Shoppers Drug Mart Corporation Announces Strong First Quarter Results



    - CONTINUED GROWTH IN SALES AND NET EARNINGS

    TORONTO, April 28 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the first quarter ended March 28, 2009.

    First Quarter Results (12 Weeks)

    First quarter sales increased 8.5% to $2.195 billion, with the Company
continuing to experience strong sales growth in all regions of the country. On
a same-store basis and excluding tobacco products, sales increased 4.0% during
the quarter.
    Prescription sales increased 11.7% in the first quarter to $1.086
billion, accounting for 49.5% of the Company's sales mix compared to 48.0% in
the same period last year. On a same-store basis, prescription sales increased
5.9%, 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 first quarter of 2009, generic molecules
represented 52.8% of prescriptions dispensed compared to 50.2% of
prescriptions dispensed in the first quarter of 2008.
    Front store sales increased 5.5% in the first quarter to $1.109 billion,
with the Company continuing to experience sales and market share gains in all
categories except tobacco. On a same-store basis and excluding tobacco
products, front store sales increased 2.1%. The Company estimates that the
shift in the Easter selling season to the second quarter of this year from the
first quarter last year had a negative impact on comparable front store sales
growth of approximately 150 basis points.
    First quarter net earnings increased 6.1% to $107 million or 49 cents per
share (diluted) from $101 million or 46 cents per share (diluted) a year ago.
Strong top line growth, an enhanced sales mix and a continued emphasis on cost
reduction, productivity and efficiency, partially offset by higher operating
expenses at store-level and increased amortization associated with the
continued expansion of the store network, as well as stepped-up investments in
marketing and promotional activities, resulted in growth in operating income
and net earnings.
    Commenting on the quarter, Jurgen Schreiber, President and CEO stated,
"We are pleased with our first quarter results, particularly in the context of
these challenging economic times. Against this backdrop we remain cautious in
our outlook for the balance of 2009, but confident in our ability to deliver
continued growth in sales and net earnings. Together with our Associate-owners
and their teams, we are committed to staying the course and executing on our
clearly defined strategic growth priorities and initiatives."

    Store Network Development

    During the first quarter, 40 drug stores were opened or acquired, 14 of
which were relocations, and one smaller drug store was closed. At quarter-end,
there were 1,242 stores in the system, comprised of 1,174 drug stores (1,144
Shoppers Drug Mart/Pharmaprix stores and 30 Shoppers Simply
Pharmacy/Pharmaprix Simplement Santé stores), 66 Shoppers Home Health Care
stores and two Murale stores. Drug store selling space was approximately 11.0
million square feet at the end of the first quarter, an increase of 11.6%
compared to a year ago.

    Dividend

    The Company also announced today that its Board of Directors has declared
a dividend of 21.5 cents per common share, payable July 15, 2009 to
shareholders of record as of the close of business on June 30, 2009.

    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 12, 2009. The call playback can be accessed after 5:00
p.m. (Eastern Daylight Time) on Tuesday, April 28, 2009 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 5473877.

    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 1,144 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 30 medical clinic pharmacies operating under the name
Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and two
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, including the Management's Discussion and Analysis,
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 future operating and financial
results, its capital expenditure plans and the ability to execute on its
future operating, investing and financing strategies.
    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 and the availability of manufacturer allowances, or changes to
such laws and regulations that increase compliance costs; the risk of adverse
changes to existing pharmacy reimbursement programs and the availability of
manufacturer allowance funding; 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; 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

                     MANAGEMENT'S DISCUSSION AND ANALYSIS

                             As at April 21, 2009
    

    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 28, 2009. 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 53 week
period ended January 3, 2009.

    FORWARD-LOOKING INFORMATION AND STATEMENTS

    This discussion of the consolidated financial condition and results of
operations of the Company 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, strategies, 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 discussion
includes, but is not limited to, statements with respect to the Company's
future operating and financial results, its capital expenditure plans and the
ability to execute on its future operating, investing and financing
strategies.
    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 and the availability of manufacturer allowances, or changes to
such laws and regulations that increase compliance costs; the risk of adverse
changes to existing pharmacy reimbursement programs and the availability of
manufacturer allowance funding; 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 the 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; 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 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 discussion of the
consolidated financial condition and results of operations of the Company
represent the Company's views only as of the date hereof. Forward-looking
information and statements contained in this Management's Discussion and
Analysis 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.

    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
28, 2009, there were 1,144 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 also licenses or owns 30
medical clinic pharmacies operating under the name Shoppers Simply
Pharmacy(TM) (Pharmaprix Simplement Santé(MC) in Québec) and two luxury beauty
destinations operating as Murale(TM).
    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 trademarks Life Brand(R), Quo(R), Everyday
Market(R), Bio-Life(R), Nativa(R) and Easypix(R), among others, and
value-added services such as the HealthWatch(R) program, which offers patient
counselling and advice on medications, disease management and health and
wellness, and the Shoppers Optimum(R) program, one of the largest retail
loyalty card programs in Canada. In fiscal 2008, the Company recorded
consolidated sales in excess of $9.4 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 15 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. (See discussion on "Associate Loans
Guarantees" under "Off-balance Sheet Arrangements" in this Management's
Discussion and Analysis.)
    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) and Pharmaprix
Simplement Santé(MC) trade names. 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) and Pharmaprix Simplement
Santé(MC) stores and their Associates benefit from the same infrastructure and
support provided to all other Shoppers Drug Mart(R) and Shoppers Simply
Pharmacy(TM) 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 the
Canadian Institute of Chartered Accountants 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 66 Shoppers Home Health Care(R)
stores. These retail stores are engaged in the sale and service 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 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.

    
    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 28, 2009 compared to the 12 week period
ended March 22, 2008, as well as certain other metrics with respect to
investing activities for the 12 week period ended March 28, 2009 and financial
position as at that same date.

    -   Sales of $2.195 billion, an increase of 8.5%.

    -   Total comparable store sales growth, excluding tobacco products, of
        4.0%.

        -  Comparable store prescription sales growth of 5.9%.

        -  Comparable store front store sales growth, excluding tobacco
           products, of 2.1%.

    -   EBITDA(1) of $224 million, an increase of 9.1%.

        -  EBITDA margin(2) of 10.20%, an increase of 6 basis points.

    -   Net earnings of $107 million, an increase of 6.1%.

        -  Earnings per share (diluted) of $0.49 versus $0.46 in the prior
           year.

    -   Capital expenditure program of $111 million compared to $147 million
        in the prior year.

        -  Opened or acquired 40 new drug stores, 14 of which were
           relocations.

        -  Year-over-year increase in drug store selling space of 11.6%.

    -   Maintained desired capital structure and financial position.

        -  Net debt to total capitalization ratio of 0.30:1 at March 29, 2009
           compared to 0.28:1 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 28,    March 22,
    ($000s, except per share data)                         2009         2008
    -------------------------------------------------------------------------
                                                     (unaudited)  (unaudited)

    Sales                                           $ 2,195,260  $ 2,023,799
    Cost of goods sold and other operating
     expenses(1)                                      1,971,422    1,818,667
                                                   --------------------------

    EBITDA(2)                                           223,838      205,132
    Amortization                                         55,603       44,771
                                                   --------------------------

    Operating income                                    168,235      160,361
    Interest expense                                     14,506       13,760
                                                   --------------------------

    Earnings before income taxes                        153,729      146,601
    Income taxes                                         46,887       45,861
                                                   --------------------------

    Net earnings                                    $   106,842  $   100,740
                                                   --------------------------
                                                   --------------------------

    Per common share
    - Basic net earnings                            $      0.49  $      0.46
    - Diluted net earnings                          $      0.49  $      0.46

    (1) Reflects the impact of the retrospective application of the new
        accounting standard concerning Goodwill and Other Intangible Assets -
        CICA Handbook Section 3064. (See discussion on "Accounting Standards
        Implemented in 2009" under "New Accounting Pronouncements" in this
        Management's Discussion and Analysis and in note 2 to the
        accompanying unaudited consolidated financial statements of the
        Company.)

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

    Sales

    Sales represent the combination of sales of the retail drug stores owned
by the Associates, sales at the Murale(TM) stores and sales of the
Company-owned home health care business, Shoppers Drug Mart Specialty Health
Network Inc. and MediSystem Technologies Inc.
    Sales in the first quarter were $2.195 billion compared to $2.024 billion
in the same period last year, an increase of $171 million or 8.5%, with the
Company continuing to experience strong sales growth in all regions of the
country. The Company's capital investment program, which resulted in an 11.6%
increase in selling square footage compared to a year ago, continues to have a
positive impact on sales growth. On a same-store basis and excluding tobacco
products, sales increased 4.0% during the first quarter of 2009.
    Prescription sales were $1.086 billion in the first quarter compared to
$972 million in the first quarter of 2008, an increase of $114 million or
11.7%. During the first quarter of 2009, prescription sales accounted for
49.5% of the Company's sales mix compared to 48.0% in the same period last
year. On a same-store basis, prescription sales increased 5.9% during the
first 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 first quarter of 2009, generic
molecules represented 52.8% of prescriptions dispensed compared to 50.2% of
prescriptions dispensed in the first quarter of 2008.
    Front store sales were $1.109 billion in the first quarter compared to
$1.052 billion in the first quarter of 2008, an increase of $57 million or
5.5%, with the Company continuing to experience sales and market share gains
in all categories except tobacco. On a same-store basis and excluding tobacco
products, front store sales increased 2.1% during the first quarter of 2009.
The Company estimates that the shift in the Easter selling season to the
second quarter of this year from the first quarter last year had a negative
impact on comparable front store sales growth of approximately 150 basis
points.

    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, the cost of goods sold at the Murale(TM)
stores and the cost of goods sold at the Company-owned home health care
business, Shoppers Drug Mart Specialty Health Network Inc. 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, operating expenses at
Murale(TM) and operating expenses at the Company-owned home health care
business, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem
Technologies Inc.
    Total cost of goods sold and other operating expenses were $1.971 billion
in the first quarter compared to $1.819 billion in the same period last year,
an increase of $152 million or 8.4%. Expressed as a percentage of sales, cost
of goods sold declined by 59 basis points in the first quarter of 2009 versus
the comparative prior year period, reflecting an enhanced sales mix and the
benefits from improved buying synergies. Largely offsetting this improvement
were higher operating expenses which, when expressed as a percentage of sales,
increased by 53 basis points over the prior year period. Operating expenses
were higher due in large part to increased store-level expenses, primarily
occupancy, wages and benefits associated with the continued growth and
expansion of the store network, and due to stepped-up investments in marketing
and promotional activities in response to continued softness in market
conditions and greater promotional efforts on the part of other retailers.

    Amortization

    Amortization of capital assets and other intangible assets was $56
million in the first quarter compared to $45 million in the same period last
year, an increase of $11 million or 24.2%. Expressed as a percentage of sales,
amortization increased 32 basis points in the first quarter of 2009 versus the
comparative prior year period, reflecting the continued growth of the
Company's capital investment and store development program.

    Operating Income

    Operating income was $168 million in the first quarter of 2009 compared
to $160 million in the same period last year, an increase of $8 million or
4.9%. Sales growth, an enhanced sales mix and a continued emphasis on cost
reduction, productivity and efficiency, partially offset by increased
marketing costs, higher operating expenses at store-level and increased
amortization tied largely to the continued expansion of the store network,
drove this increase. In 2009, first quarter operating margin (operating income
divided by sales) declined by 26 basis points to 7.66% compared to 7.92% in
the first quarter of last year. The Company's EBITDA margin (EBITDA divided by
sales) was 10.20% in the first quarter of 2009, a 6 basis point improvement
over the EBITDA margin of 10.14% 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 $15 million in the first quarter of 2009 compared to
$14 million in the same period last year. This increase can be largely
attributed to growth in the amount of consolidated net debt outstanding,
coupled with the Company's decision to extend the term on a portion of its
floating rate, short-term debt obligations, and higher amortization of
deferred financing costs related to the Company's financing activities in 2008
and the first quarter of 2009. These increases were partially offset by a
market-driven decrease in short-term interest rates on the Company's remaining
floating rate debt obligations. (See note 5 to the accompanying unaudited
consolidated financial statements of the Company.)

    Income Taxes

    The Company's effective income tax rate in the first quarter of 2009 was
30.5% compared to 31.3% in the same period last year. This decrease in the
effective income tax rate can be attributed to a reduction in statutory rates.

    Net Earnings

    First quarter net earnings were $107 million compared to $101 million in
the same period last year, an increase of $6 million or 6.1%. On a diluted
basis, earnings per share were $0.49 in the first quarter of 2009 compared to
$0.46 in the same period last year.

    Capitalization and Financial Position

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

    
                                                       March 28,  January 3,
    ($000s)                                                2009        2009
    -------------------------------------------------------------------------

    Cash                                            $   (26,190) $   (36,567)
    Bank indebtedness                                   265,058      240,844
    Commercial paper                                    293,045      339,943
    Short-term debt                                           -      197,845
    Long-term debt                                      943,384      647,250
                                                   --------------------------

    Net debt                                          1,475,297    1,389,315

    Shareholders' equity(1)                           3,483,236    3,420,529

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

    Total capitalization                            $ 4,958,533  $ 4,809,844
                                                   --------------------------
                                                   --------------------------

    Net debt:Shareholders' equity                        0.42:1       0.41:1
    Net debt:Total capitalization                        0.30:1       0.29:1
    Net debt:EBITDA(2)                                   1.35:1       1.30:1
    EBITDA:Cash interest expense(2)(3)                  17.39:1      17.21:1

    (1) Reflects the impact of the retrospective application of the new
        accounting standard concerning Goodwill and Other Intangible Assets -
        CICA Handbook Section 3064. (See discussion on "Accounting Standards
        Implemented in 2009" under "New Accounting Pronouncements" in this
        Management's Discussion and Analysis and in note 2 to the
        accompanying unaudited consolidated financial statements of the
        Company.)

    (2) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
        for each of the 53 week periods then ended and reflects the impact of
        the new accounting standard concerning Goodwill and Other Intangible
        Assets - CICA Handbook Section 3064.

    (3) Cash interest expense is comprised of interest expense for each of
        the 53 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
217,355,791 common shares outstanding at April 21, 2009. As at this same date,
the Company had issued options to acquire 966,169 of its common shares
pursuant to its stock-based compensation plans, of which 741,196 were
exercisable.

    Financing Activities

    On January 20, 2009, the Company issued $250 million of three-year
medium-term notes maturing January 20, 2012, which bear interest at a fixed
rate of 4.80% per annum (the "Series 3 Notes") and $250 million of five-year
medium-term notes maturing January 20, 2014, which bear interest at a fixed
rate of 5.19% per annum (the "Series 4 Notes"). The Series 3 Notes and Series
4 Notes were issued pursuant to a final short form base shelf prospectus dated
May 22, 2008 (the "Prospectus"), as supplemented by pricing supplements dated
January 14, 2009, and filed by the Company with Canadian securities regulators
in all of the provinces of Canada. At the time of issuance, the Series 3 Notes
and Series 4 Notes were assigned ratings of A (low) from DBRS Limited and BBB+
from Standard & Poor's. The net proceeds from the issuance of the Series 3
Notes and Series 4 Notes were used to refinance existing indebtedness,
including repayment of all amounts outstanding under the Company's then
existing senior unsecured 364-day bank credit facility. As a result of
applying the net proceeds from the issuance of the Series 3 Notes and Series 4
Notes to refinance existing indebtedness, the consolidated net debt position
of the Company remained substantially unchanged. (See note 8 to the
accompanying unaudited consolidated financial statements of the Company.)

    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 $800 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 $500 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 DBRS Limited. In the event that the Company's
commercial paper program is unable to maintain this rating, the program is
supported by the Company's $800 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 by providing guarantees to various Canadian chartered banks that
support Associate loans. (See discussion on "Associate Loans Guarantees" under
"Off-balance Sheet Arrangements" in this Management's Discussion and
Analysis.)
    The Company has obtained additional long-term financing from the issuance
of $450 million of five-year medium-term notes maturing June 3, 2013, which
bear interest at a fixed rate of 4.99% per annum (the "Series 2 Notes"), the
Series 3 Notes and the Series 4 Notes. The Series 2 Notes were issued pursuant
to the Prospectus, as supplemented by a pricing supplement dated May 28, 2008.
The Series 3 Notes and Series 4 Notes were issued pursuant to the Prospectus,
as supplemented by pricing supplements dated January 14, 2009. The pricing
supplements were filed by the Company with Canadian securities regulators in
all of the provinces of Canada. At the time of issuance, the medium-term notes
were assigned ratings of A (low) from DBRS Limited and BBB+ from Standard &
Poor's.
    At the end of the first quarter of 2009, $11 million of the Company's
$800 million revolving bank credit facility was utilized, all in respect of
outstanding letters of credit. At January 3, 2009, $209 million of this
facility was utilized, including $9 million in respect of outstanding letters
of credit. At March 28, 2009, the Company had $294 million of commercial paper
issued and outstanding under its commercial paper program compared to $341
million at the end of 2008. At the end of the first quarter of 2009,
Associates had drawn an aggregate amount of $278 million in the form of
Associate loans from various Canadian chartered banks compared to $264 million
at the end of the 2008. (See discussion on "Associate Loans Guarantees" under
"Off-balance Sheet Arrangements" in this Management's Discussion and
Analysis.)
    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 of 2009, no amounts were
outstanding on these facilities, unchanged from the end of 2008.

    Cash Flows from Operating Activities

    Cash flows from operating activities were $71 million in the first
quarter of 2009 compared to cash flows used in operating activities of $7
million in the same period last year. Growth in net earnings, adjusted for
non-cash items, combined with a reduced investment in non-cash working capital
balances versus the comparative quarter accounted for a substantial portion of
the year-over-year variance. The reduction in amounts invested in working
capital balances can be largely attributed to the timing of accounts
receivable, tax payments and trade payables.

    Cash Flows Used in Investing Activities

    Cash flows used in investing activities were $105 million in the first
quarter of 2009 compared to $102 million in the same period last year. Of
these totals, investments in property and equipment, net of proceeds from any
dispositions, amounted to $76 million in the first quarter of this year
compared to $58 million in the same period last year, reflecting the continued
growth of the Company's capital investment and store development program. The
Company also invested $27 million in business acquisitions during the first
quarter of 2009 compared to $78 million in the same period last year.
Consistent with the Company's stated growth objectives, these investments
relate primarily to acquisitions of drug stores and prescription files, as the
Company continues to pursue attractive opportunities in the marketplace,
albeit at a slower pace relative to the prior year. During the first quarter
of 2009, the balance of funds deposited and held in escrow in respect of
outstanding offers to purchase drug stores and land decreased by $1 million
compared to a decrease of $44 million in the same period last year.
    During the first quarter of 2009, 40 new drug stores were opened or
acquired, 14 of which were relocations, and one smaller drug store was closed.
As a result of this activity, drug store selling space increased by 11.6%
compared to a year ago. At the end of the first quarter of 2009, there were
1,242 stores in the Company's retail network, comprised of 1,174 drug stores
(1,144 Shoppers Drug Mart/Pharmaprix stores and 30 Shoppers Simply
Pharmacy/Pharmaprix Simplement Santé stores), 66 Shoppers Home Health Care(R)
stores and two Murale(TM) stores.

    Cash Flows from Financing Activities

    Cash flows from financing activities were $23 million in the first
quarter of 2009, as cash inflows of $526 million were largely offset by cash
outflows of $503 million. Cash inflows were comprised of a $24 million
increase in the amount of bank indebtedness, $500 million from the issuance of
medium-term notes and $2 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 a $47 million decrease in the amount of
commercial paper issued and outstanding by the Company under its commercial
paper program, $200 million to repay all amounts outstanding under the
Company's previously existing senior unsecured 364-day bank credit facility, a
$200 million reduction in bankers' acceptance borrowings under the Company's
$800 million revolving bank credit facility, $2 million to funds costs
associated with financing activities, a $7 million reduction in the amount of
Associate investment and $47 million for the payment of dividends. (See
discussion on "Financing Activities" in this Management's Discussion and
Analysis and note 8 to the accompanying unaudited consolidated financial
statements of the Company.)
    In the first quarter of 2009, the net result of the Company's operating,
investing and financing activities was a decrease in cash balances of $10
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. While credit
markets in Canada and globally have tightened, causing credit spreads to widen
and liquidity risk to intensify, the Company does not foresee any major
difficulty in obtaining additional short or long-term financing given its
current credit ratings and past experiences in the capital markets.

    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Implemented in 2009

    Financial Statement Concepts

    In February 2008, the Canadian Institute of Chartered Accountants (the
"CICA") issued amendments to CICA Handbook 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 are effective
for interim and annual financial statements relating to fiscal years beginning
on or after October 1, 2008. The Company applied the amendments to Section
1000 at the beginning of its current fiscal year in conjunction with CICA
Handbook 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 is based on the
International Accounting Standards Board's (the "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 the new standard is to eliminate the
practice of deferring costs that do not meet the definition and recognition
criteria of assets. The standard is effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008. The Company
applied the new accounting standard 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 meet 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 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.
    The implementation of the new standard has resulted in a reduction to the
Company's 2009 and 2008 fiscal years' opening retained earnings of $38.9
million and $27.8 million, respectively. The impacts on other balances are
described in the following paragraphs.
    The impact for the year ended January 3, 2009 is an increase in cost of
goods sold and operating expenses and a decrease in operating income of $15.3
million and a decrease in net earnings of $11.1 million, resulting in a
decrease of $0.05 in basic and diluted net earnings per share. The adjustment
relates to previously deferred costs that no longer qualify for recognition as
an asset, primarily store opening costs.
    The impact for the 12 weeks ended March 22, 2008 is an increase in cost
of goods sold and operating expenses and a decrease in operating income of
$0.8 million and a decrease in net earnings of $0.6 million, resulting in a
decrease of $0.01 in basic and diluted earnings per share. The adjustment
relates to previously deferred costs that no longer qualify for recognition as
an asset, primarily store opening costs.
    The impact on balances as at January 3, 2009 was primarily an increase in
net future income tax assets of $17.7 million, a decrease in prepaid expenses
and deposits of $4.7 million, a decrease in property and equipment of $110.8
million, a decrease in deferred costs of $47.2 million, an increase in
intangible assets of $114.5 million and a decrease in other assets of $8.3
million. 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.
    The impact on balances as at March 22, 2008 was primarily an increase in
net future income tax assets of $13.6 million, a decrease in prepaid expenses
and deposits of $7.5 million, a decrease in property and equipment of $81.4
million, a decrease in deferred costs of $33.7 million, an increase in
intangible assets of $83.4 million and a decrease in other assets of $2.8
million. 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.
    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
impairment, the excess of the carrying amount over the fair value of goodwill
would be charged to earnings.
    Intangible assets are amortized on a straight-line basis over the
estimated useful lives of the assets. Intangible assets are tested for
impairment at least on an annual basis. In the event of impairment, the excess
of the carrying amount over the fair value of intangible assets would be
charged to earnings.

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

    The Emerging Issues Committee of the CICA (the "EIC") issued a new
abstract on January 20, 2009 concerning the measurement of financial assets
and financial liabilities ("EIC-173 - Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities") (the "Abstract"). There had been
diversity in practice as to whether an entity's own credit risk and the credit
risk of the counterparty were 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. The Abstract is 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 the Abstract,
with retrospective application without restatement of prior periods. The
Company applied the new Abstract 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 and disclosures.

    Future Accounting Standards

    Business Combinations

    In January 2009, the CICA issued new accounting standards concerning
Business Combinations ("Section 1582"), Non-controlling Interests ("Section
1602") and Consolidated Financial Statements ("Section 1601"), which are based
on the IASB's International Financial Reporting Standard 3, "Business
Combinations". The new standards replace the existing guidance on business
combinations and consolidated financial statements. The objective of the new
standards is to harmonize Canadian accounting for business combinations with
the international and U.S. accounting standards. The new standards are to be
applied prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after January 1, 2011, with earlier application permitted. Assets and
liabilities that arose from business combinations whose acquisition dates
preceded the application of the new standards shall not be adjusted upon
application of these new standards. Section 1602 should be applied
retrospectively except for certain items.
    The Company is assessing whether it will apply the new accounting
standards at the beginning of its 2011 fiscal year or elect to early adopt the
new accounting standards at the beginning of its 2010 fiscal year in order to
minimize the amount of restatement when the Company adopts International
Financial Reporting Standards ("IFRS"). The impact of the new standards on the
Company's results of operations, financial position and disclosures will be
assessed as part of the Company's IFRS transition project.

    Transition to International Financial Reporting Standards

    In January 2006, the Accounting Standards Board (the "AcSB") announced
its decision to require all publicly accountable enterprises to report under
IFRS for years beginning on or after January 1, 2011. As a result, financial
reporting by Canadian publicly accountable enterprises will change
significantly from current Canadian generally accepted accounting principles
to IFRS.
    On February 13, 2008, the AcSB confirmed that publicly accountable
enterprises will be required to use IFRS, as issued by the IASB, unless
modifications or additions to the requirements of IFRS are issued by the AcSB.
IFRS must be adopted for interim and annual financial statements related to
fiscal years beginning on or after January 1, 2011.
    The Company launched its IFRS transition project in 2008 with a high
level assessment of the key areas where conversion to IFRS may have a
significant impact, or present a significant challenge. To date, the Company
has engaged an external advisor and established a working team, completed a
high level assessment, substantially completed the identification of
differences between the Company's current policies and those under IFRS,
delivered an initial training program and prepared an initial transition plan.
The initial transition plan has been designed to guide the Company towards its
reporting deadlines.
    Where differences exist, the Company is assessing the information
technology and data system impacts, the resource requirements and timing of
transition activities. The options under IFRS 1, First-time Adoption of
International Reporting Standards, have been identified and will be further
analyzed as the Company progresses through its detailed assessment of the
individual standards. The impact on other business activities, disclosure
controls and procedures and internal controls over financial reporting will be
assessed once the impacts of the standards as a whole are identified.

    OFF-BALANCE SHEET ARRANGEMENTS

    Associate Loans Guarantees

    The Company has provided guarantees to various Canadian chartered banks
that support Associate loans. At the end of the first quarter of 2009, the
Company's maximum obligation in respect of such guarantees was $425 million,
unchanged from the end of 2008. At March 28, 2009, an aggregate amount of $407
million in available lines of credit had been allocated to the Associates by
the various banks compared to $398 million at January 3, 2009, against which
an aggregate amount of $278 million was drawn compared to $264 million at
January 3, 2009. 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,
subject to certain prior-ranking statutory claims. 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.

    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
    ($000s, except per    ------------------------- -------------------------
     share data -             2009         2008         2008        2007(1)
     unaudited)            (12 Weeks)   (12 Weeks)   (13 Weeks)   (12 Weeks)
    -------------------------------------------------------------------------

    Sales                 $ 2,195,260  $ 2,023,799  $ 2,496,799  $ 2,168,822

    Net earnings          $   106,842  $   100,740  $   166,537  $   151,331

    Per common share

    - Basic net earnings  $      0.49  $      0.46  $      0.77  $      0.70
    - Diluted net
       earnings           $      0.49  $      0.46  $      0.77  $      0.70


                                Third Quarter            Second Quarter
    ($000s, except per    ------------------------- -------------------------
     share data -             2008        2007(1)       2008        2007(1)
     unaudited)            (16 Weeks)   (16 Weeks)   (12 Weeks)   (12 Weeks)
    -------------------------------------------------------------------------

    Sales                 $ 2,793,005  $ 2,542,671  $ 2,109,308  $ 1,928,094

    Net earnings          $   160,276  $   141,672  $   126,593  $   112,154

    Per common share
    - Basic net earnings  $      0.74  $      0.65  $      0.58  $      0.52
    - Diluted net
       earnings           $      0.74  $      0.65  $      0.58  $      0.52

    (1) Does not reflect the impact of the retrospective application of the
        new accounting standard concerning Goodwill and Other Intangible
        Assets - CICA Handbook Section 3064. (See discussion on "Accounting
        Standards Implemented in 2009" under "New Accounting Pronouncements"
        in this Management's Discussion and Analysis and in note 2 to the
        accompanying unaudited consolidated financial statements of the
        Company.)
    

    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.

    RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

    The Company is exposed to a number of risks associated with financial
instruments that have the potential to affect its operating and financial
performance. The Company's primary financial instrument risk exposures are
interest rate risk and liquidity risk. The Company's exposures to foreign
currency risk, credit risk and other price risk are not considered to be
material. 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.

    Exposure to Interest Rate Fluctuations

    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 positively or
negatively 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 million (2008 - $250 million) of floating rate debt into fixed
rate debt. The fixed rates payable by the Company under these agreements range
from 4.11% to 4.18% (2008 - 4.03% to 4.18%). These agreements mature as
follows: $50 million in December 2009 and $50 million in December 2010, with
reset terms of one month.
    Furthermore, the Company may be exposed to losses should any counterparty
to its derivative agreements fail to fulfil its obligations. The Company has
sought to minimize counterparty risk by transacting with counterparties that
are large financial institutions. There is no unrecognized exposure as at
March 28, 2009, as the interest rate derivative agreements are in a liability
position, unchanged from a year ago.
    As at March 28, 2009, the Company had $472 million of unhedged floating
rate debt. During the 12 weeks ended March 28, 2009, the Company's average
outstanding unhedged floating rate debt was $671 million. Had interest rates
been higher or lower by 50 basis points during the period, net earnings would
have decreased or increased, respectively, by approximately $0.5 million as a
result of the Company's exposure to interest rate fluctuations on its unhedged
floating rate debt.

    Foreign Currency Exchange Risk

    The Company conducts the vast majority of its business in Canadian
dollars. The Company's foreign currency exchange risk principally relates to
purchases made in U.S. dollars and this risk is tied to fluctuations in the
exchange rate of the Canadian dollar, vis-à-vis the U.S. dollar. The Company
monitors its foreign currency purchases in order to monitor its foreign
currency exchange risk. The Company does not consider its exposure to foreign
currency exchange rate risk to be material.

    Credit Risk

    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.

    Other Price Risk

    The Company uses cash-settled equity forward agreements to limit its
exposure to future changes in the market price of its common shares by virtue
of its obligations under its 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.
    Based on market values of the equity forward agreements in place at March
28, 2009, the Company recognized a liability of $2.3 million, of which $1.1
million is presented in accounts payable and accrued liabilities and $1.2
million is presented in other long-term liabilities. Based on market values of
the equity forward agreements in place at March 22, 2008, the Company
recognized a net liability of $0.8 million, of which $0.1 million was
presented in accounts receivable and $0.9 million was presented in other
long-term liabilities. During the 12 week periods ended March 28, 2009 and
March 22, 2008, the Company assessed that the percentage of the equity forward
agreements in place related to unearned units under the LTIP were an effective
hedge for its exposure to future changes in the market price of its common
shares in respect of the unearned units. Market values were determined based
on information received from the Company's counterparty to these equity
forward agreements.

    Capital Management and Liquidity Risk

    The Company's primary objectives when managing its capital and liquidity
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 acquisition of
sites as part of a land bank program, 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.
    The Company monitors its capital structure principally through measuring
its net debt to shareholders' equity ratio and net debt to total
capitalization ratio, and ensures its ability to service its debt and meet
other fixed obligations by tracking its in terest and other fixed charges
coverage ratios. (See discussion under "Capitalization and Financial Position"
in this Management's Discussion and Analysis.)
    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 credit 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.
    For a complete description of the Company's sources of liquidity, see the
discussions on "Sources of Liquidity" and "Future Liquidity" under "Liquidity
and Capital Resources" in this Management's Discussion and Analysis.

    INTERNAL CONTROLS OVER FINANCIAL REPORTING

    The Chief Executive Officer and the Chief Financial Officer have
designed, or caused to be designed under their supervision, internal controls
over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting, its compliance with Canadian GAAP and the
preparation of financial statements for external purposes. Internal control
systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be designed effectively can provide only
reasonable assurance with respect to financial reporting and financial
statement preparation.
    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 28,    March 22,
                                                           2009         2008
                                                    -------------------------

    Sales                                           $ 2,195,260  $ 2,023,799
    Operating expenses
      Cost of goods sold and other operating
       expenses (Notes 2 and 3)                       1,971,422    1,818,667
      Amortization                                       55,603       44,771
    -------------------------------------------------------------------------

    Operating income                                    168,235      160,361

    Interest expense (Note 5)                            14,506       13,760
    -------------------------------------------------------------------------

    Earnings before income taxes                        153,729      146,601

    Income taxes (Note 2)
      Current                                            46,724       48,663
      Future                                                163       (2,802)
    -------------------------------------------------------------------------
                                                         46,887       45,861
    -------------------------------------------------------------------------
    Net earnings                                    $   106,842  $   100,740
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings per common share:

      Basic                                         $      0.49  $      0.46
      Diluted                                       $      0.49  $      0.46

    Weighted average common shares outstanding
      - Basic (millions)                                  217.3        216.8
      - Diluted (millions)                                217.4        217.4
    Actual common shares outstanding (millions)           217.3        216.9



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

                                                          12 Weeks Ended
                                                    -------------------------
                                                       March 28,    March 22,
                                                           2009         2008
    -------------------------------------------------------------------------

    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                                        106,842      100,740
    Dividends                                           (46,727)     (46,626)
    -------------------------------------------------------------------------
    Retained earnings, end of period                $ 1,959,254  $ 1,585,848
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Consolidated Statements of Comprehensive Income and Accumulated Other
    Comprehensive Loss
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------

                                                          12 Weeks Ended
                                                    -------------------------
                                                       March 28,    March 22,
                                                           2009         2008
    -------------------------------------------------------------------------
    Net earnings                                    $   106,842  $   100,740
    Other comprehensive income (loss), net of tax
      Change in unrealized gain/loss on interest
       rate derivatives (net of tax of $121
       (2008 - $1,181))                                     257       (2,397)
      Change in unrealized gain/loss on equity
       forward derivatives (net of tax of $2
       (2008 - $149))                                         9         (304)
      Amount of previously unrealized gain/loss
       recognized in earnings during the period
       (net of tax of $23 (2008 - $nil))                     91            -
    -------------------------------------------------------------------------
    Other comprehensive income (loss)                       357       (2,701)
    -------------------------------------------------------------------------
    Comprehensive income                            $   107,199  $    98,039
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Accumulated other comprehensive (loss)
     income, beginning of period                    $    (3,442) $       247
    Other comprehensive income (loss)                       357       (2,701)
    -------------------------------------------------------------------------
    Accumulated other comprehensive loss, end
     of period                                      $    (3,085) $    (2,454)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SHOPPERS DRUG MART CORPORATION
    Consolidated Balance Sheets
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------

                                          March 28,    March 22,   January 3,
                                              2009         2008         2009
    -------------------------------------------------------------------------

    Assets

    Current
      Cash                             $    26,190  $    35,784  $    36,567
      Accounts receivable                  411,293      384,310      448,476
      Inventory (Note 3)                 1,716,123    1,516,991    1,743,253
      Income taxes recoverable               9,371            -        8,835
      Future income taxes (Note 2)          82,285       77,371       84,770
      Prepaid expenses and deposits
       (Note 2)                             53,511       83,860       59,327
    -------------------------------------------------------------------------
                                         2,298,773    2,098,316    2,381,228

    Property and equipment (Note 2)      1,363,472    1,070,004    1,331,363
    Goodwill (Note 2)                    2,446,832    2,308,695    2,427,239
    Intangible assets (Note 2)             216,512      154,848      212,279
    Other assets (Note 2)                   11,872       11,575       12,114
    -------------------------------------------------------------------------
    Total assets                       $ 6,337,461  $ 5,643,438  $ 6,364,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities

    Current
      Bank indebtedness (Note 6)       $   265,058  $   191,082  $   240,844
      Commercial paper                     293,045      736,676      339,943
      Short-term debt (Note 8)                   -            -      197,845
      Accounts payable and accrued
       liabilities                         845,846      844,693    1,018,505
      Income taxes payable                       -       39,724            -
      Dividends payable                     46,727       46,626       46,709
      Current portion of long-term
       debt                                      -      299,107            -
    -------------------------------------------------------------------------
                                         1,450,676    2,157,908    1,843,846

    Long-term debt (Note 8)                943,384            -      647,250
    Other long-term liabilities            317,219      257,845      303,117
    Future income taxes                     31,565       21,866       30,803
    -------------------------------------------------------------------------
                                         2,742,844    2,437,619    2,825,016

    Associate interest                     111,381      105,113      118,678

    Shareholders' equity

    Share capital                        1,516,359    1,507,257    1,514,207
    Contributed surplus                     10,708       10,055       10,625

    Accumulated other comprehensive
     loss                                   (3,085)      (2,454)      (3,442)
    Retained earnings (Note 2)           1,959,254    1,585,848    1,899,139
    -------------------------------------------------------------------------
                                         1,956,169    1,583,394    1,895,697
    -------------------------------------------------------------------------
                                         3,483,236    3,100,706    3,420,529
    -------------------------------------------------------------------------
    Total liabilities and
     shareholders' equity              $ 6,337,461  $ 5,643,438  $ 6,364,223
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                                                          12 Weeks Ended
                                                    -------------------------
                                                       March 28,    March 22,
                                                           2009         2008
    -------------------------------------------------------------------------

    Operating activities
      Net earnings (Note 2)                         $   106,842  $   100,740
      Items not affecting cash
        Amortization (Note 2)                            54,217       44,080
        Future income taxes (Note 2)                        163       (2,802)
        Loss on disposal of property and equipment        1,865          857
        Stock-based compensation                            180          342
    -------------------------------------------------------------------------
                                                        163,267      143,217
      Net change in non-cash working capital
       Balances (Note 2)                               (101,530)    (157,393)
    Increase in other long-term liabilities               9,623        7,625
    -------------------------------------------------------------------------
    Cash flows from (used in) operating activities       71,360       (6,551)
    -------------------------------------------------------------------------

    Investing activities
      Purchase of property and equipment (Note 2)       (81,207)     (63,407)
      Proceeds from disposition of property and
       equipment                                          5,204        5,740
      Business acquisitions (Note 4)                    (27,280)     (77,542)
      Deposits                                              555       43,987
      Purchase and development of intangible
       assets (Note 2)                                   (2,426)      (6,411)
      Other assets (Note 2)                                 242       (4,716)
    -------------------------------------------------------------------------
    Cash flows used in investing activities            (104,912)    (102,349)
    -------------------------------------------------------------------------

    Financing activities
      Bank indebtedness, net (Note 6)                    24,214      (34,070)
      Commercial paper, net                             (47,000)     192,800
      Repayment of short-term debt (Note 8)            (200,000)           -
      Issuance of Series 3 notes (Note 8)               250,000            -
      Issuance of Series 4 notes (Note 8)               250,000            -
      Revolving term debt, net                         (200,000)           -
      Financing costs incurred                           (2,088)           -
      Associate interest                                 (7,297)      (8,006)
      Proceeds from shares issued for stock
       options exercised                                  1,945          888
      Repayment of share purchase loans                     110          170
      Dividends paid                                    (46,709)     (34,686)
    -------------------------------------------------------------------------
    Cash flows from financing activities                 23,175      117,096
    -------------------------------------------------------------------------
    (Decrease) increase in cash                         (10,377)       8,196
    Cash, beginning of period                            36,567       27,588
    -------------------------------------------------------------------------
    Cash, end of period                             $    26,190  $    35,784
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash flow information
    Interest paid                                   $     4,880  $    10,370
    Income taxes paid                               $    48,276  $    74,435



    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 are effective for interim and annual financial
    statements relating to fiscal years beginning on or after October 1,
    2008. The Company applied 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 is based on the
    International Accounting Standards Board's ("IASB's") 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 the new standard is to eliminate
    the practice of deferring costs that do not meet the definition and
    recognition criteria of assets. The standard is effective for interim and
    annual financial statements for fiscal years beginning on or after
    October 1, 2008. The Company applied the new accounting standard
    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 meet 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.

    Intangible assets are amortized on a straight-line basis over the
    estimated useful lives of the assets. Intangible assets are 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 intangible
    assets would be charged to earnings.

    Net Earnings Impact

    The following table summarizes the impact of the implementation of the
    new standard on the Company's consolidated statements of earnings for the
    53 weeks ended January 3, 2009 and 12 weeks ended March 22, 2008,
    respectively:

                                              53 weeks ended  12 weeks ended
                                             January 3, 2009  March 22, 2008
    -------------------------------------------------------------------------
    Adjustment - pre-tax                         $   (15,329)    $      (792)
    Income taxes                                       4,262             199
    -------------------------------------------------------------------------
    Net earnings impact                          $   (11,067)    $      (593)
    Net earnings per common share (diluted)
     impact                                      $     (0.05)    $     (0.01)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings, as reported                    $   565,212     $   101,333
    Net earnings per common share (diluted),
     as reported                                 $      2.60     $      0.47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings, as restated                    $   554,145     $   100,740
    Net earnings per common share (diluted),
     as restated                                 $      2.55     $      0.46
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    Opening Retained Earnings Adjustment

    The implementation of the new standard 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
    the new standard on the Company's consolidated balance sheets as at
    January 3, 2009 and March 22, 2008, respectively.

    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.

    The impact on balances as at March 22, 2008 was primarily an increase in
    net future income tax assets of $13,612, a decrease in prepaid expenses
    and deposits of $7,548, a decrease in property and equipment of $81,389,
    a decrease in deferred costs of $33,690, an increase in intangible assets
    of $83,389, and a decrease in other assets of $2,801.

    Financial Assets and Financial Liabilities

    The Emerging Issues Committee ("EIC") issued a new abstract on January
    20, 2009, concerning the measurement of financial assets and financial
    liabilities ("EIC-173 - Credit Risk and the Fair Value of Financial
    Assets and Financial Liabilities") (the "Abstract"). There has 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 Committee reached a consensus
    that these risks should be taken into account in the measurement of
    financial assets and financial liabilities. The Abstract is 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 the Abstract with retrospective application
    without restatement of prior periods. The Company applied the new
    Abstract 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.

    3.  INVENTORY

    During the 12 weeks ended March 28, 2009, the Company recognized cost of
    inventory of $1,384,322 (2008 - $1,277,596) 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 weeks ended March 28, 2009 and March 22, 2008, 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

    During the 12 weeks ended March 28, 2009, 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 $27,280 (2008 - $77,542), including costs incurred in
    connection with the acquisitions, is allocated primarily to goodwill and
    other 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 Ended
                                                    -------------------------
                                                       March 28,    March 22,
                                                           2009         2008
    -------------------------------------------------------------------------

    Interest on bank indebtedness                   $     1,534  $     2,726
    Interest on commercial paper                          2,000        7,742
    Interest on short-term debt                             504            -
    Interest on long-term debt                           10,468        3,292
    -------------------------------------------------------------------------
                                                    $    14,506  $    13,760
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 $425,000 (2008 - $415,000)
    of lines of credit. As at March 28, 2009, the Associate-owned stores have
    utilized $278,444 (2008 - $217,627) of the available lines of credit.

    7.  EMPLOYEE FUTURE BENEFITS

    The net benefit expense included in the results for the 12 weeks ended
    March 28, 2009, for benefits provided under pension plans was $1,082
    (2008 - $1,356), and for benefits provided under other benefit plans was
    $23 (2008 - $23).

    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.

    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 positively or negatively 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 March 28, 2009, the Company had $472,444 (2008 - $677,775) of
    unhedged floating rate debt. During the 12 weeks ended March 28, 2009,
    the Company's average outstanding unhedged floating rate debt was
    $670,969 (2008 - $750,437). Had interest rates been higher or lower by 50
    basis points during the 12 weeks ended March 28, 2009, net earnings would
    have decreased or increased, respectively, by approximately $537 (2008 -
    $594) 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 March 28,
    2009 and March 22, 2008, 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
    March 28, 2009, are as follows:

                                Payments    Payments
                                     due         due
                    Payments     between     between
                  due in the 90 days and  1 year and    Payments
                        next   less than   less than   due after
    $000's           90 days      a year     2 years     2 years       Total
    -------------------------------------------------------------------------
    Bank indebt-
     edness       $  265,058  $        -  $        -  $        -  $  265,058
    Commercial
     paper           294,000           -           -           -     294,000
    Accounts
     payable         786,599      40,522           -           -     827,121
    Dividends
     payable          46,727           -           -           -      46,727
    Medium-term
     notes                 -           -           -     950,000     950,000
    Other long-
     term
     liabilities           -           -      12,973      13,438      26,411
    -------------------------------------------------------------------------
    Total         $1,392,384  $   40,522  $   12,973  $  963,438  $2,409,317
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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

    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. The fixed rates payable by
    the Company under the derivative agreements ranged from 4.11% to 4.18%.
    The agreements mature as follows: $50,000 with a fixed rate payable of
    4.11% in December 2009 and $50,000 with a fixed rate payable of 4.18% in
    December 2010, with reset terms of one month.

    Based on market values of the interest rate derivative agreements at
    March 28, 2009, the Company recognized a liability of $4,268 (2008 -
    $3,151), of which $1,318 (2008 - $1,025) is presented in accounts payable
    and accrued liabilities and $2,950 (2008 - $2,126) is presented in other
    long-term liabilities. During the 12 weeks ended March 28, 2009 and
    March 22, 2008, 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.

    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. 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 March 28,
    2009, the Company recognized a liability of $2,334, of which $1,145 is
    presented in accounts payable and accrued liabilities and $1,189 is
    presented in other long-term liabilities. Based on market values of
    equity forward agreements at March 22, 2008, the Company recognized a net
    liability of $767, of which $127 was presented in accounts receivable and
    $894 was presented in other long-term liabilities. During the 12 weeks
    ended March 28, 2009 and March 22, 2008, the Company assessed that the
    percentage of the equity forward derivatives related to unearned units
    under the LTIP were 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 weeks ended March 28, 2009, an amount previously recorded
    in accumulated other comprehensive loss of $91 (2008 - $nil) was
    recognized 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 approximate their carrying values given their short-
    term maturities. The fair values of long-term receivables, long-term debt
    and other long-term liabilities approximate their carrying values given
    the current market rates associated with these instruments.

    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.

    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.

                                          March 28,    March 22,   January 3,
                                              2009         2008         2009
    -------------------------------------------------------------------------

    Cash                               $   (26,190) $   (35,784) $   (36,567)
    Bank indebtedness                      265,058      191,082      240,844
    Commercial paper                       293,045      736,676      339,943
    Short-term debt                              -            -      197,845
    Current portion of long-term debt            -      299,107            -
    Long-term debt                         943,384            -      647,250
                                       --------------------------------------

    Net debt                             1,475,297    1,191,081    1,389,315

    Shareholders' equity                 3,483,236    3,100,706    3,420,529
                                       --------------------------------------

    Total capitalization               $ 4,958,533  $ 4,291,787  $ 4,809,844
                                       --------------------------------------
                                       --------------------------------------

    Net debt:Shareholders' equity           0.42:1       0.38:1       0.41:1
    Net debt:Total capitalization           0.30:1       0.28:1       0.29:1
    EBITDA:Cash interest expense(1)(2)     17.39:1      18.09:1      17.21:1


    (1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
        for the 53 week and 52 week periods then ended, as appropriate.
        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 53 week and 52 week periods then ended, as
        appropriate, and exclude the amortization of deferred financing
        costs.

    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
    March 28, 2009:

                                                                    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 weeks
    ended March 28, 2009.

    Earnings Coverage Exhibit to the Consolidated Financial Statements

    53 Weeks Ended March 28, 2009
    -------------------------------------------------------------------------
    Earnings coverage on long-term debt obligations              25.20 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




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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