations (Note 3)               -          -          -      300.0
      Deferred charges                    -       (0.8)         -       (2.6)
      Dividends paid                      -          -          -      (12.9)
    -------------------------------------------------------------------------
                                       (0.9)    (300.6)      (2.1)    (217.3)
    -------------------------------------------------------------------------

    Increase (decrease) in cash and
     short-term investments           121.2     (191.2)      13.1     (396.1)
    Cash and short-term
     investments at beginning
     of period                        614.8      544.3      722.9      749.2
    -------------------------------------------------------------------------
    Cash and short-term
     investments at end of period $   736.0  $   353.1  $   736.0  $   353.1
    -------------------------------------------------------------------------

    Cash at end of period         $   104.0  $    85.8  $   104.0  $    85.8
    Short-term investments at end
     of period                        632.0      267.3      632.0      267.3
    -------------------------------------------------------------------------
    Total cash and short-term
     investments at end of period $   736.0  $   353.1  $   736.0  $   353.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    September 29, 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 and 39-week periods ended
    September 29, 2007 and September 30, 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") 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.

    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
    fiscal 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 approved, in the first quarter, the change
    in the date of the fiscal year end to the Saturday closest to January 31.
    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 and 39-week periods ended
    September 29, 2007, $0.2 million (2006 - $1.9 million) and $0.9 million
    (2006 - $5.1 million), respectively, as an increase to net income related
    to binding agreements for which full entitlement has not yet been met but
    is probable.

    Asset Retirement Obligations and Conditional Asset Retirement Obligations

    In September 2007, the Company recognized an obligation to remove certain
    equipment at auto centres which are, or had until recently, been
    licensed, as described in Note 12 "Unusual Items" to the Company's
    Consolidated Notes to Financial Statements for the 52-week period ended
    January 1, 2005 (fiscal 2004). An Asset Retirement Obligation ("ARO") in
    the amount of $1.7 million was recorded in connection with this
    obligation, for equipment which will be removed before the end of 2008.
    The Company has identified a conditional ARO for equipment which will be
    removed in future years. The Company does not expect the cost to remove
    this equipment to be material, however, as the timing is indeterminable,
    the fair market value cannot be estimated. Accordingly, no liability has
    been recorded for the conditional ARO.

    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:

        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 on long-term debt in the 13 and
    39-week periods ended September 29, 2007 were $5.9 million (2006 -
    $20.5 million) and $26.4 million (2006 - $53.4 million), respectively.

    Interest expense on long-term debt for the 13 and 39-week periods ended
    September 29, 2007 amounted to $10.0 million (2006 - $25.5 million) and
    $30.8 million (2006 - $55.3 million), respectively.

    Included in Principal payments on long-term obligations due within one
    year in the current liability section of the Consolidated Statements of
    Financial Position is $125.0 million of secured debentures due
    November 5, 2007.

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

    During the first quarter of 2007, the Company disposed of its interest in
    a real estate joint venture. As part of this transaction, the purchaser
    assumed 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. To
    mitigate the risk of fluctuations in the Canadian/U.S. exchange rate and
    the floating interest rate, the Company concurrently entered into cross-
    currency interest rate swaps and applied hedge accounting on these swaps.
    On September 29, 2006, the Company repaid the U.S. term loan, settled the
    cross-currency interest rate swaps and discontinued hedge accounting.
    Included in interest expense for the 39-week period ended September 30,
    2006 is the cost to settle the swaps of $8.9 million and the write-off of
    previously capitalized debt issue costs of $0.9 million.

    4.  UNUSUAL ITEMS

    The Company recorded a pre-tax gain of $77.2 million (2006 - expense of
    $4.9 million) and a pre-tax gain of $86.4 million (2006 - pre-tax expense
    of $25.2 million) in the 13 and 39-week periods ended September 29, 2007,
    respectively. The unusual items are as follows:


                                    13-Week    13-Week    26-Week    26-Week
                                     Period     Period     Period     Period
                                      Ended      Ended      Ended      Ended
                                  September  September  September  September
                                         29,        30,        29,        30,
    (in millions)                      2007       2006       2007       2006
    -------------------------------------------------------------------------
    Sale of real estate           $    74.0          -  $    74.0  $       -
    Sale of real estate joint
     venture                            3.2          -       12.5          -
    Sale of corporate airplane            -          -        3.5          -
    Settlement of lawsuit                 -          -       (3.6)         -
    Restructuring activities              -       (4.9)         -      (25.2)
    -------------------------------------------------------------------------
    Total unusual items - gain
     (expense)                    $    77.2 $     (4.9) $    86.4  $   (25.2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Sale of real estate

    During the third quarter of 2007, the Company sold the property upon
    which the Full-line store in Hamilton, Ontario is situated and its head
    office property in Toronto, Ontario for total combined proceeds of
    $88.0 million, net of transaction costs, resulting in a pre-tax gain of
    $74.0 million. Concurrently, the Company entered into agreements to
    leaseback the properties for periods ranging from five to thirty-six
    months.

    Sale of real estate joint venture

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

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

    Sale of corporate airplane

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

    Settlement of lawsuit

    During the second quarter of 2007, the Company expended $5.0 million to
    settle a lawsuit relating to a commercial dispute. Of the total
    settlement, a pre-tax expense of $3.6 million is included in unusual
    items for the 13-week period ended June 29, 2007 as $1.4 million was
    accrued in prior years.

    Restructuring activities

    Pre-tax restructuring charges for the 13 and 39-week periods ended
    September 29, 2007 were Nil (2006 - $4.9 million) and Nil (2006 -
    $25.2 million), respectively. 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 and
    39-week periods ended September 30, 2006 relate primarily to severance
    and related charges resulting from a workforce reduction in certain
    departments and positions, including the logistics and transportation
    divisions, the product repair services organization and executive
    positions. In addition, the Company incurred a $0.5 million non-cash
    charge during the second quarter of 2006 related to the write-down of
    fixed assets from the product repair services organization and a
    $4.9 million charge during the third quarter of 2006 related to pension
    enhancements as part of the above noted severance.

    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
    -------------------------------------------------------------------------
    Cash payments                                                       (0.9)
    Accrued liability June 30, 2007                                $     2.3
    Cash payments                                                       (0.2)
    -------------------------------------------------------------------------
    Accrued liability September 29, 2007                           $     2.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    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     39-Week     39-Week
                                  Period      Period      Period      Period
                                   Ended       Ended       Ended       Ended
                               September   September   September   September
                                      29,         30,         29,         30,
    (number of shares)              2007        2006        2007        2006
    -------------------------------------------------------------------------
    Average number of shares
     per basic net earnings
     per share calculation   107,620,995 107,620,995 107,620,995 107,563,118

    Effect of dilutive
     instruments outstanding      27,246       9,662      27,078     140,891
    -------------------------------------------------------------------------
    Average number of shares
     per diluted net earnings
     per share calculation   107,648,241 107,630,657 107,648,073 107,704,009
    -------------------------------------------------------------------------

    For the 13 and 39-week periods ended September 29, 2007, 177,431 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    39-Week    39-Week
                                     Period     Period     Period     Period
                                      Ended      Ended      Ended      Ended
                                  September  September  September  September
                                         29,        30,        29,        30,
    (in millions)                      2007       2006       2007       2006
    -------------------------------------------------------------------------

    Total revenues
      Merchandising(*)            $ 1,355.1  $ 1,395.7  $ 3,990.5  $ 4,019.4
      Real Estate Joint Ventures       12.5       13.1       40.1       39.4
    -------------------------------------------------------------------------
    Total revenues                $ 1,367.6  $ 1,408.8  $ 4,030.6  $ 4,058.8
    -------------------------------------------------------------------------
    Earnings before interest,
     unusual items and income
     taxes
      Merchandising(*)            $    71.1  $    80.8  $   158.1  $   132.8
      Real Estate Joint Ventures        5.7        5.9       18.2       17.5
    -------------------------------------------------------------------------
    Earnings before interest,
     unusual items and income
     taxes                             76.8       86.7      176.3      150.3
      Interest expense, net             3.5       19.9       14.4       42.0
      Unusual items - (gain)
       expense                        (77.2)       4.9      (86.4)      25.2
      Income taxes                     45.3       24.1       78.2       39.0
    -------------------------------------------------------------------------
    Net earnings                  $   105.2  $    37.8  $   170.1  $    44.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (*) The Merchandising segment includes revenue and earnings from the
        alliance with JPMorgan Chase as follows: for the 13-week period ended
        September 29, 2007 - $18.9 million (2006 - $19.4 million) and
        $14.6 million (2006 - $20.8 million); for the 39-week period ended
        September 29, 2007 - $56.1 million (2006 - $55.6 million) and
        $40.6 million (2006 - $44.8 million), respectively.



    Segmented Statements of Capital Employed((*))

                                                 As at      As at      As at
                                             September  September   December
                                                    29,        30,        30,
      (in millions)                               2007       2006       2006
    -------------------------------------------------------------------------
      Merchandising                          $ 1,354.8  $ 1,088.3  $ 1,195.8
      Real Estate Joint Ventures                 102.5      135.8      131.5
    -------------------------------------------------------------------------
      Total                                  $ 1,457.3  $ 1,224.1  $ 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
                                             September  September   December
                                                    29,        30,        30,
      (in millions)                               2007       2006       2006
    -------------------------------------------------------------------------
      Merchandising                          $ 2,937.3  $ 2,708.6  $ 2,913.1
      Real Estate Joint Ventures                 114.2      149.1      147.2
    -------------------------------------------------------------------------
      Total                                  $ 3,051.5  $ 2,857.7  $ 3,060.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Included in the Capital assets section of the Merchandising segment are
    assets held for sale relating to the Company's Calgary, Alberta Full-line
    store in the amount of $2.4 million. The Company has conditionally sold
    this property for proceeds of $40.0 million, to be received in February
    2008. This transaction, which is expected to yield an estimated pre-tax
    gain of $37.6 million, net of closing costs, will be recognized in the
    first quarter of 2008.

    7. INCOME TAXES

    The Company's total net cash payments of income taxes in the 13 and 39-
    week periods ended September 29, 2007 were $7.0 million (2006 -
    $1.6 million) and $39.8 million (2006 - $207.1 million), respectively.

    8. CAPITAL STOCK

    As at September 29, 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 September 29, 2007.

    Cash received from the issuance of capital stock upon the exercise of
    options amounted to Nil (2006 - Nil) and Nil (2006 - less than
    $0.1 million), respectively, in the 13 and 39-week periods ended
    September 29, 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 and 39-week periods ended September 29, 2007, the Company
    credited Nil (2006 - Nil) and Nil (2006 - $2.0 million), respectively, to
    capital stock for notional dividend equivalents related to the quarterly
    dividends. As at September 29, 2007, Nil (2006 - Nil) 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. The compensation expense is recorded to
    adjust the liability for changes in the market price of the Company's
    shares and for awards exercised in the period. During the 13 and 39-week
    periods ended September 29, 2007, an expense of $0.1 million (2006 -
    $0.2 million) and an expense of $0.2 million (2006 - credit of
    $0.1 million), respectively, were recorded related to tandem awards.

    Cash payments for stock appreciation rights made upon the exercise of
    previously issued tandem awards during the 13 and 39-week periods ended
    September 29, 2007 were less than $0.1 million (2006 - Nil) and
    $0.2 million (2006 - $0.1 million), respectively.

    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 $19.0 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 and 39-week periods ended September 29, 2007 was $6.7 million
    (2006 - $19.2 million) and $21.5 million (2006 - $48.4 million),
    respectively. The Company contributed a total of $16.2 million (2006 -
    $2.6 million) and $19.6 million (2006 - $29.0 million), respectively, to
    its associate future benefit plans during the 13 and 39-week periods
    ended September 29, 2007.

    As discussed in Note 19 of the Company's consolidated financial
    statements for the year ended December 30, 2006, the Company initiated an
    asset/liability study to determine a strategic asset allocation for the
    pension fund assets. Pending completion of this study, the pension fund
    assets were allocated 70% fixed income and 30% equity. During the second
    quarter of 2007, the Company completed this study and adopted a policy
    for asset allocation comprised of 50% fixed income, 30% hedge funds and
    20% equity. This change resulted in a reduction in the Company's annual
    pension expense. The asset allocation may be changed from time to time in
    terms of weighting between equity, fixed income and other asset classes.

    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 in the income statement 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 the Company's pricing of
    tires. The Company believes these allegations are without merit. The
    outcome of these actions is indeterminable, and the monetary damages, if
    any, cannot be reliably estimated. Therefore, the Company has not made a
    provision for any potential liability.

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

    Restricted cash

    Cash is considered to be restricted when it is subject to contingent
    rights of a third party customer, vendor, or government agency. As at
    September 29, 2007, the Company recorded $5.1 million (2006 -
    $6.1 million) of restricted cash, under current assets, representing
    funds held in trust in accordance with regulatory requirements governing
    advance ticket sales related to Sears Travel.

    13. FINANCIAL INSTRUMENTS

    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 LOSS

    The opening balance adjustment in accumulated other comprehensive income
    from the unrealized gain on available-for-sale investments was less than
    $0.1 million, net of tax. For the 13 and 39-week periods ended September
    29, 2007, the Company recorded an other comprehensive loss from the
    unrealized loss on available-for-sale investments of $0.1 million and
    $0.2 million, net of tax, respectively.

    15. COMPARATIVE FIGURES

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





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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