Shoppers Drug Mart Corporation announces fourth quarter and full year results

- CONTINUED GROWTH IN SALES AND NET EARNINGS

- ANNUAL DIVIDEND INCREASED BY 5 PERCENT TO $0.90 PER SHARE

TORONTO, Feb. 11 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today announced its unaudited financial results for the fourth quarter and fiscal year ended January 2, 2010. The Company also announced that its Board of Directors has declared a dividend of 22.5 cents per common share, payable April 15, 2010 to shareholders of record as of the close of business on March 31, 2010. This represents an increase in the Company's quarterly dividend payments of approximately 5%, resulting in an annualized dividend of 90 cents per common share.

Fourth Quarter Results (12 Weeks Compared to 13 Weeks in Fiscal 2008)

The Company recorded sales of $2.489 billion in the fourth quarter of 2009 which was 12 weeks in duration compared to a 13 week quarter in 2008. Excluding the benefit of the extra week in the prior year, which accounted for $174 million of additional sales, sales increased 7.1% on a comparable 12 week basis, with the Company continuing to experience strong sales growth in all regions of the country. The Company's capital investment program, which resulted in a 9.9% increase in selling space compared to a year ago, together with effective marketing initiatives, strong seasonal programs and an aggressive promotional calendar, combined to drive this top-line growth. On a same-store (12 week) basis and excluding tobacco products, sales increased 4.7% during the fourth quarter of 2009.

On a comparable 12 week basis, prescription sales increased 8.0% in the fourth quarter to $1.148 billion, accounting for 46.1% of the Company's sales mix compared to 46.2% in the same period last year. On a same-store (12 week) basis, prescription sales increased 5.5% during the fourth quarter of 2009, driven by strong growth in the number of prescriptions filled, while increased generic utilization continued to have a deflationary impact on sales growth in the category. In the fourth quarter of 2009, generic molecules represented 53.7% of prescriptions dispensed compared to 52.2% of prescriptions dispensed in the fourth quarter of 2008.

On a comparable 12 week basis, front store sales increased 6.5% to $1.341 billion in the fourth quarter, with the Company continuing to experience sales gains in its core categories, led by over-the-counter medications. Strong sales in over-the-counter medications and related categories can be attributed to customer and patient awareness of the H1N1 virus, coupled with in-store programs that focused on education, prevention and wellness. On a same-store (12 week) basis and excluding tobacco products, front store sales increased 4.1% during the fourth quarter of 2009.

Fourth quarter net earnings increased to $171 million or 79 cents per share (diluted) from $167 million or 77 cents per share (diluted) a year ago. Excluding the benefit of the extra week from the prior year's results, which the Company estimates to have been worth approximately 3 cents per share, fourth quarter net earnings increased by approximately 7% in 2009. The Company's EBITDA margin (EBITDA divided by sales) was 12.61% in the fourth quarter of 2009, a 34 basis point improvement over the EBITDA margin of 12.27% posted in the fourth quarter of 2008. This result was driven by comparably strong sales growth, improved purchasing synergies and a continued emphasis on cost reduction, productivity and efficiency, the benefits of which were partially offset by higher operating expenses at store-level associated with the continued growth and expansion of the store network, and by further investments in pricing and promotional activities. Fourth quarter operating margin (operating income divided by sales) was 10.26% compared to 10.25% in the fourth quarter of last year, as increased amortization, reflecting the continued growth of the Company's capital investment and store development program, served to largely offset the improvement in EBITDA margin. Net earnings growth was also aided by lower interest expense and by a reduction in the Company's effective income tax rate.

Commenting on the results, Jürgen Schreiber, President and CEO stated: "We are pleased with our performance in the fourth quarter and are proud of what we accomplished in 2009. Together with our Associate-owners and their teams, we continued to execute on our strategic priorities and initiatives and managed to grow the business in what was a challenging economic environment. On behalf of our shareholders and the Board of Directors, I would like to personally thank our employees, Associate-owners and their teams for their efforts and contributions to our success in 2009."

In reference to the dividend increase, Mr. Schreiber went on to say, "The amount of this increase is essentially in-line with our rate of growth in reported net earnings and as such, serves to maintain our dividend payout ratio at a sector-leading 33 percent."

Fiscal 2009 Results (52 Weeks Compared to 53 Weeks in Fiscal 2008)

Sales in 2009 were $9.986 billion compared to $9.423 billion in 2008, an increase of $563 million or 6.0%. During 2009, the Company continued to experience strong sales growth in all regions of the country, led once again by gains in Québec. The Company's capital investment and store development program continues to have a positive impact on sales growth. Sales growth was also aided by the Company's efforts to acquire drug stores and prescription files, and by the inclusion of a full year's results from Shoppers Drug Mart Specialty Health Network Inc., a business that was acquired by the Company in the third quarter of 2008. On a same-store (52 week) basis and excluding tobacco products, sales increased 4.8% in 2009.

Prescription sales were $4.824 billion in 2009 compared to $4.486 billion in 2008, an increase of $338 million or 7.5%. In 2009, prescription sales accounted for 48.3% of the Company's sales mix compared to 47.6% in the prior year. On a same-store (52 week) basis, prescription sales increased 5.7% during the year. Consistent with the prior year, pharmacy sales growth was driven by strong growth in the number of prescriptions filled, while greater generic utilization continued to have a deflationary impact on sales growth in the category. In 2009, generic molecules represented 53.0% of prescriptions dispensed compared to 51.2% of prescriptions dispensed in 2008, an increase of 3.5%.

Front store sales were $5.162 billion in 2009 compared to $4.937 billion in 2008, an increase of $225 million or 4.6%. On a same-store (52 week) basis and excluding tobacco products, front store sales increased 4.0% in 2009. Store network expansion and square footage growth, combined with effective merchandising and category management initiatives, drove front store sales growth during the year. Additionally, the Company invested aggressively in marketing, pricing and promotional activities throughout 2009 in order to drive continued top-line growth in its front store categories.

Net earnings were $585 million in 2009 compared to $554 million in 2008, an increase of $31 million or 5.6%. On a diluted basis, earnings per share were $2.69 in 2009 compared to $2.55 in 2008. Excluding the benefit of the extra week from the prior year's results which, as stated above the Company estimates to have been worth approximately 3 cents per share, net earnings increased by approximately 7% in 2009. Top-line growth, improved purchasing synergies and productivity and efficiency gains, partially offset by higher operating costs and increased amortization tied to the Company's strategic growth and store network expansion initiatives, resulted in a year-over-year increase in operating income. Net earnings growth in 2009 also benefited from a reduction in interest expense and from a decline in the Company's effective income tax rate.

Store Network Development

During the fourth quarter of 2009, 10 drug stores were opened or acquired, three of which were relocations. The Company also added two Murale luxury beauty stores to its network during the quarter. For the fiscal year ended January 2, 2010, the Company opened or acquired 114 drug stores, 40 of which were relocations, and closed four smaller stores. The Company also opened four Murale stores in 2009. At year-end, there were 1,291 stores in the system, comprised of 1,219 drug stores (1,170 Shoppers Drug Mart/Pharmaprix stores and 49 Shoppers Simply Pharmacy/Pharmaprix Simplement Santé stores), 66 Shoppers Home Health Care stores and six Murale stores. During 2009, the selling square footage of the retail store network increased by 9.9%, to in excess of 11.9 million square feet at year end.

Fiscal 2010 Outlook (52 Weeks Ending January 1, 2011)

The Company expects total sales to increase by between 6.0% and 7.0% in 2010. This expectation is underpinned by anticipated same-store sales growth of between 4.0% and 5.0% in pharmacy and 2.75% to 4.25% in the front of the store. In pharmacy, it is expected that prescription sales growth will continue to be driven by strong growth in prescription counts, offset somewhat by an anticipated decrease in average value, as generic prescription utilization rates are expected to rise at an increasing rate. As generic prescription utilization rates increase, the Company intends to pursue alternative sourcing and procurement models for generic drug products, including contracting for the fabrication of generic molecules to be offered on a private label basis. The Company believes that these alternative sourcing and procurement arrangements will improve service levels, through enhanced supply chain management, and promote further increases in generic prescription utilization rates. The Company specifically cautions that its prescription sales growth estimates are based on what it believes to be a reasonable set of assumptions with respect to matters such as the cost of prescription drugs, drug pricing and pharmacy reimbursement regulation and programs, among others, however potential changes to the Ontario drug system may differ materially from the Company's assumptions. In the front of the store, it is the Company's expectation that sustained investments in pricing and promotional activities will be required throughout 2010 in order to drive the anticipated rate of sales growth.

In fiscal 2010, the Company plans to allocate approximately $560 million to capital expenditures, with approximately 70% of this amount being invested in the store network, including acquisitions of drug stores, prescription files and land. This should result in an increase in retail selling square footage of between 8% and 9%. This will be accomplished through the addition of between 105 and 115 new drug stores, approximately 45 of which will be relocations and 10 of which will be Shoppers Simply Pharmacy or Pharmaprix Simplement Santé formats, and through the completion of between 25 and 30 major drug store expansions.

2009 Annual Report

The Company's audited consolidated financial statements for the year ended January 2, 2010 will be available on or before April 2, 2010. Management's Discussion and Analysis for the year ended January 2, 2010, including further discussion and analysis of fourth quarter events or items that affected results of operations, financial position and cash flows, will also be available on or before April 2, 2010. Both documents will be contained in the Company's 2009 Annual Report and will available in the Investor Relations section of the Company's website at www.shoppersdrugmart.ca, or on the Canadian Securities Administrators' website at www.sedar.com.

Other Information

The Company will hold an analyst call at 3:30 p.m. (Eastern Standard Time) today to discuss its fourth quarter results and its outlook for fiscal 2010. The call may be accessed by dialing 416-695-7848 from within the Toronto area, or 1-800-355-4959 outside of Toronto. The call will also be simulcast on the Company's website for all interested parties. The webcast can be accessed via the Investor Relations section of the Shoppers Drug Mart website at www.shoppersdrugmart.ca. The conference call will be archived in the Investor Relations section of the Shoppers Drug Mart website until the Company's next analyst call. A playback of the call will also be available by telephone until 11:59 p.m. (Eastern Standard Time) on February 25, 2010. The call playback can be accessed after 5:00 p.m. (Eastern Standard Time) on Thursday, February 11, 2010 by dialing 416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of Toronto. The seven-digit passcode number is 3748385.

About Shoppers Drug Mart Corporation

Shoppers Drug Mart Corporation is one of the most recognized and trusted names in Canadian retailing. The Company is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Québec). With more than 1,170 Shoppers Drug Mart and Pharmaprix stores operating in prime locations in each province and two territories, the Company is one of the most convenient retailers in Canada. The Company also licenses or owns more than 49 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and six luxury beauty destinations operating as Murale. As well, the Company also owns and operates 66 Shoppers Home Health Care stores, making it the largest Canadian retailer of home health care products and services. In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services, and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities in Ontario and Alberta.

For more information, visit www.shoppersdrugmart.ca.

Forward-looking Information and Statements

This news release contains forward-looking information and statements which constitute "forward-looking information" under Canadian securities law and which may be material, regarding, among other things, the Company's beliefs, plans, objectives, estimates, intentions and expectations. Forward-looking information and statements are typically identified by words such as "anticipate", "believe", "expect", "estimate", "forecast", "goal", "intend", "plan", "will", "may", "should", "could" and similar expressions. Specific forward-looking information in this news release includes, but is not limited to, statements with respect to the Company's operating and financial results, its capital expenditure plans and dividend policy, the ability to execute on its future operating, financing and investing strategies and the impact on the Company's financial results of the potential changes to the Ontario drug system.

The forward-looking information and statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking information and statements contained herein. Inherent in the forward-looking information and statements are known and unknown risks, uncertainties and other factors beyond the Company's ability to control or predict, which give rise to the possibility that the Company's predictions, forecasts, expectations or conclusions will not prove to be accurate, that its assumptions may not be correct and that the Company's plans, objectives and statements will not be achieved. Actual results or developments may differ materially from those contemplated by the forward-looking information and statements.

The material risk factors that could cause actual results to differ materially from the forward-looking information and statements contained herein include, without limitation: the risk of adverse changes to laws and regulations relating to prescription drugs and their sale, including pharmacy reimbursement programs and the availability of manufacturer allowances, or changes to such laws and regulations that increase compliance costs; the risk of adverse changes in economic and financial conditions in Canada and globally; the risk of increased competition from other retailers; the risk of an inability of the Company to manage growth and maintain its profitability; the risk of exposure to fluctuations in interest rates; the risk of material adverse changes in foreign currency exchange rates; the risk of an inability to attract and retain pharmacists and key employees; the risk of an inability of the Company's information technology systems to support the requirements of the Company's business; the risk of changes to estimated contributions of the Company in respect of its pension plans or post-employment benefit plans which may adversely impact the Company's financial performance; the risk of changes to the relationships of the Company with third-party service providers; the risk that the Company will not be able to lease or obtain suitable store locations on economically favourable terms; the risk of adverse changes to the Company's results of operations due to seasonal fluctuations; risks associated with alternative arrangements for sourcing generic drug products, including intellectual property and product liability risks; the risk that new, or changes to current, federal and provincial laws, rules and regulations, including environmental and privacy laws, rules and regulations, may adversely impact the Company's business and operations; the risk that violations of law, breaches of Company policies or unethical behaviour may adversely impact the Company's financial performance; property and casualty risks; the risk of injuries at the workplace or health issues; the risk that changes in tax law, or changes in the way that tax law is expected to be interpreted, may adversely impact the Company's business and operations; the risk that new, or changes to existing, accounting pronouncements may adversely impact the Company; the risks associated with the performance of the Associate-owned store network; and the risk of damage to the reputation of brands promoted by the Company, or to the reputation of any supplier or manufacturer of these brands.

This is not an exhaustive list of the factors that may affect any of the Company's forward-looking information and statements. Investors and others should carefully consider these and other risk factors and not place undue reliance on the forward-looking information and statements. Further information regarding these and other risk factors is included in the Company's public filings with provincial securities regulatory authorities including, without limitation, the sections entitled "Risks and Risk Management" and "Risks Associated with Financial Instruments" in the Company's Management's Discussion and Analysis for the 53 week period ended January 3, 2009. The forward-looking information and statements contained in this news release represent the Company's views only as of the date of this release. Forward-looking information and statements contained in this news release about prospective results of operations, financial position or cash flows that are based upon assumptions about future economic conditions and courses of action are presented for the purpose of assisting the Company's shareholders in understanding management's current views regarding those future outcomes and may not be appropriate for other purposes. While the Company anticipates that subsequent events and developments may cause the Company's views to change, the Company does not undertake to update any forward-looking information and statements, except to the extent required by applicable securities laws.

Additional information about the Company, including the Annual Information Form, can be found at www.sedar.com.

    
    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Earnings
    (unaudited)
    (in thousands of dollars except per share amounts)
    -------------------------------------------------------------------------
                          12 Weeks      13 Weeks      52 Weeks      53 Weeks
                             Ended         Ended         Ended         Ended
                       ------------------------------------------------------
                         January 2,    January 3,    January 2,    January 3,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------
    Sales              $ 2,488,544   $ 2,496,799   $ 9,985,600   $ 9,422,911
    Operating expenses
      Cost of goods
       sold and other
       operating
       expenses (Notes
       2 and 3)          2,174,809     2,190,321     8,841,170     8,350,367
      Amortization          58,343        50,477       248,794       205,371
    -------------------------------------------------------------------------

    Operating income       255,392       256,001       895,636       867,173

    Interest expense
     (Note 5)               11,768        15,940        58,215        63,952
    -------------------------------------------------------------------------

    Earnings before
     income taxes          243,624       240,061       837,421       803,221

    Income taxes
     (Note 2)
      Current               67,092        64,809       249,776       254,159
      Future                 5,472         8,716         2,737        (5,083)
    -------------------------------------------------------------------------
                            72,564        73,525       252,513       249,076
    -------------------------------------------------------------------------

    Net earnings
     (Note 2)          $   171,060   $   166,536   $   584,908   $   554,145
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings per
     common share
     (Note 2):

      Basic            $      0.79   $      0.77   $      2.69   $      2.55
      Diluted          $      0.79   $      0.77   $      2.69   $      2.55

    Weighted average
     common shares
     outstanding
      - Basic
       (millions)            217.4         217.1         217.4         217.0
      - Diluted
       (millions)            217.5         217.4         217.5         217.5

    Actual common
     shares out-
     standing
     (millions)              217.4         217.3         217.4         217.3



    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Retained Earnings
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                      52 Weeks      53 Weeks
                                                         Ended         Ended
                                                  ---------------------------
                                                     January 2,    January 3,
                                                          2010          2009
    -------------------------------------------------------------------------
    Retained earnings, beginning of period
     as reported                                   $ 1,938,023   $ 1,559,551
    Impact of the adoption of new accounting
     standard, Handbook Section 3064, Goodwill
     and Intangible Assets (Note 2)                    (38,884)      (27,817)
    -------------------------------------------------------------------------
    Retained earnings, beginning of period as
     restated                                        1,899,139     1,531,734
    Net earnings                                       584,908       554,145
    Dividends                                         (186,956)     (186,679)
    Premium on share capital purchased for
     cancellation                                            -           (61)
    -------------------------------------------------------------------------
    Retained earnings, end of period               $ 2,297,091   $ 1,899,139
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Consolidated Statements of Comprehensive Income and Accumulated
     Other Comprehensive Loss
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                          12 Weeks      13 Weeks      52 Weeks      53 Weeks
                             Ended         Ended         Ended         Ended
                       ------------------------------------------------------
                         January 2,    January 3,    January 2,    January 3,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------
    Net earnings       $   171,060   $   166,536   $   584,908   $   554,145
      Other comprehensive
       income (loss), net
       of tax Change in
       unrealized loss/
       gain on interest
       rate derivatives
       (net of tax of
       $204 and $1,035
       (2008 - $634 and
       $1,605))                437        (1,176)        1,967        (3,148)
      Change in unrealized
       loss on equity
       forward derivatives
       (net of tax of $44
       and $22 (2008 - $93
       and $167))              119          (186)           56          (337)
      Amount of previously
       unrealized loss/gain
       recognized in
       earnings during
       the period (net of
       tax of $30 and $117
       (2008 - $143 and
       $145))                   45          (200)          294          (204)
    -------------------------------------------------------------------------
    Other comprehensive
     income (loss)             601        (1,562)        2,317        (3,689)
    -------------------------------------------------------------------------
    Comprehensive
     income            $   171,661    $  164,974   $   587,225   $   550,456
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Accumulated other
     comprehensive
     (loss) income,
     beginning of
     period                                        $    (3,442)  $       247
    Other comprehensive
     income (loss)                                       2,317        (3,689)
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive loss,
     end of period                                 $    (1,125)  $    (3,442)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SHOPPERS DRUG MART CORPORATION
    Consolidated Balance Sheets
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                     January 2,    January 3,
                                                          2010          2009
    -------------------------------------------------------------------------

    Assets

    Current
      Cash                                         $    44,391   $    36,567
      Accounts receivable                              471,029       448,476
      Inventory (Note 3)                             1,852,441     1,743,253
      Income taxes recoverable                               -         8,835
      Future income taxes (Note 2)                      86,161        84,770
      Prepaid expenses and deposits (Note 2)            75,573        59,327
    -------------------------------------------------------------------------
                                                     2,529,595     2,381,228

    Property and equipment (Note 2)                  1,566,024     1,331,363
    Goodwill (Note 2)                                2,481,353     2,427,239
    Intangible assets (Note 2)                         258,766       212,279
    Other assets (Note 2)                               16,716        12,114
    -------------------------------------------------------------------------
    Total assets                                   $ 6,852,454   $ 6,364,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities

    Current
      Bank indebtedness (Note 6)                   $   270,332   $   240,844
      Commercial paper                                 260,386       339,943
      Short-term debt (Note 8)                               -       197,845
      Accounts payable and accrued liabilities         964,736     1,018,505
      Income taxes payable                              17,046             -
      Dividends payable                                 46,748        46,709
    -------------------------------------------------------------------------
                                                     1,559,248     1,843,846

    Long-term debt (Note 8)                            946,098       647,250
    Other long-term liabilities                        347,951       303,117
    Future income taxes                                 42,858        30,803
    -------------------------------------------------------------------------
                                                     2,896,155     2,825,016

    Associate interest                                 130,189       118,678

    Shareholders' equity

    Share capital                                    1,519,870     1,514,207
    Contributed surplus                                 10,274        10,625

    Accumulated other comprehensive loss                (1,125)       (3,442)
    Retained earnings (Note 2)                       2,297,091     1,899,139
    -------------------------------------------------------------------------
                                                     2,295,966     1,895,697
    -------------------------------------------------------------------------
                                                     3,826,110     3,420,529
    -------------------------------------------------------------------------
    Total liabilities and shareholders' equity     $ 6,852,454   $ 6,364,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Cash Flows
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                          12 Weeks      13 Weeks      52 Weeks      53 Weeks
                             Ended         Ended         Ended         Ended
                       ------------------------------------------------------
                         January 2,    January 3,    January 2,    January 3,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Operating
     activities
      Net earnings
       (Note 2)        $   171,060   $   166,536   $   584,908   $   554,145
      Items not affect-
       ing cash
        Amortization
         (Note 2)           61,951        51,903       250,202       204,533
        Future income
         taxes (Note 2)      5,472         8,716         2,737        (5,083)
        (Gain) loss on
         disposal of
         property and
         equipment          (7,365)          253        (3,456)        3,436
        Stock-based
         compensation          112           186           694         1,498
    -------------------------------------------------------------------------
                           231,230       227,594       835,085       758,529

      Net change in non-
       cash working
       capital balances
       (Note 2)            (59,495)      (80,118)     (177,724)     (328,806)
      Increase in
       other long-term
       liabilities             143         9,658        35,757        45,609
    -------------------------------------------------------------------------
    Cash flows from
     operating activities  171,878       157,134       693,118       475,332
    -------------------------------------------------------------------------

    Investing activities
      Purchase of prop-
       erty and equip-
       ment (Note 2)      (154,598)     (182,444)     (461,438)     (476,315)
      Proceeds from dis-
       position of prop-
       erty and equipment    5,107         6,096        30,106        24,690
      Business acqui-
       sitions (Note 4)     (5,265)      (46,196)      (97,100)     (243,901)
      Deposits              (1,187)       28,804         3,527        88,522
      Purchase and dev-
       elopment of in-
       tangible assets
       (Note 2)            (14,832)      (23,670)      (33,989)      (48,650)
      Other assets
       (Note 2)                322           318        (4,310)       (5,255)
    -------------------------------------------------------------------------
    Cash flows used
     in investing
     activities           (170,453)     (217,092)     (563,204)     (660,909)
    -------------------------------------------------------------------------

    Financing activities
      Bank indebtedness,
       net (Note 6)          7,430       (18,550)       29,488        15,692
      Commercial paper,
       net                   7,000        (4,000)      (80,000)     (203,350)
      Issuance of short-
       term debt                 -       200,000             -       200,000
      Repayment of short-
       term debt (Note 8)        -             -      (200,000)            -
      Issuance of Series
       2 notes                   -             -             -       450,000
      Issuance of Series
       3 notes (Note 8)          -             -       250,000             -
      Issuance of Series
       4 notes (Note 8)          -             -       250,000             -
      Revolving term debt,
       net                   1,298       200,000      (198,702)      200,000
      Repayment of Series
       1 notes                   -      (300,000)            -      (300,000)
      Financing costs
       incurred                  -        (2,550)       (2,088)       (6,050)
      Associate interest    14,995        16,064        11,511         5,559
      Proceeds from shares
       issued for stock
       options exercised       497         2,388         4,481         7,144
      Repayment of share
       purchase loans            -            69           137           288
      Repurchase of
       share capital             -           (36)            -           (71)
      Dividends paid       (46,742)      (46,677)     (186,917)     (174,656)
    -------------------------------------------------------------------------
    Cash flows (used in)
     from financing
     activities            (15,522)       46,708      (122,090)      194,556
    -------------------------------------------------------------------------
    (Decrease) increase
     in cash               (14,097)      (13,250)        7,824         8,979
    Cash, beginning of
     period                 58,488        49,817        36,567        27,588
    -------------------------------------------------------------------------
    Cash, end of
     period            $    44,391   $    36,567   $    44,391   $    36,567
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash
     flow information
    Interest paid      $    11,457   $    26,224   $    44,818   $    63,893
    Income taxes paid  $    28,580   $    55,720   $   223,296   $   327,184



    SHOPPERS DRUG MART CORPORATION
    Notes to the Consolidated Financial Statements
    (unaudited)
    (in thousands of dollars except per share amounts)
    -------------------------------------------------------------------------

    1.  BASIS OF PRESENTATION

    The unaudited interim consolidated financial statements have been
    prepared in accordance with Canadian generally accepted accounting
    principles ("GAAP") and follow the same accounting policies and methods
    of application with those used in the preparation of the audited annual
    consolidated financial statements for the 53 week period ended January 3,
    2009, except as described in Note 2, Changes in Accounting Policies.
    These financial statements do not contain all disclosures required by
    Canadian GAAP for annual financial statements and, accordingly, should be
    read in conjunction with the most recently prepared annual consolidated
    financial statements and the accompanying notes included in the Company's
    2008 Annual Report.

    The consolidated financial statements of the Company include the accounts
    of Shoppers Drug Mart Corporation, its subsidiaries and entities
    considered to be variable interest entities, as defined by the Canadian
    Institute of Chartered Accountants ("CICA") Accounting Guideline 15,
    "Consolidation of Variable Interest Entities" ("AcG-15"). Under AcG-15,
    the Company has consolidated the Associate-owned stores.

    The individual Associate-owned stores that comprise the Company's store
    network are variable interest entities and the Company is the primary
    beneficiary. As such, the Associate-owned stores are subject to
    consolidation by the Company. The Associate-owned stores remain separate
    legal entities and consolidation of the Associate-owned stores has no
    impact on the underlying risks facing the Company.

    2.  CHANGES IN ACCOUNTING POLICIES

    Adoption of New Accounting Standards

    Financial Statement Concepts

    In February 2008, the CICA issued amendments to Section 1000, "Financial
    Statement Concepts" ("Section 1000"), to clarify the criteria for
    recognition of an asset and the timing of expense recognition,
    specifically, deleting the guidance permitting the deferral of costs. The
    new requirements were effective for interim and annual financial
    statements relating to fiscal years beginning on or after October 1,
    2008. The Company adopted the amendments to Section 1000 at the beginning
    of its current fiscal year in conjunction with Section 3064, "Goodwill
    and Intangible Assets".

    Goodwill and Intangible Assets

    In February 2008, the CICA issued a new accounting standard concerning
    Goodwill and Intangible Assets ("Section 3064"), which was based on the
    International Accounting Standards Board's ("IASB") International
    Accounting Standard 38, "Intangible Assets". The new section replaced the
    existing guidance on goodwill and other intangible assets and research
    and development costs. The objective of Section 3064 was to eliminate the
    practice of deferring costs that do not meet the definition and
    recognition criteria of assets. Section 3064 was effective for interim
    and annual financial statements for fiscal years beginning on or after
    October 1, 2008. The Company adopted Section 3064 retrospectively at the
    beginning of its current fiscal year, with restatement of prior periods.
    Intangible assets recognized prior to the Company's current fiscal year
    that no longer met the new recognition or measurement criteria and the
    definition of an asset were removed from the consolidated balance sheets
    in accordance with CICA Handbook Section 1506, "Accounting Changes". The
    balance of any such deferred costs as at the end of the Company's 2007
    and 2008 fiscal years was reflected as a charge to opening retained
    earnings.

    Goodwill is recorded as the excess amount of the purchase price of an
    acquired business over the fair value of the underlying net assets,
    including intangible assets, at the date of acquisition. Goodwill is not
    amortized but is tested for impairment at least on an annual basis. In
    the event of an impairment, the excess of the carrying amount over the
    fair value of goodwill would be charged to earnings.

    Net Earnings Impact

    The following table summarizes the impact of the implementation of
    Section 3064 on the Company's consolidated statements of earnings for the
    13 and 53 weeks ended January 3, 2009, respectively:

                                                      13 weeks      53 weeks
                                                         ended         ended
                                                     January 3,    January 3,
                                                          2009          2009
    -------------------------------------------------------------------------
    Adjustment - pre-tax                           $    (8,932)  $   (15,329)
    Income taxes                                         2,417         4,262
    -------------------------------------------------------------------------
    Net earnings impact                            $    (6,515)  $   (11,067)
    Net earnings per common share (diluted) impact $     (0.03)  $     (0.05)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings, as reported                      $   173,051   $   565,212
    Net earnings per common share (diluted),
     as reported                                   $      0.80   $      2.60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings, as restated                      $   166,536   $   554,145
    Net earnings per common share (diluted),
     as restated                                   $      0.77   $      2.55
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The adjustment relates to previously deferred costs, primarily store
    opening costs, that no longer qualify for recognition as an asset.

    Opening Retained Earnings Adjustment

    The implementation of Section 3064 has resulted in a reduction to the
    Company's 2009 and 2008 fiscal years' opening retained earnings of
    $38,884 and $27,817, respectively.

    Balance Sheet Adjustments

    The following paragraphs summarize the impact of the implementation of
    Section 3064 on the Company's consolidated balance sheets as at
    January 3, 2009.

    The impact on balances as at January 3, 2009 was primarily an increase in
    net future income tax assets of $17,676, a decrease in prepaid expenses
    and deposits of $4,727, a decrease in property and equipment of $110,772,
    a decrease in deferred costs of $47,213, an increase in intangible assets
    of $114,466, and a decrease in other assets of $8,328. The increase in
    intangible assets and decrease in property and equipment primarily
    reflects the reclassification of certain computer software costs,
    previously included in property and equipment.

    Credit Risk and the Fair Value of Financial Assets and Financial
    Liabilities

    In January 2009, the Emerging Issues Committee ("EIC") issued a new
    abstract concerning the measurement of financial assets and financial
    liabilities, EIC-173 "Credit Risk and the Fair Value of Financial Assets
    and Financial Liabilities" ("EIC-173"). There had been diversity in
    practice as to whether an entity's own credit risk and the credit risk of
    the counterparty are taken into account in determining the fair value of
    financial instruments. The EIC reached a consensus that these risks
    should be taken into account in the measurement of financial assets and
    financial liabilities. EIC-173 was effective for all financial assets and
    financial liabilities measured at fair value in interim and annual
    financial statements issued for periods ending on or after the date of
    issuance of EIC-173 with retrospective application without restatement of
    prior periods. The Company adopted EIC-173 at the beginning of its
    current fiscal year. The implementation did not have a significant impact
    on the Company's results of operations, financial position or
    disclosures.

    Financial Instruments - Recognition and Measurement

    In August 2009, the CICA made amendments to Section 3855, "Financial
    Instruments - Recognition and Measurement" ("Section 3855"), adding and
    amending paragraphs regarding financial asset measurement categories and
    impairment as well as providing specific transitional guidance. The
    Company adopted the amendments to Section 3855 in its 2009 third and
    fourth quarter interim financial statements. The implementation did not
    have a significant impact on the Company's results of operations,
    financial position or disclosures.

    Future Accounting Standards

    Financial Instruments - Recognition and Measurement

    In April 2009, the CICA amended Section 3855, "Financial Instruments -
    Recognition and Measurement" ("Section 3855"), adding and amending
    paragraphs regarding the application of the effective interest method to
    previously impaired financial assets and embedded prepayment options. The
    amendments are effective for interim and annual financial statements
    relating to fiscal years beginning on or after January 1, 2011, with
    early adoption permitted. The Company will adopt the amendments to
    Section 3855 in its 2011 fiscal year. The amendments are not expected to
    have a significant impact on the Company's accounting for its financial
    instruments.

    Financial Instruments - Disclosures

    In June 2009, the CICA amended Section 3862, "Financial Instruments -
    Disclosures" ("Section 3862"), to adopt the amendments recently issued by
    the IASB to International Financial Reporting Standard 7, "Financial
    Instruments: Disclosures" ("IFRS 7"), in March 2009. These amendments are
    applicable to publicly accountable enterprises and those private
    enterprises, co-operative business enterprises, rate-regulated
    enterprises and not-for-profit organizations that choose to adopt Section
    3862. The amendments were made to enhance disclosures about fair value
    measurements, including the relative reliability of the inputs used in
    those measurements, and about the liquidity risk of financial
    instruments.

    The amendments are effective for annual financial statements for fiscal
    years ending after September 30, 2009, with early adoption permitted. To
    provide relief for preparers, and consistent with IFRS 7, the CICA
    decided that an entity need not provide comparative information for the
    disclosures required by the amendments in the first year of application.
    The Company will adopt these amendments in its 2009 annual consolidated
    financial statements. The impact of the amendments to the fair value
    measurement and liquidity risk disclosure requirements of the Company is
    not expected to be significant.

    Multiple Deliverable Revenue Arrangements

    In December 2009, the EIC issued a new abstract concerning multiple
    deliverable revenue arrangements, EIC 175 "Multiple Deliverable Revenue
    Arrangements" ("EIC 175"), which amended EIC 142 "Revenue Arrangements
    with Multiple Deliverables" ("EIC 142"). The objective of issuing this
    Abstract is to harmonize EIC 142 with amendments made to U.S. generally
    accepted accounting principles. These amendments require a vendor to
    allocate arrangement consideration at the inception of the arrangement to
    all deliverables using the relative selling price method, thereby
    eliminating the use of the residual value method. The amendments also
    change the level of evidence of the standalone selling price required to
    separate deliverables when more objective evidence of the selling price
    is not available. EIC 175 should be adopted prospectively to revenue
    arrangements entered into or materially modified in the first annual
    fiscal period beginning on or after January 1, 2011, with early adoption
    permitted. EIC 142 continues to be effective until that date.

    3.  INVENTORY

    During the 12 and 52 weeks ended January 2, 2010, the Company recognized
    cost of inventory of $1,521,818 and $6,238,239 (2008 - $1,558,194 and
    $5,944,249), respectively, as an expense. This expense is included in
    cost of goods sold and other operating expenses in the consolidated
    statements of earnings for the period.

    During the 12 and 52 weeks ended January 2, 2010 and the 13 and 53 weeks
    ended January 3, 2009, there were no significant write-downs of inventory
    as a result of net realizable values being lower than cost and no
    inventory write-downs recognized in previous years were reversed.

    4.  ACQUISITIONS

    HealthAccess and Information Healthcare Marketing Corp.

    On July 2, 2008, the Company acquired the specialty drug assets of the
    HealthAccess business of Calea Ltd. and 100% of the shares of Calea
    Ltd.'s wholly owned subsidiary, Information Healthcare Marketing Corp.,
    which operates a related call centre business. The acquired business is
    based in Mississauga, Ontario, operates as Shoppers Drug Mart Specialty
    Health Network Inc. and provides comprehensive patient support services
    for specialty pharmaceutical needs. The assets acquired are composed
    primarily of goodwill, intangible assets and leasehold improvements at
    two locations. The operations of the acquired assets and business have
    been included in the Company's results of operations from the date of
    acquisition.

    The total cost of the acquisition in cash, including costs incurred in
    connection with the acquisition, was $88,742. The cost of the acquisition
    was allocated to the assets acquired on the basis of their fair values as
    follows:

    Net working capital                                          $     3,841
    Property and equipment                                               162
    Goodwill                                                          70,739
    Customer relationships(1)                                         14,000
    -------------------------------------------------------------------------
    Purchase price                                               $    88,742
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The carrying value of the Company's customer relationships is
        included in intangible assets in the consolidated balance sheets.

    Other Business Acquisitions

    During the 12 and 53 weeks ended January 2, 2010, the Company acquired
    the assets or shares of a number of pharmacies, each of which is
    individually immaterial to the Company's total acquisitions. The total
    cost of acquisitions of $5,265 and $97,100 (2008 - $45,617 and $154,824),
    respectively, including costs incurred in connection with the
    acquisitions, is allocated primarily to goodwill and intangible assets
    based on their fair values. Certain purchase price allocations are
    preliminary and may change. The operations of the acquired pharmacies
    have been included in the Company's results of operations from the date
    of acquisition.

    5.  INTEREST EXPENSE

    The components of the Company's interest expense are as follows:

                          12 Weeks      13 Weeks      52 Weeks      53 Weeks
                             Ended         Ended         Ended         Ended
                       ------------------------------------------------------
                         January 2,    January 3,    January 2,    January 3,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------
    Interest on bank
     indebtedness      $     1,150   $     2,266   $     5,378   $    10,584
    Interest on
     commercial paper        1,161         3,809         6,231        23,689
    Interest on short-
     term debt                   -         2,292           504         2,292
    Interest on long-
     term debt               9,457         7,573        46,102        27,387
    -------------------------------------------------------------------------
                       $    11,768   $    15,940   $    58,215   $    63,952
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  BANK INDEBTEDNESS

    Bank indebtedness is comprised of lines of credit borrowings by both the
    Company and the Associate-owned stores. The Associate-owned stores borrow
    under agreements guaranteed by the Company. The Company has entered into
    agreements with banks to guarantee a total of $520,000 (2008 - $425,000)
    of lines of credit. As at January 2, 2010, the Associate-owned stores
    have utilized $254,332 (2008 - $263,830) of the available lines of
    credit.

    7.  EMPLOYEE FUTURE BENEFITS

    The net benefit expense included in the results for the 12 and 52 weeks
    ended January 2, 2010, for benefits provided under pension plans was
    $1,082 and $4,688 (2008 - $1,355 and $5,874), respectively, and for
    benefits provided under other benefit plans was $1,012 and $1,089 (2008 -
    $632 and $709), respectively.

    8.  DEBT REFINANCING

    On January 20, 2009, the Company issued $250,000 of three-year
    medium-term notes maturing January 20, 2012, which bear interest at a
    fixed rate of 4.80% (the "Series 3 notes") and $250,000 of five-year
    medium-term notes maturing January 20, 2014, which bear interest at a
    fixed rate of 5.19% (the "Series 4 notes"). The Series 3 notes and the
    Series 4 notes were issued pursuant to the Company's shelf prospectus, as
    supplemented by pricing supplements dated January 14, 2009.

    The net proceeds from the issuance of the Series 3 notes and the Series 4
    notes were used to refinance existing indebtedness, including repayment
    of all amounts outstanding under the Company's senior unsecured 364-day
    bank credit facility ("short-term debt"). The Company's senior unsecured
    364-day bank credit facility was terminated on January 20, 2009.

    On June 22, 2009, the Company filed with the securities regulators in
    each of the provinces of Canada an amendment to its short form base shelf
    prospectus dated May 22, 2008 (the "Amended Prospectus") to increase the
    aggregate principal amount of medium-term notes to be issued from
    $1,000,000 to $1,500,000. Subject to the requirements of applicable law,
    the Company may issue medium-term notes under the Amended Prospectus for
    up to 25 months from May 22, 2008.

    As at January 2, 2010, the Company can issue an additional $500,000 of
    medium-term notes under its Amended Prospectus.

    9.  FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES RELATED TO
        FINANCIAL INSTRUMENTS

    In the normal course of business, the Company is exposed to financial
    risks that have the potential to negatively impact its financial
    performance. The Company may use derivative financial instruments to
    manage certain of these risks. The Company does not use derivative
    financial instruments for trading or speculative purposes. These risks
    are discussed in more detail below:

    Interest Rate Risk

    Interest rate risk is the risk that fair value or future cash flows
    associated with the Company's financial assets or liabilities will
    fluctuate due to changes in market interest rates.

    The Company, including its Associate-owned store network, is exposed to
    fluctuations in interest rates by virtue of its borrowings under its bank
    credit facilities, commercial paper program and financing programs
    available to its Associates. Increases or decreases in interest rates
    will negatively or positively impact the financial performance of the
    Company.

    The Company uses interest rate derivatives to manage this exposure and
    monitors market conditions and the impact of interest rate fluctuations
    on its fixed and floating rate debt instruments on an ongoing basis. The
    Company has interest rate derivative agreements converting an aggregate
    notional principal amount of $100,000 of floating rate commercial paper
    debt into fixed rate debt.

    As at January 2, 2010, the Company had $466,630 (2008 - $904,830) of
    unhedged floating rate debt. During the 12 and 52 weeks ended January 2,
    2010, the Company's average outstanding unhedged floating rate debt was
    $584,631 and $600,562 (2008 - $822,983 and $671,423), respectively. Had
    interest rates been higher or lower by 50 basis points during the 12 and
    52 weeks ended January 2, 2010, net earnings would have decreased or
    increased, respectively, by approximately $464 and $2,066 (2008 - $708
    and $2,365), respectively, as a result of the Company's exposure to
    interest rate fluctuations on its unhedged floating rate debt.

    Furthermore, the Company may be exposed to losses should any counterparty
    to its derivative agreements fail to fulfill its obligations. The Company
    has sought to minimize counterparty risk by transacting with
    counterparties that are large financial institutions. As at January 2,
    2010 and January 3, 2009, there are no net exposures, as the interest
    rate derivative agreements are in a liability position.

    Credit Risk

    Credit risk is the risk that the Company's counterparties will fail to
    meet their financial obligations to the Company causing a financial loss.

    Accounts receivable arise primarily in respect of prescription sales
    billed to governments and third-party drug plans and, as a result,
    collection risk is low. There is no concentration of balances with
    debtors in the remaining accounts receivable. The Company does not
    consider its exposure to credit risk to be material.

    Liquidity Risk

    Liquidity risk is the risk that the Company will be unable to meet its
    obligations relating to its financial liabilities.

    The Company prepares cash flow budgets and forecasts to ensure that it
    has sufficient funds through operations, access to bank facilities and
    access to debt and capital markets to meet its financial obligations,
    capital investment program and fund new investment opportunities or other
    unanticipated requirements as they arise. The Company manages its
    liquidity risk as it relates to financial liabilities by monitoring its
    cash flow from operating activities to meet its short-term financial
    liability obligations and planning for the repayment of its long-term
    financial liability obligations through cash flow from operating
    activities and/or the issuance of new debt.

    The contractual maturities of the Company's financial liabilities as at
    January 2, 2010, are as follows:

                                Payments
                                     due    Payments
                                 between         due
                    Payments     90 days   between 1
                      due in    and less    year and    Payments
                    the next      than a   less than   due after
                     90 days        year     2 years     2 years       Total
    -------------------------------------------------------------------------
    Bank indebted-
     ness        $   270,332 $         -  $        -  $        -  $  270,332
    Commercial
     paper           261,000           -           -           -     261,000
    Accounts
     payable         885,497      47,133           -           -     932,630
    Dividends
     payable          46,748           -           -           -      46,748
    Medium-term
     notes                 -           -           -     950,000     950,000
    Revolving
     term facility         -           -       1,298           -       1,298
    Other long-
     term lia-
     bilities              -           -       9,691      13,749      23,440
    -------------------------------------------------------------------------
    Total        $ 1,463,577 $    47,133 $    10,989 $   963,749 $ 2,485,448
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    There is no difference between the carrying value of bank indebtedness
    and the amount the Company is required to pay. The accounts payable and
    other long-term liabilities amounts exclude certain liabilities that are
    not considered financial liabilities.

    10. FINANCIAL INSTRUMENTS

    Interest Rate Derivatives

    During the 12 and 52 weeks ended January 2, 2010, the Company had
    interest rate derivative agreements converting an aggregate notional
    principal amount of $100,000 of floating rate commercial paper debt into
    fixed rate debt. The fixed rates payable by the Company under the
    derivative agreements range from 4.11% to 4.18%. An agreement covering
    $50,000 of the notional principal amount matured in December 2009. The
    Company recorded a net loss of $1,811 over the life of this agreement as
    interest expense on commercial paper (2008 - net gain of $332). The
    remaining agreement for $50,000 with a fixed rate payable of 4.18%
    matures in December 2010, with reset terms of one month.

    Based on market values of the interest rate derivative agreements at
    January 2, 2010, the Company recognized a liability of $1,645 (2008 -
    $4,647), all of which (2008 - $1,566) was presented in accounts payable
    and accrued liabilities (2008 - $3,081 was also presented in other
    long-term liabilities). During the 12 and 52 weeks ended January 2, 2010,
    the Company assessed that the interest rate derivatives were an effective
    hedge for the floating interest rates on the associated commercial paper
    debt. During the 13 and 53 weeks ended January 3, 2009, the Company
    assessed that the interest rate derivatives were an effective hedge for
    the floating interest rates on the associated commercial paper debt.
    Market values were determined based on information received from the
    Company's counterparties to these agreements.

    During the 12 and 52 weeks ended January 2, 2010, amounts previously
    recorded in accumulated other comprehensive loss of $nil were recognized
    as income in earnings. During the 13 weeks ended January 3, 2009, amounts
    previously recorded in accumulated other comprehensive loss of $186 were
    recognized as a loss in earnings. During the 53 weeks ended January 3,
    2009, amounts previously recorded in accumulated other comprehensive
    income of $186 were recognized as a loss in earnings.

    Equity Forward Derivatives

    The Company uses cash-settled equity forward agreements to limit its
    exposure to future price changes in the Company's share price for share
    unit awards under the Company's long-term incentive plan ("LTIP"). The
    income or expense arising from the use of these instruments is included
    in cost of goods sold and other operating expenses for the year.

    Based on market values of the equity forward agreements at January 2,
    2010, the Company recognized a net liability of $910 (2008 - $2,093), of
    which $286 (2008 - $nil) is presented in other assets, $1,196 (2008 -
    $1,006) is presented in accounts payable and accrued liabilities and $nil
    (2008 - $1,087) is presented in other long-term liabilities. During the
    12 and 52 weeks ended January 2, 2010, the Company assessed that the
    percentage of the equity forward derivatives related to unearned units
    under the LTIP was an effective hedge for the common share price of the
    unearned units. During the 13 and 53 weeks ended January 3, 2009, the
    Company assessed that the percentage of the equity forward derivatives
    related to unearned units under the LTIP was an effective hedge for the
    common share price of the unearned units. Market values were determined
    based on information received from the Company's counterparties to these
    agreements.

    During the 12 and 52 weeks ended January 2, 2010, amounts previously
    recorded in accumulated other comprehensive loss of $45 and $294,
    respectively, were recognized as income in earnings. During the 13 weeks
    ended January 3, 2009, amounts previously recorded in accumulated other
    comprehensive loss of $14 were recognized as a loss in earnings. During
    the 53 weeks ended January 3, 2009, amounts previously recorded in
    accumulated other comprehensive income of $18 were recognized as a loss
    in earnings.

    Fair Value of Financial Instruments

    The fair value of a financial instrument is the estimated amount that the
    Company would receive or pay to settle the financial assets and financial
    liabilities as at the reporting date.

    The fair values of cash, accounts receivable, deposits, bank
    indebtedness, commercial paper, short-term debt, accounts payable and
    dividends payable, fair value approximates their carrying values due to
    their short-term maturities. The fair values of long-term receivables,
    revolving term facility and other long-term liabilities approximate their
    carrying values due to the current market rates associated with these
    instruments; and the fair value of the medium-term notes at January 2,
    2010 is approximately $1,007,522 compared to a carrying value of $950,000
    (excluding transaction costs) due to decreases in market interest rates
    for similar instruments (2008: the fair value of long-term debt
    approximated its carrying value).

    The interest rate and equity forward derivatives are recognized at fair
    value, which is determined based on current market rates and on
    information received from the Company's counterparties to these
    agreements.

    11. CAPITAL MANAGEMENT

    The Company's primary objectives when managing capital are to profitably
    grow its business while maintaining adequate financing flexibility to
    fund attractive new investment opportunities and other unanticipated
    requirements or opportunities that may arise. Profitable growth is
    defined as earnings growth commensurate with the additional capital being
    invested in the business in order that the Company earns an attractive
    rate of return on that capital. The primary investments undertaken by the
    Company to drive profitable growth include additions to the selling
    square footage of its store network via the construction of new,
    relocated and expanded stores, including related leasehold improvements
    and fixtures, the purchase of sites for future store construction, as
    well as through the acquisition of independent drug stores or their
    prescription files. In addition, the Company makes capital investments in
    information technology and its distribution capabilities to support an
    expanding store network. The Company also provides working capital to its
    Associates via loans and/or loan guarantees. The Company largely relies
    on its cash flow from operations to fund its capital investment program
    and dividend distributions to its shareholders. This cash flow is
    supplemented, when necessary, through the borrowing of additional debt.
    No changes were made to these objectives during the period.

    The Company considers its total capitalization to be bank indebtedness,
    commercial paper, short-term debt, long-term debt (including the current
    portion thereof) and shareholders' equity, net of cash. The Company also
    gives consideration to its obligations under operating leases when
    assessing its total capitalization. The Company manages its capital
    structure with a view to maintaining investment grade credit ratings from
    two credit rating agencies. In order to maintain its desired capital
    structure, the Company may adjust the level of dividends paid to
    shareholders, issue additional equity, repurchase shares for cancellation
    or issue or repay indebtedness. The Company has certain debt covenants
    and is in compliance with those covenants as at January 2, 2010 and
    January 3, 2009.

    The Company monitors its capital structure principally through measuring
    its net debt to shareholders' equity and net debt to total capitalization
    ratios, and ensures its ability to service its debt and meet other fixed
    obligations by tracking its interest and other fixed charges coverage
    ratios.

    The following table provides a summary of certain information with
    respect to the Company's capital structure and financial position as at
    the dates indicated.

                                                     January 2,    January 3,
                                                          2010          2009
    -------------------------------------------------------------------------

    Cash                                           $   (44,391)  $   (36,567)
    Bank indebtedness                                  270,332       240,844
    Commercial paper                                   260,386       339,943
    Short-term debt                                          -       197,845
    Long-term debt                                     946,098       647,250
                                                  ---------------------------

    Net debt                                         1,432,425     1,389,315

    Shareholders' equity                             3,826,110     3,420,529
                                                  ---------------------------

    Total capitalization                           $ 5,258,535   $ 4,809,844
                                                  ---------------------------
                                                  ---------------------------

    Net debt:Shareholders' equity                       0.37:1        0.41:1
    Net debt:Total capitalization                       0.27:1        0.29:1
    EBITDA:Cash interest expense(1)(2)                 19.59:1       17.05:1

    (1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
        for the 52 week and 53 week periods ended January 2, 2010 and
        January 3, 2009, respectively. EBITDA (earnings before interest,
        taxes, depreciation and amortization) is a non-GAAP financial
        measure. Non-GAAP financial measures do not have standardized
        meanings prescribed by GAAP and therefore may not be comparable to
        similar measures presented by other reporting issuers.

    (2) Cash interest expense is also a non-GAAP measure and is comprised of
        interest expense for the 52 week and 53 week periods ended January 2,
        2010 and January 3, 2009, respectively, and excludes the amortization
        of deferred financing costs and includes capitalized interest.

    As measured by the ratios set out above, the Company maintained its
    desired capital structure and financial position during the period.

    The following table provides a summary of the Company's credit ratings at
    January 2, 2010:

                                                                    Dominion
                                                      Standard   Bond Rating
                                                      & Poor's       Service
                                                   --------------------------
    Corporate credit rating                               BBB+             -
    Senior unsecured debt                                 BBB+        A (low)
    Commercial paper                                         -      R-1 (low)

    There were no changes to the Company's credit ratings during the 12 and
    52 weeks ended January 2, 2010.

    Earnings Coverage Exhibit to the Consolidated Financial Statements

    52 Weeks Ended January 2, 2010
    -------------------------------------------------------------------------
    Earnings coverage on long-term debt obligations              19.16 times
    -------------------------------------------------------------------------

    The earnings coverage ratio on long-term debt (including any current
    portion) is equal to earnings (before interest and income taxes) divided
    by interest expense on long-term debt (including any current portion).
    Interest expense excludes any amounts in respect of amortization and
    includes amounts capitalized to property and equipment that were included
    in and excluded from, respectively, interest expense as shown in the
    consolidated statement of earnings of the Company for the period.
    

%SEDAR: 00016987EF

SOURCE Shoppers Drug Mart Corporation

For further information: For further information: Media Contact: Tammy Smitham, Director, Communications & Corporate Affairs, (416) 490-2892, or corporateaffairs@shoppersdrugmart.ca, (416) 493-1220, ext. 5500; Investor Relations: (416) 493-1220, ext. 5678, investorrelations@shoppersdrugmart.ca


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