Shoppers Drug Mart Corporation announces strong first quarter results



    TORONTO, April 30 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the first quarter ended March 24, 2007.

    First Quarter Results (12 Weeks)
    First quarter sales increased 10.0% to $1.839 billion, with strong sales
growth experienced in all regions of the country. On a same-store basis, sales
increased 6.4% during the quarter.
    Prescription sales increased 10.3% in the first quarter to $894 million,
accounting for 48.6% of the Company's sales mix compared to 48.5% in the same
period last year. On a same-store basis, prescription sales increased 7.0%,
with increased generic prescription utilization continuing to temper the
inflationary impact on prescription sales growth.
    Front store sales increased 9.8% in the first quarter to $945 million,
with the Company continuing to experience sales gains in all categories. On a
same-store basis, front store sales increased 5.8%.
    Solid top line growth, an enhanced sales mix and an ongoing commitment to
cost reduction, productivity and efficiency, partially offset by higher
operating costs and increased amortization in new and relocated stores,
resulted in growth in operating income and net earnings. First quarter net
earnings increased 18.7% to $85 million or 39 cents per share (diluted) from
$72 million or 33 cents per share (diluted) a year ago. Net earnings growth
was also aided by a modest reduction in interest expense versus the
comparative prior year period.
    Commenting on the quarter, Jurgen Schreiber, President and CEO stated,
"We are pleased with our first quarter results, which saw us build upon the
momentum we had coming out of last year. Thanks in large part to the efforts
of our Associate-owners and their teams, fiscal 2007 is off to a good start
and we are in position to deliver another year of strong growth in sales and
profitability."

    Store Network Development
    During the first quarter, 13 drug stores were opened or acquired, seven
of which were relocations, and two drug stores were closed. The Company also
added one home health care store to its network during the quarter. At
quarter-end, there were 1,050 stores in the system, comprised of 991 drug
stores and 59 Shoppers Home Health Care stores.

    Dividend
    The Company also announced today that its Board of Directors has declared
a dividend of 16 cents per common share, payable July 13, 2007 to shareholders
of record as of the close of business on June 29, 2007.

    Other Information
    The Company will hold an analyst call at 3:00 p.m. (Eastern Daylight
Time) today to discuss its first quarter results. The call may be accessed by
dialing 416-641-6114 from within the Toronto area, or 1-866-696-5895 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
Daylight Time) on May 14, 2007. The call playback can be accessed after
5:00 p.m. (Eastern Daylight Time) on Monday, April 30, 2007 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 3218433.

    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 1,000 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 owns and operates 59
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 also owns MediSystem Technologies Inc., a provider of
pharmaceutical products and services to long-term care facilities in Ontario
and Alberta.

    This news release, including the Management's Discussion and Analysis,
contains forward-looking statements regarding, among other things, the
Company's beliefs, plans, objectives, estimates, intentions and expectations,
including as they relate to its operating and financial results, capital
expenditures, dividend policy and the ability to execute on its operating,
investing and financing strategies. These forward-looking statements are based
on certain assumptions by management, certain of which are set out in this
news release. Inherent in these forward-looking statements are known and
unknown risks, uncertainties and other factors beyond the Company's ability to
control or predict. Actual results or developments may differ materially from
those contemplated by these statements depending on, among others, such
factors as changes in the regulatory environment as it relates to the sale of
prescription drugs, competition from other retailers, exposure to interest
rate fluctuations, foreign currency risks, certain property and casualty
risks, the ability to attract and retain pharmacists, risks in connection with
third party service providers, the availability of suitable store locations,
seasonality risks, changes in federal and provincial laws, rules and
regulations relating to the Company's business and environmental matters,
changes in tax regulations and accounting pronouncements, the success of the
Company's Associate-owned stores, supplier and brand reputations and the
accuracy of management's assumptions. This list is not exhaustive of the
factors that may affect any of the Company's forward-looking statements.
Investors and others should carefully consider these and other factors and not
place undue reliance on these forward-looking statements. Further information
regarding these and other factors is included in the Company's public filings
with provincial securities regulatory authorities including, without
limitation, the section entitled "Risks and Risk Management" in the Company's
Management's Discussion and Analysis for the 52 week period ended December 30,
2006 and the section entitled "Risk Factors" in the Company's Annual
Information Form for the same period. The forward-looking statements contained
in this news release represent the Company's views only as of the date of this
release. 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 statements.
    Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

    
                       SHOPPERS DRUG MART CORPORATION

                    MANAGEMENT'S DISCUSSION AND ANALYSIS

                            As at April 23, 2007
    

    The following is a discussion of the consolidated financial condition and
results of operations of Shoppers Drug Mart Corporation (the "Company") for
the periods indicated and of certain factors that the Company believes may
affect its prospective financial condition, cash flows and results of
operations. This discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements of the Company and the notes
thereto for the 12 week period ended March 24, 2007. The Company's unaudited
interim period financial statements and the notes thereto have been prepared
in accordance with Canadian generally accepted accounting principles ("GAAP")
and are reported in Canadian dollars. 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 for the 52 week
period ended December 30, 2006.

    FORWARD-LOOKING STATEMENTS

    This discussion of the consolidated financial condition and results of
operations of the Company contains forward-looking statements regarding, among
other things, the Company's beliefs, plans, objectives, strategies, estimates,
intentions and expectations, including as they relate to its operating and
financial results, capital expenditures, dividend policy and the ability to
execute on its operating, investing and financing strategies. These
forward-looking statements are based on certain assumptions by management,
certain of which are set out herein. Inherent in these forward-looking
statements are known and unknown risks, uncertainties and other factors beyond
the Company's ability to control or predict. Actual results or developments
may differ materially from those contemplated by these statements depending
on, among others, such factors as changes in the regulatory environment as it
relates to the sale of prescription drugs, competition from other retailers,
exposure to interest rate fluctuations, foreign currency risks, certain
property and casualty risks, the ability to attract and retain pharmacists,
risks in connection with third party service providers, the availability of
suitable store locations, seasonality risks, changes in federal and provincial
laws, rules and regulations relating to the Company's business and
environmental matters, changes in tax regulations and accounting
pronouncements, the success of the Company's Associate-owned stores, supplier
and brand reputations and the accuracy of management's assumptions. This list
is not exhaustive of the factors that may affect any of the Company's
forward-looking statements. Investors and others should carefully consider
these and other factors and not place undue reliance on these forward-looking
statements. Further information regarding these and other factors is included
in the Company's public filings with provincial securities regulatory
authorities including, without limitation, the section entitled "Risks and
Risk Management" in the Company's Management's Discussion and Analysis for the
52 week period ended December 30, 2006 and the section entitled "Risk Factors"
in the Company's Annual Information Form for the same period. The
forward-looking statements contained in this discussion of the consolidated
financial condition and results of operations of the Company represent the
Company's views only as of the date hereof. 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 statements.
    Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

    OVERVIEW

    The Company is the licensor of full-service retail drug stores operating
under the name Shoppers Drug Mart(R) (Pharmaprix(R) in Québec). As at
March 24, 2007, there were 991 Shoppers Drug Mart/Pharmaprix retail drug
stores owned and operated by the Company's licensees ("Associates"). An
Associate is a pharmacist-owner of a corporation that is licensed to operate a
retail drug store at a specific location using the Company's trademarks. The
Company's licensed stores are located in prime locations in each province and
two territories, making Shoppers Drug Mart/Pharmaprix stores among the most
convenient retail outlets in Canada.
    The Company has successfully leveraged its leadership position in
pharmacy and its convenient store locations to capture a significant share of
the market in front store merchandise. Front store merchandise categories
include over-the-counter medications, health and beauty aids, cosmetics and
fragrances (including prestige brands), everyday household needs and seasonal
products. The Company also offers a broad range of high quality private label
products marketed under the Life Brand(R) and Quo(R) trademarks, and
value-added services such as the HealthWatch(R) program, which offers patient
counselling on medications and disease management, and the Shoppers
Optimum(TM) program, one of the largest retail loyalty card programs in
Canada. In fiscal 2006, the Company recorded consolidated sales of
approximately $7.8 billion.
    Under the licensing arrangement with Associates, the Company provides the
capital and financial support to enable Associates to operate Shoppers Drug
Mart(R) and Pharmaprix(R) stores without any initial investment. The Company
also provides a package of services to facilitate the growth and profitability
of each Associate's business. These services include the use of trademarks,
operational support, marketing and advertising, purchasing and distribution,
information technology and accounting. In return for being provided these and
other services, Associates pay fees to the Company. Fixtures, leasehold
improvements and equipment are purchased by the Company and leased to
Associates over periods ranging from two to ten years, with title retained by
the Company. The Company also provides its Associates with assistance in
meeting their working capital and long-term financing requirements through the
provision of loans and loan guarantees. In addition, the Company also provides
a standby letter of credit to an independent trust (the "Trust") which
provides additional financing to Associates to facilitate their purchase of
inventory and to fund their working capital requirements. (See notes 1 and 6
to the accompanying unaudited consolidated financial statements of the
Company.)
    Under the licensing arrangement, the Company receives a substantial share
of Associate store profits. The Company's share of Associate store profits is
reflective of its investment in, and commitment to, the operations of the
Associates' stores.
    The Company operates in Québec under the Pharmaprix(R) trade name. Under
Québec law, profits generated from the prescription area or dispensary may
only be earned by a pharmacist or a corporation controlled by a pharmacist. As
a result of these restrictions, the licence agreement used for Québec
Associates differs from the Associate agreement used in other provinces.
Pharmaprix(R) stores and their Associates benefit from the same infrastructure
and support provided to all other Shoppers Drug Mart(R) stores and Associates.
    The Company has determined that the individual Associate-owned stores
that comprise its store network are deemed to be variable interest entities
and that the Company is the primary beneficiary in accordance with Accounting
Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"). As
such, the Associate-owned stores are subject to consolidation by the Company.
However, as the Associate-owned stores remain separate legal entities from the
Company, consolidation of these stores has no impact on the underlying risks
facing the Company. (See note 1 to the accompanying unaudited consolidated
financial statements of the Company.)
    The Company also owns and operates 59 Shoppers Home Health Care(R)
stores. These retail stores are engaged in the sale and services of
assisted-living devices, medical equipment, home-care products and durable
mobility equipment to institutional and retail customers.
    In addition to its retail store network, the Company also owns MediSystem
Technologies Inc., a provider of pharmaceutical products and services to
long-term care facilities in Ontario and Alberta.

    OVERALL FINANCIAL PERFORMANCE

    Key Operating, Investing and Financial Metrics

    The following provides an overview of the Company's operating performance
for the 12 week period ended March 24, 2007 compared to the 12 week period
ended March 25, 2006, as well as certain other metrics with respect to
investing activities for the 12 week period ended March 24, 2007 and financial
position as at that same date.

    
    -   Sales of $1.839 billion, an increase of 10.0%.

    -   Total comparable store sales growth of 6.4%.

        -   Comparable store prescription sales growth of 7.0%.

        -   Comparable store front store sales growth of 5.8%.

    -   EBITDA(1) of $177 million, an increase of 17.3%.

    -   EBITDA margin(2) of 9.60%, an increase of 60 basis points.

    -   Net earnings of $85 million, an increase of 18.7%.

        -   Earnings per share (diluted) of $0.39 versus $0.33 in the prior
            year.

    -   Capital expenditures of $44 million compared to $40 million in the
        prior year.

        -   Opened or acquired 13 new drug stores, seven of which were
            relocations, and added one home health care store.

    -   Net debt to total capitalization ratio of 0.25:1 at March 24, 2007
        compared to 0.29:1 a year ago.


    (1)  Earnings before interest, taxes, depreciation and amortization.
         (See reconciliation to the most directly comparable GAAP measure
         under "Results of Operations" in this Management's Discussion and
         Analysis.)

    (2)  EBITDA divided by sales.


    Results of Operations

    The following table presents a summary of certain selected consolidated
financial information for the Company for the periods indicated.

                                                          12 Weeks Ended
                                                   --------------------------
                                                       March 24,    March 25,
    ($000's, except per share data)                        2007         2006
    -------------------------------------------------------------------------
                                                     (unaudited)  (unaudited)

    Sales                                           $ 1,838,795  $ 1,671,119
    Cost of goods sold and other operating expenses   1,662,285    1,520,662
                                                   --------------------------

    EBITDA(1)                                           176,510      150,457
    Amortization                                         37,235       30,913
                                                   --------------------------

    Operating income                                    139,275      119,544
    Interest expense                                     11,374       11,880
                                                   --------------------------

    Earnings before income taxes                        127,901      107,664
    Income taxes                                         42,770       35,960
                                                   --------------------------

    Net earnings                                    $    85,131  $    71,704
                                                   --------------------------
                                                   --------------------------

    Per common share
      - Basic net earnings                          $      0.40  $      0.34
      - Diluted net earnings                        $      0.39  $      0.33

    (1)  Earnings before interest, taxes, depreciation and amortization.
    

    Sales
    Sales represent the combination of sales of the retail drug stores owned
by the Associates and sales of the Company-owned home health care business and
MediSystem Technologies Inc.
    Sales in the first quarter were $1.839 billion compared to $1.671 billion
in the same period last year, an increase of $168 million or 10.0%, with
strong sales growth experienced in all regions of the country. The Company's
capital investment program, which has resulted in a 10.7% increase in selling
square footage versus a year ago, combined with new product offerings and
innovative marketing tactics, continue to have a positive impact on sales
growth. On a same-store basis, sales increased 6.4% during the first quarter
of 2007.
    Prescription sales were $894 million in the first quarter compared to
$810 million in the first quarter of 2006, an increase of $84 million or
10.3%. In addition to new real estate, the acquisition of MediSystem
Technologies Inc. in the third quarter of 2006 contributed to pharmacy sales
growth. On a same-store basis, prescription sales increased 7.0% during the
first quarter of 2007, with increased generic prescription utilization
continuing to temper the inflationary impact on prescription sales growth.
Prescription sales represented 48.6% of the Company's sales mix during the
first quarter of 2007 compared to 48.5% in the same period last year.
    Front store sales were $945 million in the first quarter compared to
$861 million in the first quarter of 2006, an increase of $84 million or 9.8%,
with the Company continuing to experience sales gains in all categories. On a
same-store basis, front store sales increased 5.8% during the first quarter of
2007.

    Cost of Goods Sold and Other Operating Expenses
    Cost of goods sold is comprised of the cost of goods sold at the retail
drug stores owned by the Associates and the cost of goods sold at the
Company-owned home health care business and MediSystem Technologies Inc. Other
operating expenses include corporate selling, general and administrative
expenses, operating expenses at the retail drug stores owned by the
Associates, including Associates' earnings, and operating expenses at the
Company-owned home health care business and MediSystem Technologies Inc.
    Total cost of goods sold and other operating expenses were $1.662 billion
in the first quarter compared to $1.521 billion in the same period last year,
an increase of $141 million or 9.3%. Expressed as a percentage of sales, cost
of goods sold declined by 55 basis points in the first quarter of 2007 versus
the comparative prior year period, reflecting improvements in cost of goods
and a better sales mix and margin rate. Despite the stepped-up pace of the
Company's store network expansion program, an ongoing commitment to cost
reduction and productivity allowed the Company to leverage additional
efficiencies from a higher sales base and reduce other operating expenses,
expressed as a percentage of sales, by five basis points in the first quarter
of 2007 versus the comparative prior year period.

    Amortization
    Amortization of capital assets and other intangible assets was
$37 million in the first quarter compared to $31 million in the same period
last year, an increase of $6 million or 20.5%. Expressed as a percentage of
sales, amortization increased 18 basis points in the first quarter of 2007
versus the comparative prior year period, reflecting the continued growth of
the Company's capital investment program.

    Operating Income
    Operating income was $139 million in the first quarter of 2007 compared
to $120 million in the same period last year, an increase of $19 million or
16.5%. As described above, sales growth, an enhanced sales mix and an ongoing
commitment to cost reduction, productivity and efficiency, partially offset by
increased amortization in new and relocated stores, resulted in a higher
operating margin (operating income divided by sales). In 2007, first quarter
operating margin improved by 42 basis points to 7.57% compared to 7.15% in the
first quarter of last year. The Company's EBITDA margin (EBITDA divided by
sales) was 9.60% in the first quarter of 2007, a 60 basis point improvement
over the EBITDA margin of 9.00% posted in the first quarter of last year.

    Interest Expense
    Interest expense is comprised of interest expense arising from borrowings
at the Associate-owned stores and from debt obligations of the Company.
    Interest expense was $11 million in the first quarter of 2007, a decrease
of 4.3% when compared to the same period last year. This decrease is primarily
attributable to lower amortization of deferred financing costs, as a
market-driven increase in short-term interest rates mitigated much of the
benefit derived from a reduction in the amount of consolidated net debt
outstanding. (See note 3 to the accompanying unaudited consolidated financial
statements of the Company.)

    Income Taxes
    The Company's effective income tax rate in the first quarter of 2007 was
33.4%, unchanged from the rate in the first quarter of last year.

    Net Earnings
    First quarter net earnings were $85 million compared to $72 million in
the same period last year, an increase of $13 million or 18.7%. On a diluted
basis, earnings per share were $0.39 in the first quarter of 2007 compared to
$0.33 in the same period last year.

    Financial Position

    The following table provides a summary of certain information with
respect to the Company's financial position at the end of the periods
indicated.

    
                                                       March 24, December 30,
    ($000's)                                               2007         2006
    -------------------------------------------------------------------------

    Cash                                            $   (39,778) $   (62,865)
    Bank indebtedness                                   202,854      134,487
    Commercial paper                                    485,194      503,550
    Long-term debt                                      298,599      300,000
                                                   --------------------------

    Net debt                                            946,869      875,172

    Shareholders' equity                              2,779,715    2,723,954

                                                   --------------------------

    Total capitalization                            $ 3,726,584  $ 3,599,126
                                                   --------------------------
                                                   --------------------------

    Net debt:Shareholders' equity                        0.34:1       0.32:1
    Net debt:Total capitalization                        0.25:1       0.24:1
    Net debt:EBITDA(1)                                   1.11:1       1.06:1
    EBITDA:Cash interest expense(1)(2)                  17.74:1      17.16:1


    (1)  For purposes of calculating the ratios, EBITDA is comprised of
         EBITDA for each of the 52 week periods then ended.

    (2)  Cash interest expense is comprised of interest expense for each of
         the 52 week periods then ended and excludes the amortization of
         deferred financing costs.
    

    Outstanding Share Capital
    The Company's outstanding share capital is comprised of common shares. An
unlimited number of common shares is authorized and the Company had
216,164,194 common shares outstanding at April 23, 2007. As at this same date,
the Company had issued options to acquire 2,184,103 of its common shares
pursuant to its stock-based compensation plans, of which 1,441,596 were
exercisable.

    Liquidity and Capital Resources

    Sources of Liquidity
    The Company has the following sources of liquidity: (i) cash provided by
operating activities; (ii) cash available from a committed $550 million
revolving bank credit facility maturing June 6, 2011, less what is currently
drawn and/or being utilized to support commercial paper issued and
outstanding; and (iii) up to $300 million in availability under its commercial
paper program, less what is currently issued. The Company's commercial paper
program is rated R-1 (low) by Dominion Bond Rating Service. In the event that
the Company's commercial paper program is unable to maintain this rating, the
program is supported by the Company's $550 million revolving bank credit
facility. The Company does not currently foresee any reasonable circumstances
under which this credit rating would not be maintained.
    The Company has also arranged for its Associates to obtain financing to
facilitate their purchase of inventory and fund their working capital
requirements from the following sources: (i) an independent trust (the
"Trust") whose activities are financed through the issuance of short-term,
asset-backed notes that are rated R-1 (middle) by Dominion Bond Rating Service
to third-party investors; and (ii) by providing guarantees to various Canadian
chartered banks that support Associate loans. (See notes 1 and 6 to the
accompanying unaudited consolidated financial statements of the Company.)
    The Company has obtained additional long-term financing from the issuance
of $300 million of five-year medium-term notes maturing October 24, 2008,
which bear interest at a fixed rate of 4.97% per annum (the "Notes"). The
Notes were issued pursuant to a short form base shelf prospectus dated
October 10, 2003, as supplemented by a pricing supplement dated October 20,
2003, and filed by the Company with Canadian securities regulators in all of
the provinces of Canada. At the time of issuance, the Notes were assigned a
rating of A (low) from Dominion Bond Rating Service and BBB from Standard &
Poor's.
    At the end of the first quarter, $50 million of the Company's
$550 million revolving bank credit facility was utilized, all in respect of
outstanding letters of credit and trade finance guarantees. At December 30,
2006, $51 million of this facility was utilized, all in respect of letters of
credit and trade finance guarantees. At March 24, 2007, the Company had
$25 million of commercial paper issued and outstanding under its commercial
paper program compared to $50 million at year-end. At the end of the first
quarter, Associates had obtained an aggregate amount of $461 million of Trust
financing and had drawn an aggregate amount of $190 million in loans from
various Canadian chartered banks compared to $454 million and $141 million,
respectively, at the end of the prior year.
    In addition to the above, MediSystem Technologies Inc., a subsidiary of
the Company, has arranged for up to $1 million of revolving demand bank credit
facilities. At the end of the first quarter, no amounts were outstanding on
these facilities, unchanged from the end of the prior year.

    Cash Flows Used in Operating Activities
    Cash flows used in operating activities were $2 million in the first
quarter of 2007 compared to $5 million of cash generated in the same period
last year. Consistent with the prior year, growth in net earnings, adjusted
for non-cash items, was more than offset by an increased investment in
non-cash working capital. The increased investment in working capital balances
can be attributed to higher accounts receivable stemming from the acquisitions
of MediSystem Technologies Inc. and Therapy Supplies & Rental Limited in the
latter part of 2006, and growth in inventory tied largely to the expansion of
the store network and increased sales activity, the sum of which was only
partially offset by growth in accounts payable balances.

    Cash Flows Used in Investing Activities
    Cash flows used in investing activities were $45 million in the first
quarter of 2007 compared to $40 million in the same period last year, an
increase of $5 million or 11.2%. Of these totals, purchases of property and
equipment amounted to $40 million in the first quarter of this year compared
to $38 million in the same period last year, reflecting the continued
revitalization and growth of the store network. The Company also invested
$4 million in business acquisitions in the first quarter of 2007 compared to
$3 million in the same period last year.
    During the first quarter of 2007, 13 new drug stores were opened or
acquired, seven of which were relocations, and two drug stores were closed.
The Company also added one home health care store to its network during the
quarter. At the end of the quarter there were 1,050 stores in the system,
comprised of 991 drug stores and 59 Shoppers Home Health Care(R) stores.

    Cash Flows from Financing Activities
    Cash flows from financing activities were $24 million in the first
quarter of 2007, as cash inflows of $72 million were partially offset by cash
outflows of $48 million. Cash inflows were comprised of a $68 million increase
in bank indebtedness and $4 million of proceeds received from the issuance of
common shares and loan repayments under the Company's stock-based incentive
plans. Cash outflows were comprised of an $18 million decrease in the amount
of commercial paper issued and outstanding under the Company's commercial
paper programs (a $25 million decrease in the amount of commercial paper
issued and outstanding by the Company, partially offset by $7 million of
additional Trust financing obtained by Associates), a $5 million reduction in
the amount of Associate investment and $26 million for the payment of
dividends.
    In the first quarter of 2007, the net result of the Company's operating,
investing and financing activities was a decrease in cash balances of
$23 million.

    Future Liquidity
    The Company believes that its current credit facilities, commercial paper
program and financing programs available to its Associates, together with cash
generated from operating activities, will be sufficient to fund its
operations, including the operations of its Associate-owned store network,
investing activities and commitments for the foreseeable future. The Company
does not foresee any difficulty in obtaining long-term financing given its
current credit ratings and past experiences in the capital markets.

    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Implemented in 2007

    Financial Instruments
    In 2006, the Canadian Institute of Chartered Accountants issued new
accounting standards concerning financial instruments: Financial Instruments -
Recognition and Measurement ("Section 3855"); Hedges ("Section 3865"); and
Comprehensive Income ("Section 1530"). These standards require prospective
application and are effective for the Company's first quarter of fiscal 2007.
The Company applied the new accounting standards at the beginning of its
current fiscal year and their implementation did not have a significant impact
on the Company's results of operations or financial position.

    Financial Assets and Liabilities
    Section 3855 establishes standards for recognizing and measuring
financial instruments. Under the new standards, all financial instruments are
classified into one of the following five categories: held for trading;
held-to-maturity investments; loans and receivables; available-for-sale
financial assets; or other financial liabilities. It is this classification
that will drive the future basis of measurement and the accounting treatment
in the financial statements. (See note 2 to the accompanying unaudited
consolidated financial statements of the Company.)

    Derivatives and Hedge Accounting
    The Company has entered into various interest rate derivative agreements
converting an aggregate notional principal amount of $250 million of floating
rate short-term, asset-backed notes issued by the Trust into fixed rate debt.
The fixed rates payable by the Company under these agreements range from 4.03%
to 4.18%. These agreements mature as follows: $150 million in December 2008;
$50 million in December 2009; and $50 million in December 2010. These interest
rate derivative agreements are designated as hedges in accordance with the new
standards. Accordingly, the fair value of these agreements has been included
in "other assets" on the consolidated balance sheet of the Company. Any
after-tax adjustments related to the fair values of these interest rate
derivative agreements have been included in "accumulated other comprehensive
income" on the consolidated balance sheet of the Company. (See note 2 to the
accompanying unaudited consolidated financial statements of the Company.)
    In addition, the Company has entered into cash-settled equity forward
agreements to limit its exposure to future changes in the market price of
200,252 of its common shares by virtue of its obligations under the LTIP.
These agreements mature in December 2008 and December 2009. A percentage of
these equity forward derivative agreements, related to the unearned units
under the LTIP, has been designated as a hedge in accordance with the new
standards. Accordingly, upon adoption of the new standards, the fair value of
this hedge was reflected in the opening balance of "accumulated other
comprehensive income", net of tax.
    During the first quarter of 2007, the change in the fair value of the
percentage of these equity forward agreements that relates to the unearned
LTIP units has been recorded in "other comprehensive income". (See note 2 to
the accompanying unaudited consolidated financial statements of the Company).

    OFF-BALANCE SHEET ARRANGEMENTS

    Associate Loans
    The Company has provided guarantees to various Canadian chartered banks
that support Associate loans. At the end of the first quarter of 2007, the
Company's maximum obligation in respect of such guarantees was $370 million,
unchanged from the end of the prior year. At March 24, 2007, an aggregate
amount of $326 million in available lines of credit had been allocated to the
Associates by the various banks compared to $323 million at December 30, 2006,
against which an aggregate amount of $190 million was drawn compared to
$141 million at December 30, 2006. Any amounts drawn by the Associates are
included in bank indebtedness on the Company's consolidated balance sheets. As
recourse in the event that any payments are made under the guarantees, the
Company holds a first ranking security interest on all assets of
Associate-owned stores, excluding inventory. As the Company is involved in
allocating the available lines of credit to its Associates, it estimates that
the net proceeds from secured assets would exceed the amount of any payments
required in respect of the guarantees.

    Associate Financing Trust
    The Company has arranged for its Associates to obtain financing from the
Trust to facilitate their purchase of inventory and fund their working capital
requirements. At the end of the first quarter of 2007, the total amount of
loans outstanding from the Trust to the Company's Associates was $461 million
compared to $454 million at the end of the prior year. The Company has
determined that the Trust is a variable interest entity and that the Company
is the primary beneficiary. As such, the Trust is subject to consolidation by
the Company and these loans are included in commercial paper on the Company's
consolidated balance sheets. The Company has arranged for a standby letter of
credit for the benefit of the Trust from a syndicate of banks that is equal to
approximately 10% of the aggregate principal amount of the loans, or
$47 million, as a form of credit enhancement which, in turn, enables the Trust
to provide favourable financing terms to the Company's Associates. (See notes
1 and 6 to the accompanying unaudited consolidated financial statements of the
Company.)
    If at any time the Trust's cost of borrowing and applicable fees are
greater than the interest rate charged to Associates on their loans, the Trust
has the right to request payment from the Company for any shortfall. In the
opinion of the Company's management, the Company is unlikely to have to make
any such payment as it is involved in setting the rate that Associates are
charged on their loans. In the event that an Associate defaults on a loan from
the Trust, the Company has the right to purchase the Associate's loan from the
Trust, at which time the Trust will assign to the Company the Associate's loan
agreement and related security documentation. The assignment of this
documentation would provide the Company with first priority security over the
Associate's inventory, subject to certain prior ranking statutory claims. The
Company expects that the net proceeds from secured assets would cover any
payments made to purchase a defaulted loan from the Trust, including any
related expenses, as it is involved in setting the amount borrowed from the
Trust by its Associates. In the event that the Company does not elect to
purchase a defaulted loan from the Trust, the Trust may draw upon the standby
letter of credit or realize on its security. If the Trust draws against the
standby letter of credit, the Company has agreed to reimburse the issuing
syndicate of banks for the amount so drawn.

    SELECTED QUARTERLY INFORMATION

    Reporting Cycle
    The annual reporting cycle of the Company is divided into four quarters
of 12 weeks each, except for the third quarter which is 16 weeks in duration.
The fiscal year of the Company consists of a 52 or 53 week period ending on
the Saturday closest to December 31. When a fiscal year consists of 53 weeks,
the fourth quarter is 13 weeks in duration.

    Summary of Quarterly Results
    The following table provides a summary of certain selected consolidated
financial information for the Company for each of the eight most recently
completed fiscal quarters. This information has been prepared in accordance
with Canadian generally accepted accounting principles.

    
                                 First Quarter             Fourth Quarter
                          ------------------------- -------------------------
    ($000's, except
    per share data
    - unaudited)               2007         2006         2006         2005
                            (12 Weeks)   (12 Weeks)   (12 Weeks)   (12 Weeks)
    -------------------------------------------------------------------------

    Sales                 $ 1,838,795  $ 1,671,119  $ 2,018,067  $ 1,833,327

    Net earnings          $    85,131  $    71,704  $   132,500  $   115,125

    Per common share
      - Basic net
         earnings         $      0.40  $      0.34  $      0.62  $      0.54
      - Diluted net
         earnings         $      0.39  $      0.33  $      0.61  $      0.53



                                 Third Quarter            Second Quarter
                          ------------------------- -------------------------
    ($000's, except
    per share data
    - unaudited)               2006         2005         2006         2005
                            (16 Weeks)   (16 Weeks)   (12 Weeks)   (12 Weeks)
    -------------------------------------------------------------------------

    Sales                 $ 2,329,051  $ 2,138,085  $ 1,768,199  $ 1,624,354

    Net earnings          $   123,880  $   107,672  $    94,407  $    80,011

    Per common share
      - Basic net
         earnings         $      0.58  $      0.51  $      0.44  $      0.38
      - Diluted net
         earnings         $      0.57  $      0.50  $      0.44  $      0.37
    

    The Company experienced growth in sales and net earnings in each of the
four most recent quarters when compared to the same quarter of the prior year.
The Company continues to invest capital in expanded and relocated stores and
in new store development, which has allowed the Company to increase the
selling square footage of its store network, resulting in increased sales and
profitability.
    The Company's core prescription drug operations are not typically subject
to seasonal fluctuations. The Company's front store operations include
seasonal promotions which may have an impact on quarterly results,
particularly when the season, notably Easter, does not fall in the same
quarter each year. Also, as the Company continues to expand its front store
product and service offerings, including seasonal promotions, its results of
operations may become subject to more seasonal fluctuations.

    INTERNAL CONTROLS OVER FINANCIAL REPORTING

    There were no changes in internal control over financial reporting that
occurred during the Company's most recent interim period that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.

    NON-GAAP FINANCIAL MEASURES

    The Company reports its financial results in accordance with Canadian
GAAP. However, the foregoing contains references to non-GAAP financial
measures, such as operating margin, EBITDA (earnings before interest, taxes,
depreciation and amortization), EBITDA margin and cash interest expense.
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.
    These non-GAAP financial measures have been included in this Management's
Discussion and Analysis as they are measures which management uses to assist
in evaluating the Company's operating performance against its expectations and
against other companies in the retail drug store industry. Management believes
that non-GAAP financial measures assist in identifying underlying operating
trends.
    These non-GAAP financial measures, particularly EBITDA and EBITDA margin,
are also common measures used by investors, financial analysts and rating
agencies. These groups may use EBITDA and other non-GAAP financial measures to
value the Company and assess the Company's ability to service its debt.


    
    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Earnings
    (unaudited)
    (in thousands of dollars, except per share amounts)
    -------------------------------------------------------------------------

                                                        12 Weeks Ended
                                                   --------------------------
                                                      March 24,    March 25,
                                                        2007         2006
    -------------------------------------------------------------------------

    Sales                                           $ 1,838,795  $ 1,671,119

    Operating expenses
      Cost of goods sold and other operating
       expenses                                       1,662,285    1,520,662

      Amortization                                       37,235       30,913
    -------------------------------------------------------------------------

    Operating income                                    139,275      119,544

    Interest expense (Note 3)                            11,374       11,880
    -------------------------------------------------------------------------

    Earnings before income taxes                        127,901      107,664

    Income taxes
      Current                                            35,079       36,265
      Future                                              7,691         (305)
    -------------------------------------------------------------------------
                                                         42,770       35,960
    -------------------------------------------------------------------------
    Net earnings                                    $    85,131  $    71,704
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings per common share:
      Basic                                         $      0.40  $      0.34
      Diluted                                       $      0.39  $      0.33

    Weighted average common shares outstanding
     (millions):
      Basic                                               215.1        212.8
      Diluted                                             217.0        216.5
    Actual common shares outstanding (millions)           215.4        214.0



    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Retained Earnings
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------

                                                        12 Weeks Ended
                                                   --------------------------
                                                      March 24,    March 25,
                                                        2007         2006
    -------------------------------------------------------------------------
    Retained earnings, beginning of period
     as reported                                    $ 1,225,616  $   941,672
    Impact of the adoption of new accounting
     standards, Handbook Sections 3855, Financial
     Instruments - Recognition and Measurement;
     3865, Hedges; and 1530, Comprehensive
     Income (Note 2)                                         66            -
    Net earnings                                         85,131       71,704
    Dividends                                           (34,467)     (25,685)
    -------------------------------------------------------------------------
    Retained earnings, end of period                $ 1,276,346  $   987,691
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Consolidated Statements of Comprehensive Income
     and Accumulated Other Comprehensive Income
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                        12 Weeks Ended
                                                   --------------------------
                                                      March 24,    March 25,
                                                        2007         2006
    -------------------------------------------------------------------------
    Net earnings                                    $    85,131  $         -
    -------------------------------------------------------------------------
    Other comprehensive income, net of tax
      Change in unrealized gain on interest rate
       derivative (net of tax of $93)                       182            -
      Change in unrealized gain on equity forward
       derivative (net of tax of $27)                       (53)           -
      Amount of previously unrealized gain on
       equity forward derivative recognized in
       earnings during the period (net of tax
       of $49)                                              (96)           -
    -------------------------------------------------------------------------
    Other comprehensive income                               33            -
    -------------------------------------------------------------------------
    Comprehensive income                            $    85,164  $         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Accumulated other comprehensive income,
     beginning of period (Note 2)                   $       406  $         -
    Other comprehensive income                               33            -
    -------------------------------------------------------------------------
    Accumulated other comprehensive income, end of
     period                                         $       439  $         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SHOPPERS DRUG MART CORPORATION
    Consolidated Balance Sheets
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                                         March 24,    March 25,    December
                                           2007         2006       30, 2006
                                      ---------------------------------------

    Assets

    Current
      Cash                             $    39,778  $    22,994  $    62,865
      Accounts receivable                  275,168      243,118      307,779
      Inventory                          1,385,279    1,256,923    1,372,124
      Future income taxes                   37,067       39,253       46,407
      Prepaid expenses                      33,992       32,366       32,248
    -------------------------------------------------------------------------
                                         1,771,284    1,594,654    1,821,423

    Property and equipment                 914,995      756,486      907,728
    Deferred costs                          23,256       20,564       25,936
    Goodwill                             2,125,049    2,021,816    2,122,162
    Other intangible assets                 44,932       17,743       45,249
    Other assets                             8,136        2,746        6,516
    -------------------------------------------------------------------------
    Total assets                       $ 4,887,652  $ 4,414,009  $ 4,929,014
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities

    Current
      Bank indebtedness                $   202,854  $   151,643  $   134,487
      Commercial paper                     485,194      523,900      503,550
      Accounts payable and accrued
       liabilities                         697,945      624,238      843,278
      Income taxes payable                  58,568       40,450       70,672
      Dividends payable                     34,467       25,685       25,797
      Current portion of long-term debt          -       25,000            -
    -------------------------------------------------------------------------
                                         1,479,028    1,390,916    1,577,784

    Long-term debt                         298,599      306,028      300,000
    Other long-term liabilities            197,918      145,749      188,938
    Future income taxes                     20,394       15,020       21,689
    -------------------------------------------------------------------------
                                         1,995,939    1,857,713    2,088,411
    -------------------------------------------------------------------------

    Associate interest                     111,998      116,584      116,649

    Shareholders' equity

    Share capital                        1,494,849    1,447,809    1,491,264
    Contributed surplus                      8,081        4,212        7,074
    Accumulated other comprehensive
     income                                    439            -            -
    Retained earnings                    1,276,346      987,691    1,225,616
    -------------------------------------------------------------------------
                                         2,779,715    2,439,712    2,723,954
    -------------------------------------------------------------------------
    Total liabilities and shareholders'
     equity                            $ 4,887,652  $ 4,414,009  $ 4,929,014
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Cash Flows
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------

                                                        12 Weeks Ended
                                                   --------------------------
                                                      March 24,    March 25,
                                                        2007         2006
    -------------------------------------------------------------------------

    Operating activities
    Net earnings                                    $    85,131  $    71,704
    Items not affecting cash
      Amortization                                       39,243       33,257
      Future income taxes                                 7,691         (305)
      Loss on disposal of property and equipment            869          786
      Stock-based compensation                            1,007          630
    -------------------------------------------------------------------------
                                                        133,941      106,072

    Net change in non-cash working capital balances    (139,725)    (103,453)
    Increase in long-term liabilities                     5,774        4,594
    Store opening costs                                  (2,254)      (2,132)
    -------------------------------------------------------------------------
    Cash flows (used in) from operating activities       (2,264)       5,081
    -------------------------------------------------------------------------

    Investing activities
    Purchase of property and equipment                  (40,258)     (37,577)
    Business acquisitions                                (3,795)      (2,832)
    Proceeds from disposition of property and
     equipment                                               48           85
    Other assets                                           (622)         200
    -------------------------------------------------------------------------
    Cash flows used in investing activities             (44,627)     (40,124)
    -------------------------------------------------------------------------

    Financing activities
    Bank indebtedness                                    68,367      (11,860)
    Commercial paper, net                               (17,700)      54,050
    Revolving term debt, net                                  -        6,028
    Associate interest                                   (4,651)          83
    Shares issued for stock options exercised             3,330        4,707
    Repayment of share purchase loans                       255        1,848
    Dividends paid                                      (25,797)     (21,343)
    -------------------------------------------------------------------------
    Cash flows from financing activities                 23,804       33,513
    -------------------------------------------------------------------------
    Decrease in cash                                    (23,087)      (1,530)
    Cash, beginning of period                            62,865       24,524
    -------------------------------------------------------------------------
    Cash, end of period                             $    39,778  $    22,994
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash flow information
    Interest paid                                   $     7,273  $     8,080
    Income taxes paid                               $    51,637  $    35,945



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

    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 52 week period ended
    December 30, 2006, except as described in Note 2, Change in Accounting
    Policy. 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 2006 Annual Report.

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

    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.

    The Company has an arrangement with an independent trust (the "Trust") to
    provide loans to Associates to facilitate their purchase of inventory and
    fund their working capital requirements. The Trust's activities are
    financed through the issuance of short-term asset backed notes to third
    party investors. The Trust is a variable interest entity and the Company
    is the primary beneficiary. As such, the Trust is subject to
    consolidation by the Company.

    Comparative Amounts

    Certain comparative amounts have been reclassified to conform with the
    current year's financial statement presentation.

    2.  CHANGE IN ACCOUNTING POLICIES - Adoption of New Accounting Standards

    Financial Instruments

    In 2006, the Canadian Institute of Chartered Accountants ("CICA") issued
    new accounting standards concerning financial instruments: Financial
    Instruments - Recognition and Measurement ("Section 3855"); Financial
    Instruments - Disclosure and Presentation ("Section 3861"), Hedges
    ("Section 3865"); and Comprehensive Income ("Section 1530"). The
    standards require prospective application and are effective for the
    Company's first quarter of fiscal 2007. The Company applied the new
    accounting standards at the beginning of its current fiscal year.

    Financial Assets and Liabilities

    Section 3855 establishes standards for recognizing and measuring
    financial instruments. Under the new standards, all financial instruments
    are classified into one of the following five categories: held for
    trading, held-to-maturity investments, loans and receivables,
    available-for-sale financial assets or other financial liabilities.

    The Company's financial assets and financial liabilities are classified
    and measured as follows:

       Asset/Liability                  Category               Measurement
    Cash                          Held for trading           Fair value
    Accounts receivable           Loans and receivables      Amortized cost
    Long-term receivables         Loans and receivables      Amortized cost
    Bank indebtedness             Held for trading           Fair value
    Commercial paper              Other liabilities          Amortized cost
    Accounts payable              Other liabilities          Amortized cost
    Long-term debt                Other liabilities          Amortized cost
    Other long-term liabilities   Other liabilities          Amortized cost

    Derivatives and Hedge Accounting

    The Company uses interest rate derivatives to manage its exposure to
    fluctuations in interest rates related to the Company's commercial paper.
    In addition, the Company uses cash-settled equity forward contracts 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 Company's interest rate derivatives have been designated as cash flow
    hedges and reported at fair value, in accordance with the new standards,
    as a component of other assets. A percentage of the equity forward
    derivatives, related to unearned units under the LTIP, has been
    designated as a hedge. The fair value of the percentage of the equity
    derivatives designated as a hedge has been reflected in the opening
    balance of accumulated other comprehensive income, net of tax.

    The following table summarizes the impact on the Company's opening
    balance sheet for fiscal 2007 as a result of the adjustments relating to
    interest rate and equity forward derivatives:

                     December 30,  Interest rate   Long-term     December 31,
                    2006 balance,     derivative   incentive            2006
                     as reported                    plan and         opening
                                                      equity         balance
                                                     forward
                                                  derivative

    Other assets       $    6,516       $    338    $    610      $    7,464

    Other long-term
     liabilities       $  188,938       $      -    $    234      $  189,172

    Future income taxes
     (within
     liabilities)      $   21,689       $    115    $    128      $   21,932

    Retained earnings  $1,225,616       $      -    $     66      $1,225,682

    Accumulated other
     comprehensive
     income            $        -       $    223    $    183      $      406
    -------------------------------------------------------------------------

    In addition to the above adjustments, the Company has adopted the policy
    of adding transaction costs to financial assets and liabilities
    classified as other than "held for trading", as a result, the Company's
    deferred financing costs were reclassified to the debt balances to which
    they relate. As at December 31, 2006, the commercial paper balance was
    reduced by $707 of deferred financing costs and the long-term debt
    balance was reduced by $1,518 of deferred financing costs. As at
    March 24, 2007, the commercial paper balance was reduced by $656 of
    deferred financing costs and the long-term debt balance was reduced by
    $1,401 of deferred financing costs.

    The Company does not have any embedded features in contractual
    arrangements that required separate presentation from the related host
    contract.

    As a result of the implementation of these standards, the Consolidated
    Financial Statements include a Consolidated Statement of Comprehensive
    Income, with the cumulative amount of other comprehensive income
    presented as a new category of shareholders' equity in the Consolidated
    Balance Sheets.

    Based on market values at March 24, 2007 the carrying amounts of the
    interest rate derivative and the equity forward contracts are $613 and
    $384 respectively.

    3.  INTEREST EXPENSE

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


                                                       12 Weeks Ended
                                                -----------------------------
                                                    March 24,       March 25,
                                                        2007            2006
    -------------------------------------------------------------------------
    Interest on bank indebtedness                 $    1,953      $    1,760
    Interest on commercial paper                       5,785           5,594
    Interest on long-term debt                         3,468           3,949
    Amortization of deferred financing costs             168             577
    -------------------------------------------------------------------------
                                                  $   11,374      $   11,880
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    4.  EMPLOYEE FUTURE BENEFITS EXPENSE

    The net benefit expense included in net earnings for the 12 weeks ended
    March 24, 2007 for benefits provided under pension plans was $1,561
    (2006 - $1,487), and for benefits provided under other benefit plans was
    $23 (2006 - $31).

    5.  STOCK-BASED COMPENSATION

    The Company uses the fair value method to account for stock options
    issued after 2002 under its stock option programs. If compensation
    expense under the fair value method of accounting had been recognized on
    stock options issued in 2002, the Company's net earnings for the 12 weeks
    ended March 24, 2007 would have been reduced by $83 (2006 - $187). For
    the 12 week period ended March 24, 2007 and March 25, 2006 basic earnings
    per share and diluted earnings per share would have been unchanged.

    For a description of the Company's stock option programs, see Note 11 to
    the consolidated financial statements in the Company's 2006 Annual
    Report.

    6.  FINANCING TRUST

    The Company has arranged for a standby letter of credit from a syndicate
    of banks for the benefit of the independent trust ("Trust") that is equal
    to approximately 10% of the aggregate principal amount of the loans, or
    $47,000, as a form of credit enhancement which, in turn, enables the
    Trust to provide favourable financing terms to the Company's Associates.

    As at March 24, 2007, $460,850 (2006 - $423,900) of the consolidated
    commercial paper balance is commercial paper issued by the Trust.

    Earnings Coverage Exhibit to the Consolidated Financial Statements

    52 Weeks Ended March 24, 2007
    -------------------------------------------------------------------------
    Earnings coverage on long-term debt obligations                    46.15
                                                                       times
    -------------------------------------------------------------------------

    The earnings coverage ratio on long-term debt (including any current
    portion) is equal to net 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 that were included in interest expense as shown in the
    consolidated statement of earnings of the Company for the period.
    
    %SEDAR: 00016987EF




For further information:

For further information: Media Contact: (416) 493-1220, ext. 5500,
corporateaffairs@shoppersdrugmart.ca; Investor Relations: (416) 493-1220, ext.
5678, investorrelations@shoppersdrugmart.ca


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