Shoppers Drug Mart Corporation announces strong results



    
    - FOURTH QUARTER NET EARNINGS INCREASE 14.4%
    - FULL YEAR NET EARNINGS INCREASE 15.2%
    

    TORONTO, Feb. 12 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its unaudited financial results for the fourth quarter and fiscal
year ended January 3, 2009.

    Fourth Quarter Results (13 Weeks Compared to 12 Weeks in Fiscal 2007)

    Fourth quarter sales increased 15.1% to $2.497 billion, with the Company
once again experiencing strong sales growth in all regions of the country. The
Company's capital investment program, which resulted in an 11.6% increase in
selling space compared to a year ago, together with the benefit of an
additional week in fiscal 2008, drove this top-line growth. On a same-store
(13 week) basis and excluding tobacco products, sales increased 3.6% during
the fourth quarter of 2008.
    Prescription sales increased 18.3% in the fourth quarter to $1.154
billion, accounting for 46.2% of the Company's sales mix compared to 45.0% in
the same period last year. On a same-store (13 week) basis, prescription sales
increased 5.0% during the fourth quarter of 2008, driven by strong growth in
the number of prescriptions filled, while increased generic utilization
continued to have a deflationary impact on sales growth in the category. In
the fourth quarter of 2008, generic molecules represented 52.2% of
prescriptions dispensed compared to 48.9% of units dispensed in the fourth
quarter of 2007.
    Front store sales increased 12.5% to $1.343 billion in the fourth
quarter, with the Company continuing to experience sales and market share
gains in all categories except tobacco, which is being phased out of its
remaining stores in Western Canada that list these products. On a same-store
(13 week) basis and excluding tobacco products, front store sales increased
2.4% during the fourth quarter of 2008. The incremental selling space stemming
from the Company's store network growth and revitalization program, combined
with effective merchandising and the continued maturation of the sales mix in
these stores, drove continued growth in front store sales. Sales growth in the
fourth quarter was also driven by stepped-up investments in promotional
pricing in response to softer market conditions, inclement weather and
increased promotional efforts on the part of other retailers.
    Fourth quarter net earnings increased 14.4% to $173 million or 80 cents
per share (diluted) from $151 million or 70 cents per share (diluted) a year
ago. Top-line growth, an enhanced sales mix and the benefits from improved
buying efficiencies, partially offset by higher operating costs and increased
amortization, resulted in year-over-year growth in fourth quarter operating
income and net earnings. Net earnings growth was also aided by a reduction in
the Company's effective income tax rate, which was 30.5% in the fourth quarter
of 2008 compared to 32.7% in the same period last year. Operating expenses
were higher due in large part to increased store-level expenses associated
with the continued growth and expansion of the store network, primarily
occupancy and labour, as well as due to additional costs incurred during the
extra week in the period. Amortization expense was higher, also reflecting the
continued growth of the Company's capital investment and store development
program.
    The Company's EBITDA margin (EBITDA divided by sales) was 12.63% in the
fourth quarter of 2008, a 30 basis point decline when compared to the EBITDA
margin of 12.93% posted in the fourth quarter of 2007. The EBITDA margin
decline experienced in the fourth quarter of 2008 was primarily a function of
the inclusion of an additional week in the quarter, one that is historically a
labour intensive and low margin sales week and that includes an extra
statutory holiday. This result is consistent with what the Company experienced
in the fourth quarter of fiscal 2003 when the Company last reported on a 53
week fiscal year basis. The Company's full year (53 week) EBITDA margin was
11.54% in 2008, a 24 basis point improvement over the EBITDA margin of 11.30%
posted in 2007.
    Commenting on the results, Jurgen Schreiber, President and CEO stated:
"We are pleased with our performance in the fourth quarter and are proud of
our results and accomplishments in fiscal 2008. The strength of our business
model, coupled with the dedication and commitment of our Associate-owners and
their teams at store level, along with the efforts of our corporate and
regional office employees, allowed us to continue to deliver sector-leading
growth in these challenging times. On behalf of our shareholders and the Board
of Directors, I would like to personally thank our employees, Associate-owners
and their teams for their efforts in 2008."

    Fiscal 2008 Results (53 Weeks Compared to 52 Weeks in Fiscal 2007)

    Sales in 2008 were $9.423 billion compared to $8.478 billion in 2007, an
increase of $945 million or 11.1%. During 2008, the Company continued to
experience strong sales growth in all regions of the country, led by gains in
Québec. The Company's robust store development and network revitalization
program continues to have a positive impact on sales growth. The additional
week in fiscal 2008 also contributed to the year-over-year increase in sales.
Sales growth was also aided by the Company's efforts to acquire drug stores
and prescription files, and by the third quarter acquisition of the assets of
the HealthAccess division of Calea Ltd. and 100% of the shares of Calea Ltd.'s
wholly-owned subsidiary, Information Healthcare Marketing Corp., which now
operate as Shoppers Drug Mart Specialty Health Network Inc. Sales growth in
2008 also benefited from the inclusion of a full year's results from the
assets of Centre d'Escomptes Racine, a seven store pharmacy chain in the
Québec City region that was acquired in the third quarter of the prior year.
On a same-store (53 week) basis and excluding tobacco products, sales
increased 4.8% in 2008.
    Prescription sales were $4.486 billion in 2008 compared to $3.989 billion
in 2007, an increase of $497 million or 12.5%. In 2008, prescription sales
accounted for 47.6% of the Company's sales mix compared to 47.0% in the prior
year. On a same-store (53 week) basis, prescription sales increased 5.4%
during the year. Consistent with the prior year, pharmacy sales growth was
driven by strong growth in the number of prescriptions filled, while greater
generic utilization continued to have a deflationary impact on sales growth in
the category. In 2008, generic molecules represented 51.2% of prescriptions
dispensed compared to 47.8% of units dispensed in the prior year, an increase
of 7.1%.
    Front store sales were $4.937 billion in 2008 compared to $4.489 billion
in 2007, an increase of $448 million or 10.0%. On a same-store (53 week) basis
and excluding tobacco products, front store sales increased 4.3% in 2008.
Square footage growth, combined with effective merchandising and the continued
maturation of the sales mix in newer stores, drove front store sales growth
and market share gains in 2008. Additionally, the Company stepped up its
promotional activities, particularly in the latter part of the year in the
context of weaker economic conditions and in response to competition, in order
to drive continued top-line growth in its front store categories.
    Net earnings were $565 million in 2008 compared to $490 million in 2007,
an increase of $75 million or 15.2%. On a diluted basis, earnings per share
were $2.60 in 2008 compared to $2.26 in 2007. Top-line growth, an enhanced
sales mix and improved purchasing synergies, partially offset by higher
operating costs and increased amortization tied to the Company's strategic
growth and store network expansion initiatives, resulted in a year-over-year
increase in operating income of 12.2%. Net earnings growth in 2008 also
benefited from a decline in the Company's effective income tax rate to 30.9%
from 33.1% in 2007, a decrease that can be attributed to a reduction in
statutory rates, which was partially offset by higher interest expense.

    Store Network Development

    During the fourth quarter of 2008, 28 drug stores were opened or
acquired, seven of which were relocations, and four smaller drug stores were
closed. In the fourth quarter of 2008, the Company also launched Murale, an
innovative stand-alone luxury beauty concept, with the opening of two stores.
For the fiscal year ended January 3, 2009, the Company opened or acquired 142
drug stores, 37 of which were relocations, and closed 13 smaller stores. The
Company also opened two home health care stores in 2008. At year-end, there
were 1,217 stores in the system, comprised of 1,149 drug stores (1,119
Shoppers Drug Mart/Pharmaprix stores and 30 Shoppers Simply
Pharmacy/Pharmaprix Simplement Santé stores), 66 Shoppers Home Health Care
stores and two Murale stores. During 2008, the selling square footage of the
retail store network increased by 11.6%, to 10.9 million square feet at year
end.

    Dividend and Dividend Policy

    The Company also announced today that its Board of Directors has declared
a dividend of 21.5 cents per common share, payable April 15, 2009 to
shareholders of record as of the close of business on March 31, 2009. This
represents an annualized dividend payment of 86 cents per common share,
unchanged from the prior year, and equates to a dividend payout ratio,
expressed as a percentage of fiscal 2008 net earnings, of 33%.
    Subject to financial results, capital requirements, available cash flow
and any other factors that the Board of Directors may consider relevant, it is
the intention of the Board of Directors to declare a comparable quarterly
dividend on an ongoing basis. It is expected that future dividend payments
will be made to shareholders of record as of the close of business on the last
business day of each calendar quarter and that the related payment date will
be the fifteenth day of the month following the record date, or if such day is
not a business day, the immediately preceding business day.

    
    Fiscal 2009 Outlook (52 Weeks Ending January 2, 2010 Compared to 53 Weeks
    in Fiscal 2008)
    

    The Company expects total sales to increase by between 5.5% and 7.0% in
2009, which is against sales for 53 weeks in the prior year. This equates to
sales growth of approximately 7.5% to 9.0% on an equivalent 52 weeks over 52
weeks basis. This expectation is underpinned by anticipated same-store sales
growth of between 5.0% and 6.0% in pharmacy, while in the front of the store,
the Company expects same-store sales growth to be more in-line with fourth
quarter 2008 results of 2.4%, plus or minus one percent. In pharmacy, it is
expected that prescription sales growth will continue to be driven by solid
growth in prescription counts, with drug price inflation not being a
significant factor, as generic prescription utilization rates continue to
rise, albeit at a somewhat slower rate in 2009, before accelerating again in
2010. In the front of the store, it is the Company's expectation that the
softer market conditions experienced in the latter part of 2008 will prevail
throughout 2009, limiting the rate of sales growth in its front store
categories. It is further expected that in 2009, comparable front store sales
growth will be higher in the second quarter than in the first quarter,
reflecting the shift of the Easter season to the second quarter this year from
the first quarter in 2008.
    In fiscal 2009, the Company plans to allocate approximately $575 million
to capital expenditures, with approximately 75% of this amount being invested
in the store network, including acquisitions of drug stores, prescription
files and land. This should result in an increase in retail selling square
footage of approximately 10%. This will be accomplished through the addition
of between 120 and 130 new drug stores, 35 to 40 of which will be relocations,
and through the completion of up to 15 major drug store expansions.

    2008 Annual Report

    The Company's audited consolidated financial statements for the year
ended January 3, 2009 will be available on or before April 3, 2009.
Management's Discussion and Analysis for the year ended January 3, 2009,
including further discussion and analysis of fourth quarter events or items
that affected results of operations, financial position and cash flows, will
also be available on or before April 3, 2009. Both documents will be contained
in the Company's 2008 Annual Report and will available in the Investor
Relations section of the Company's website at www.shoppersdrugmart.ca, or on
the Canadian Securities Administrators' website at www.sedar.com.

    Other Information

    The Company will hold an analyst call at 3:30 p.m. (Eastern Standard
Time) today to discuss its fourth quarter results and its outlook for fiscal
2009. 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 Standard Time) on February 26, 2009. The call playback can
be accessed after 5:00 p.m. (Eastern Standard Time) on Thursday, February 12,
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 3280293.

    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 1,119 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 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, including
as they relate to its operating and financial results, capital expenditures,
dividend policy and the ability to execute on its operating, investing and
financing strategies. 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. The forward-looking information and statements contained
herein are based on certain assumptions by management, certain of which are
set out in this news release.

    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 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 section entitled "Risks and Risk
Management" in the Company's Management's Discussion and Analysis for the 52
week period ended December 29, 2007 and in the section entitled "Risk Factors"
in the Company's Annual Information Form for the same period. The
forward-looking information and statements contained in this news release
represent the Company's views only as of the date of this release.
Forward-looking information and statements contained in this news release
about prospective results of operations, financial position or cash flows that
are based upon assumptions about future economic conditions and courses of
action are presented for the purpose of assisting the Company's shareholders
in understanding management's current views regarding those future outcomes,
and may not be appropriate for other purposes. While the Company anticipates
that subsequent events and developments may cause the Company's views to
change, the Company does not undertake to update any forward-looking
information and statements, except to the extent required by applicable
securities laws.
    Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

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

                             13 Weeks     12 Weeks     53 Weeks     52 Weeks
                                Ended        Ended        Ended        Ended
                         ----------------------------------------------------
                            January 3, December 29,   January 3, December 29,
                                 2009         2007         2009         2007
    -------------------------------------------------------------------------
    Sales                 $ 2,496,799  $ 2,168,822  $ 9,422,911  $ 8,478,382
    Operating expenses
      Cost of goods sold
       and other operating
       expenses (Note 2)    2,181,389    1,888,377    8,335,038    7,520,033
      Amortization             50,477       41,323      205,371      172,075
    -------------------------------------------------------------------------

    Operating income          264,933      239,122      882,502      786,274

    Interest expense
     (Note 4)                  15,940       14,185       63,952       52,873
    -------------------------------------------------------------------------

    Earnings before
     income taxes             248,993      224,937      818,550      733,401

    Income taxes (Note 2)
      Current                  64,809       72,286      254,159      249,834
      Future                   11,133        1,320         (821)      (6,874)
    -------------------------------------------------------------------------
                               75,942       73,606      253,338      242,960
    -------------------------------------------------------------------------
    Net earnings          $   173,051  $   151,331  $   565,212  $   490,441
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings per
     common share:

      Basic               $      0.80  $      0.70  $      2.60  $      2.27
      Diluted             $      0.80  $      0.70  $      2.60  $      2.26

    Weighted average
     common shares
     outstanding
      - Basic
       (millions)               217.1        216.6        217.0        216.1
      - Diluted
       (millions)               217.4        217.4        217.5        217.2
    Actual common shares
     outstanding
     (millions)                 217.3        216.8        217.3        216.8



    SHOPPERS DRUG MART CORPORATION
    Consolidated Statements of Retained Earnings
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                                                       53 Weeks     52 Weeks
                                                          Ended        Ended
                                                    -------------------------
                                                      January 3, December 29,
                                                           2009         2007
    -------------------------------------------------------------------------

    Retained earnings, beginning of period
     as reported                                    $ 1,580,888  $ 1,225,682
    Impact of the adoption of new
     accounting standard, Handbook Section 3031,
    Inventories (Note 2)                                (21,337)     (18,150)
    -------------------------------------------------------------------------
    Retained earnings, beginning of period
     as restated                                      1,559,551    1,207,532
    Net earnings                                        565,212      490,441
    Dividends                                          (186,679)    (138,398)
    Premium on share capital purchased
     for cancellation                                       (61)         (24)
    -------------------------------------------------------------------------
    Retained earnings, end of period                $ 1,938,023    1,559,551
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                             13 Weeks     12 Weeks     53 Weeks     52 Weeks
                                Ended        Ended        Ended        Ended
                          ---------------------------------------------------
                            January 3, December 29,   January 3, December 29,
                                 2009         2007         2009         2007
    -------------------------------------------------------------------------

    Net earnings          $   173,051  $   151,331  $   565,212  $   490,441
    Other comprehensive
     (loss) income,
     net of tax
      Change in unrealized
       gain/loss on
       interest rate
       derivatives
       (net of tax of $634
       and $1,605 (2007 -
       $727 and $65),
       respectively)           (1,176)      (1,476)      (3,148)          24
    Change in unrealized
     gain/loss on equity
     forward derivatives
     (net of tax of
     $93 and $167 (2007 -
     $54 and $12),
     respectively)               (186)        (108)        (337)         (23)
    Amount of previously
     unrealized gain/loss
     recognized in earnings
     during the period
     (net of tax of
     $143 and $145
     (2007 - $23 and $82),
     respectively)               (200)         (47)        (204)        (160)
    -------------------------------------------------------------------------
    Other comprehensive
     (loss) income             (1,562)      (1,631)      (3,689)        (159)
    -------------------------------------------------------------------------
    Comprehensive income  $   171,489  $   149,700  $   561,523  $   490,282
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Accumulated other
     comprehensive income,
     beginning of period                            $       247  $       406
    Other comprehensive
     (loss) income                                       (3,689)        (159)
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive
     (loss) income,
     end of period                                  $    (3,442) $       247
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                                                      January 3, December 29,
                                                           2009         2007
    -------------------------------------------------------------------------

    Assets

    Current
      Cash                                          $    36,567  $    27,588
      Accounts receivable                               448,476      372,306
      Inventory (Note 2)                              1,743,253    1,545,599
      Income taxes recoverable                            8,835            -
      Future income taxes (Note 2)                       83,279       69,952
      Prepaid expenses and deposits                      64,054      134,692
    -------------------------------------------------------------------------
                                                      2,384,464    2,150,137

    Property and equipment                            1,442,135    1,126,513
    Deferred costs                                       47,213       32,966
    Goodwill                                          2,427,239    2,245,441
    Other intangible assets                              97,813       57,930
    Other assets                                         20,442        8,990
    -------------------------------------------------------------------------
    Total assets                                    $ 6,419,306  $ 5,621,977
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities

    Current
      Bank indebtedness                             $   240,844  $   225,152
      Commercial paper (Note 7)                         339,957      543,847
      Short-term debt                                   197,845            -
      Accounts payable and accrued liabilities        1,018,505      990,545
      Income taxes payable (Note 2)                           -       65,100
      Dividends payable                                  46,709       34,686
      Current portion of long-term debt                       -      298,990
    -------------------------------------------------------------------------
                                                      1,843,860    2,158,320

    Long-term debt (Note 7)                             647,250            -
    Other long-term liabilities                         303,117      244,657
    Future income taxes                                  46,988       30,171
    -------------------------------------------------------------------------
                                                      2,841,215    2,433,148
    -------------------------------------------------------------------------

    Associate interest                                  118,678      113,119

    Shareholders' equity

    Share capital                                     1,514,207    1,506,020
    Contributed surplus                                  10,625        9,892

    Accumulated other comprehensive (loss) income        (3,442)         247
    Retained earnings (Note 2)                        1,938,023    1,559,551
    -------------------------------------------------------------------------
                                                      1,934,581    1,559,798
    -------------------------------------------------------------------------
                                                      3,459,413    3,075,710
    -------------------------------------------------------------------------
    Total liabilities and shareholders' equity      $ 6,419,306  $ 5,621,977
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                             13 Weeks     12 Weeks     53 Weeks     52 Weeks
                                Ended        Ended        Ended        Ended
                          ---------------------------------------------------
                            January 3, December 29,   January 3, December 29,
                                 2009         2007         2009         2007
    -------------------------------------------------------------------------

    Operating activities
      Net earnings
       (Note 2)           $   173,051  $   151,331  $   565,212  $   490,441
      Items not
       affecting cash
        Amortization           55,146       44,932      219,955      181,418
        Future income
         taxes (Note 2)        11,133        1,320         (821)      (6,874)
        Loss (gain) on
         disposal of
         property and
         equipment                253         (207)       3,436        4,165
        Stock-based
         compensation             186          581        1,498        3,544
    -------------------------------------------------------------------------
                              239,769      197,957      789,280      672,694
      Net change in
       non-cash working
       capital balances
       (Notes 2 and 3)        (80,652)      13,622     (325,248)    (134,069)
      Increase in other
       long-term
       liabilities              9,658       16,227       45,609       48,464
      Store opening costs     (12,938)      (7,782)     (30,652)     (22,031)
    -------------------------------------------------------------------------
    Cash flows from
     operating activities     155,837      220,024      478,989      565,058
    -------------------------------------------------------------------------

    Investing activities
      Purchase of property
       and equipment         (204,537)    (146,700)    (521,665)    (395,526)
      Proceeds from
       disposition of
       property and
       equipment                6,096       11,220       24,690       18,014
      Business
       acquisitions
       (Note 3)               (46,196)     (18,759)    (243,901)    (139,833)
      Deposits                 28,804      (18,873)      88,522      (93,688)
      Other assets                 38         (668)     (12,212)      (1,714)
    -------------------------------------------------------------------------
    Cash flows used in
     investing activities    (215,795)    (173,780)    (664,566)    (612,747)
    -------------------------------------------------------------------------

    Financing activities
      Bank indebtedness,
       net                    (18,550)     (21,757)      15,692       90,665
      Commercial paper,
      net (Note 7)             (4,000)       6,601     (203,350)      40,800
      Issuance of
       short-term debt
       (Note 7)               200,000            -      200,000            -
      Issuance of Series
       2 notes (Note 7)             -            -      450,000            -
      Revolving term debt,
       net (Note 7)           200,000            -      200,000            -
      Repayment of
       Series 1 notes
       (Note 7)              (300,000)           -     (300,000)           -
      Financing costs
       incurred                (2,550)           -       (6,050)         (20)
      Associate interest       16,064       10,531        5,559       (3,530)
      Proceeds from shares
       issued for stock
       options exercised        2,388        3,119        7,144       13,710
      Repayment of share
       purchase loans              69           30          288          325
      Repurchase of share
       capital                    (36)           -          (71)         (29)
      Dividends paid          (46,677)     (34,657)    (174,656)    (129,509)
    -------------------------------------------------------------------------
    Cash flows (used in)
     from financing
     activities                46,708      (36,133)     194,556       12,412
    -------------------------------------------------------------------------
    (Decrease) increase
     in cash                  (13,250)      10,111        8,979      (35,277)
    Cash, beginning
     of period                 49,817       17,477       27,588       62,865
    -------------------------------------------------------------------------
    Cash, end of period   $    36,567  $    27,588  $    36,567  $    27,588
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash
     flow information
    Interest paid         $    26,224  $    17,875  $    63,893  $    50,596
    Income taxes paid     $    55,720  $   115,306  $   327,184  $   280,393



    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 52 week period ended
    December 29, 2007, 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 2007 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.

    The Company had an arrangement with an independent trust (the "Trust") to
    provide loans to Associates to facilitate their purchase of inventory and
    fund their working capital requirements. The Trust's activities were
    financed through the issuance of short-term asset backed notes to third
    party investors. The Trust was a variable interest entity and the Company
    was the primary beneficiary. As such, the Trust was subject to
    consolidation by the Company. The results of operations of the Trust have
    been included in the Company's consolidated results of operations until
    June 10, 2008, when the arrangement with the Trust was terminated. See
    Notes 7 and 8 for further discussion related to the Trust.

    2. CHANGE IN ACCOUNTING POLICIES

    Adoption of New Accounting Standards

    Capital disclosures

    In 2006, the CICA issued a new accounting standard concerning Capital
    Disclosures ("Section 1535"), which requires the disclosure of both
    quantitative and qualitative information that enables users of financial
    statements to evaluate the entity's objectives, policies and processes
    for managing capital. The standard also requires an entity to disclose if
    it has complied with any capital requirements and, if it has not
    complied, the consequences of such non-compliance. The standard is
    effective for interim and annual financial statements for fiscal years
    beginning on or after October 1, 2007. The Company applied the new
    accounting standard at the beginning of its current fiscal year and its
    implementation did not have an impact on the Company's results of
    operations or financial position. See Note 10 for the resulting
    disclosures from implementation.

    Financial instruments

    The Company adopted two new accounting standards concerning financial
    instruments: CICA Handbook Section 3862 "Financial Instruments -
    Disclosures" ("Section 3862") and CICA Handbook Section 3863 "Financial
    Instruments - Presentation" ("Section 3863"). These standards were issued
    in December 2006 and replaced Section 3861, "Financial Instruments -
    Disclosure and Presentation". The new disclosure standard increased the
    emphasis on the risk associated with financial instruments and how those
    risks are managed. The new presentation standard carried forward the
    former presentation requirements under the replaced Section 3861. The
    standards are effective for interim and annual financial statements for
    fiscal years beginning on or after October 1, 2007. The Company applied
    the new accounting standards at the beginning of its current fiscal year
    and its implementation did not have an impact on the Company's results of
    operations or financial position. See Note 9 for the resulting
    disclosures from implementation.

    Inventories

    The CICA issued a new accounting standard concerning Inventories
    ("Section 3031"), in June 2007, which is based on the International
    Accounting Standards Board's ("IASB") International Accounting Standard 2
    and replaced Section 3030, "Inventories". The new standard provides
    guidance on the determination of the cost of inventory and the subsequent
    recognition of inventory as an expense, as well as requiring additional
    associated disclosures. The new standard also allows for the reversal of
    any write-downs previously recognized. The standard is effective for
    interim and annual financial statements for fiscal years beginning on or
    after January 1, 2008. The Company applied the new accounting standard
    retrospectively at the beginning of its current fiscal year, with
    restatement of prior periods.

    The results for the 12 and 52 weeks ended December 29, 2007 reflect an
    increase in cost of goods sold and other operating expenses and a
    decrease in operating income of $2,943 and $3,742, respectively, and a
    decrease in net earnings of $2,328 and $3,187, respectively, resulting in
    a decrease of $0.01 and $0.01 in basic and diluted net earnings per share
    for the 12 and 52 weeks ended December 29, 2007, respectively.

    The implementation of the new standard has resulted in a reduction to
    2008 and 2007 opening retained earnings of $21,337 and $18,150,
    respectively. The impact on balances as at December 29, 2007 was a
    decrease in inventory of $31,925, an increase in future income tax asset
    of $9,863 and a decrease in income taxes payable of $725.

    Inventory is comprised of merchandise inventory and is valued at the
    lower of cost and estimated net realizable value, with cost being
    determined on the first-in, first-out basis. Cost includes all direct
    expenditures and other appropriate costs incurred in bringing inventory
    to its present location and condition. The Company classifies rebates and
    other consideration received from a vendor as a reduction to the cost of
    inventory unless the rebate clearly relates to the reimbursement of a
    specific expense.

    The cost of inventory recognized as an expense and included in cost of
    goods sold and other operating expenses for the 13 and 53 weeks ended
    January 3, 2009 was $1,558,194 and $5,944,249 (2007 - $1,360,842 and
    $5,406,555), respectively. During the period, there were no significant
    write-downs of inventory as a result of net realizable value being lower
    than cost and no inventory write-downs recognized in previous years were
    reversed.

    Going concern

    In June 2007, the CICA issued amendments to Section 1400, "General
    Standards of Financial Statement Presentation", to include requirements
    to assess and disclose an entity's ability to continue as a going
    concern. The new amendments are effective for interim and annual
    financial statements for fiscal years beginning on or after January 1,
    2008. The Company applied the amendments to Section 1400 at the beginning
    of its current fiscal year. The implementation did not have an impact on
    the Company's results of operations, financial position or disclosures.

    Financial instruments - determining whether a contract is routinely
    denominated as a single currency

    In January 2008, the Emerging Issues Committee ("EIC") issued EIC-169,
    "Determining Whether a Contract is Routinely Denominated as a Single
    Currency", which provides additional guidance on the interpretation of
    the term "routinely denominated" in CICA Handbook Section 3855,
    "Financial Instruments - Recognition and Measurement". The new guidance
    is effective for interim and annual financial statements issued on or
    after March 15, 2008. The Company applied the new guidance
    retrospectively at the beginning of its 2008 fiscal year. The
    implementation did not have a significant impact on the Company's results
    of operations, financial position or disclosures.

    Future Accounting Standards

    Financial statement concepts

    In February 2008, the CICA issued amendments to Section 1000, "Financial
    Statement Concepts" 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 will apply the
    amendments to Section 1000 at the beginning of its 2009 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
    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 will apply the new
    accounting standards at the beginning of its 2009 fiscal year. The
    Company is currently assessing the impact of the new standard on the
    Company's results of operations, financial position and disclosures.

    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 is 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. The Non-controlling Interests standard 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.

    Financial assets and financial liabilities

    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"). 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 will be applying the new
    Abstract at the beginning of its 2009 fiscal year.

    The Company is currently assessing the impact of the Abstract on the
    measurement of its financial assets and financial liabilities; however,
    the Company does not expect the implementation to have a significant
    impact on the Company's results of operations, financial position and
    disclosures.

    3. ACQUISITIONS

    HealthAccess and Information Healthcare Marketing Corp.

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

    The total cost of the acquisition in cash, including costs incurred in
    connection with the acquisition, was $88,690 and will be allocated
    between the assets acquired on the basis of their fair values. The
    purchase price allocation remains preliminary pending finalization of the
    valuations of the assets and business acquired. The preliminary cost of
    the acquisition was allocated to the net assets on the basis of their
    fair values as follows:

    Net working capital              $  3,886
    Property and equipment                488
    Goodwill                           84,316
    ------------------------------------------
    Purchase price                   $ 88,690
    ------------------------------------------
    ------------------------------------------

    Centre d'Escomptes Racine

    On September 25, 2007, the Company purchased assets of the seven stores
    of Centre d'Escomptes Racine, a pharmacy chain in Quebec. The operations
    of the acquired stores have been included in the Company's results of
    operations from the date of acquisition.

    The total cost of the acquisition in cash, including costs incurred in
    connection with the acquisition, was $77,464. This amount includes $387
    of legal fees related to the acquisition recorded in the Company's 2008
    fiscal year. The cost of the acquisition was allocated to the net assets
    on the basis of their fair values as follows:

    Net working capital              $ 10,078
    Property and equipment              1,337
    Goodwill                           53,949
    Prescription files(1)              12,100
    ------------------------------------------
    Purchase price                   $ 77,464
    ------------------------------------------
    ------------------------------------------
    (1) The carrying value of the Company's prescription files is included in
        other intangible assets in the consolidated balance sheets.

    The net change in non-cash working capital balances reported on the
    consolidated statements of cash flows does not include working capital
    balances acquired in connection with the Company's acquisition of Centre
    d'Escomptes Racine, which is included in investing activities.

    Other business acquisitions

    During the 13 and 53 weeks ended January 3, 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 $45,617 and $154,824 (2007 - $18,759 and
    $62,756), respectively, 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.

    4.  INTEREST EXPENSE

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

                             13 Weeks     12 Weeks     53 Weeks     52 Weeks
                                Ended        Ended        Ended        Ended
                           --------------------------------------------------
                            January 3, December 29,   January 3, December 29,
                                 2009         2007         2009         2007
    -------------------------------------------------------------------------
    Interest on bank
     indebtedness            $  2,266     $  2,904     $ 10,584     $ 10,887
    Interest on commercial
     paper                      3,809        8,389       23,689       27,797
    Interest on short-term
     debt                       2,292            -        2,292            -
    Interest on long-term
     debt                       7,573        2,892       27,387       14,189
    -------------------------------------------------------------------------
                             $ 15,940     $ 14,185     $ 63,952     $ 52,873
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5.  EMPLOYEE FUTURE BENEFITS

    The net benefit expense included in the results for the 12 and 53 weeks
    ended January 3, 2009 for benefits provided under pension plans was
    $1,355 and $5,874 (2007 - $1,041 and $6,154), respectively, and for
    benefits provided under other benefit plans was $632 and $709 (2007 -
    $594 and $671), respectively.

    6.  STOCK-BASED COMPENSATION

    The Company uses the fair value method to account for stock options
    issued after 2002 under its stock option programs. If compensation
    expense under the fair value method of accounting had been recognized on
    stock options issued in 2002, the stock options would have been fully
    expensed by the end of the Company's fiscal 2007 year; and as a result,
    there would be no impact on the Company's net earnings for the 13 and 53
    weeks ended January 3, 2009 and a reduction in net earnings of $2 and
    $176 for the 12 and 52 weeks ended December 29, 2007. Basic and diluted
    earnings per share would have remained unchanged for the 13 and 53 weeks
    ended January 3, 2009 and for the 12 and 52 weeks ended December 29,
    2007.

    For a description of the Company's stock option programs, see Note 12 to
    the consolidated financial statements in the Company's 2007 Annual
    Report.

    7.  DEBT REFINANCING

    On April 22, 2008, the Company completed an amendment to its existing
    bank credit facility which matures in June of 2011, increasing the size
    of the facility from $550,000 to $800,000. In conjunction with this
    amendment, the Company also increased its commercial paper program from
    $300,000 to $500,000.

    On April 23, 2008, the Company issued $200,000 of commercial paper to
    purchase loans provided to Associates by the Trust. The purchase of these
    loans reduced the outstanding Trust loans to Associates from $499,000 to
    $299,000. In conjunction with this reduction, the standby letter of
    credit provided by the Company to the Trust as a form of credit
    enhancement was reduced from $50,000 to $30,000.

    On May 22, 2008, the Company filed with the securities regulators in each
    of the provinces of Canada, a final short form base shelf prospectus (the
    "Prospectus") for the issuance of up to $1 billion of medium-term notes.
    Subject to the requirements of applicable law, medium-term notes can be
    issued under the Prospectus for up to 25 months from May 22, 2008, the
    date of the final receipt.

    On June 2, 2008, the Company issued $450,000 of five-year medium-term
    notes (the "Series 2 Notes") under the Prospectus for aggregate net
    proceeds of $448,285. The Series 2 Notes mature on June 3, 2013 and bear
    interest at a fixed rate of 4.99% per annum.

    The net proceeds from the issuance of the Series 2 Notes were used to
    purchase the remaining outstanding Trust loans to Associates, with the
    balance applied to reduce outstanding commercial paper issued by the
    Company. In conjunction with the purchase of all remaining Trust loans to
    Associates, the $30,000 standby letter of credit was returned to the
    Company by the Trust and cancelled.

    On October 17, 2008, the Company entered into a senior, unsecured 364-day
    bank credit facility in the amount of up to $200,000; available for a
    single drawdown. On October 23, 2008, the Company fully utilized this
    facility to refinance a portion of its $300,000 medium-term notes that
    were maturing. This facility bears interest at a floating interest rate
    based on the prime rate. The debt has been recognized net of the costs of
    issuance and is valued at amortized cost.

    On October 24, 2008, the $300,000 of Series 1 notes was repaid in full,
    along with all accrued and unpaid interest owing on the final semi-annual
    interest payment. The Company financed the repayment with funds from the
    drawdown of $200,000 of the senior, unsecured 364-day bank credit
    facility and $100,000 from the revolving term facility.

    On December 19, 2008, the Company amended the senior, unsecured 364-day
    bank credit facility to increase the funds available to $300,000. The
    additional $100,000 is available for a single drawdown. Should the
    Company issue any medium-term notes during the term of the facility, the
    facility must be repaid in the lesser of: the amount of the medium-term
    notes issued or the outstanding balance of the facility.

    As at January 3, 2009, an additional $349,889 (2007 - $61,212) of the
    $800,000 revolving term facility was utilized as follows: $8,889 (2007 -
    $61,212) relating to letters of credit and trade finance guarantees and
    $341,000 (2007 - $45,000) relating to commercial paper issued by the
    Company.

    Subsequent to year end, on January 20, 2009, The Company issued $500,000
    of medium-term notes in two series and the outstanding amount on the
    senior, unsecured 364-day bank credit facility was repaid and the
    facility was terminated. See Note 11 for a description of the issuance.

    8.  FINANCING TRUST

    As a result of the debt refinancing described in Note 7, the arrangement
    with the Trust was terminated on June 10, 2008.

    9.  FINANCIAL INSTRUMENTS

    In accordance with Section 3855, Financial Instruments - Recognition and
    Measurement, financial instruments are classified into one of the
    following five categories: held for trading, held-to-maturity
    investments, loans and receivables, available-for-sale financial assets,
    or other financial liabilities. The classification determines the
    accounting treatment of the instrument. The classification is determined
    by the Company when the financial instrument is initially recorded, based
    on the underlying purpose of the instrument.

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

    Financial
    Asset / Liability            Category                     Measurement

    Cash                         Held for trading             Fair value
    Accounts receivable          Loans and receivables        Amortized cost
    Deposits(1)                  Loans and receivables        Amortized cost
    Long-term receivables(2)     Loans and receivables        Amortized cost
    Bank indebtedness            Held for trading             Fair value
    Commercial paper             Other financial liabilities  Amortized cost
    Short-term debt              Other financial liabilities  Amortized cost
    Accounts payable             Other financial liabilities  Amortized cost
    Long-term debt               Other financial liabilities  Amortized cost
    Other long-term liabilities  Other financial liabilities  Amortized cost

    Derivatives                  Classification               Measurement

    Interest rate derivatives(3) Effective cash flow hedge    Fair value
    Equity forward
     derivatives(3)              (4)                          Fair value

    Notes:
    (1) The carrying value of deposits is included in prepaid expenses and
        deposits in the consolidated balance sheets.
    (2) The carrying value of long-term receivables is included in other
        assets in the consolidated balance sheets.
    (3) The carrying values of the Company's derivatives are included in
        other assets, accounts payable and accrued liabilities and other
        long-term liabilities in the consolidated balance sheets.
    (4) The portion of the equity forward derivative agreements relating to
        the earned long-term incentive plan units is considered a derivative
        financial instrument. See Note 12 to the Company's 2007 annual
        consolidated financial statements for a further discussion of the
        long-term incentive plan.

    Financial instruments measured at amortized cost are initially recognized
    at fair value and then subsequently at amortized cost with gains and
    losses recognized in earnings in the period in which the gain or loss
    occurs. Changes in fair value of financial instruments classified as held
    for trading are recorded in net earnings in the period of change. Changes
    in the fair value of the Company's derivative instruments designated as
    effective cash flow hedges are recognized in other comprehensive loss;
    changes in derivative instruments not designated as effective hedges are
    recognized in net earnings in the period of the change.

    Transaction costs

    The Company has adopted the policy of adding transaction costs to
    financial assets and liabilities classified as other than "held for
    trading".

    Derivative financial instruments and hedge accounting

    The Company uses interest rate derivatives to manage its exposure to
    fluctuations in interest rates related to the Company's commercial paper.
    The income or expense arising from the use of these instruments is
    included in interest expense for the year.

    The Company uses cash-settled equity forward agreements to limit its
    exposure to future price changes in the Company's share price for share
    unit awards under the Company's long-term incentive plan ("LTIP"). The
    income or expense arising from the use of these instruments is included
    in other operating expenses for the year. See Note 12 of the Company's
    2007 annual consolidated financial statements for further discussion of
    the LTIP.

    The Company formally identifies, designates and documents all
    relationships between hedging instruments and hedged items, as well as
    its risk assessment objective and strategy for undertaking various hedge
    transactions. The Company assesses, both at the hedge's inception and on
    an ongoing basis including on re-designation, whether the derivatives
    that are used in hedging transactions are highly effective in offsetting
    changes in fair values or cash flows of hedged items. When such
    derivative instruments cease to exist or be effective as hedges, or when
    designation of a hedging relationship is terminated, any associated
    deferred gains or losses are recognized in net earnings in the same
    period as the corresponding gains or losses associated with the hedged
    item. When a hedged item ceases to exist, any associated deferred gains
    or losses are recognized in net earnings in the period the hedged item
    ceases to exist. Changes in the fair value of the Company's derivatives
    are non-cash transactions and are therefore not recognized in the
    consolidated statement of cash flows.

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

    Interest rate derivatives

    In December 2005, the Company entered into interest rate derivative
    agreements converting an aggregate notional principal amount of $250,000
    of floating rate commercial paper debt issued by the Trust into fixed
    rate debt. During the current fiscal year, the commercial paper issued by
    the Trust has been replaced with commercial paper issued directly by the
    Company. The fixed rates payable by the Company under the derivative
    agreements ranged from 4.03% to 4.18%. Agreements covering $150,000 of
    notional principal amount matured in December 2008. The remaining
    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. The Company recorded a net
    gain of $332 as interest expense on commercial paper related to the
    agreements that matured in December 2008.

    Based on market values of the interest rate derivative agreements at
    January 3, 2009, the Company recognized a liability of $4,647, of which
    $1,566 is presented in accounts payable and accrued liabilities and
    $3,081 is presented in other long-term liabilities. Based on market
    values of the interest rate derivative agreements at December 29, 2007,
    the Company recognized an asset of $428 in other assets. During the 13
    and 12 weeks ended January 3, 2009 and December 29, 2007, the Company
    assessed that the interest rate derivatives were an effective hedge for
    the floating interest rates on the associated commercial paper debt.
    Market values were determined based on information received from the
    Company's counterparties to these agreements.

    During the 13 weeks ended January 3, 2009, an amount previously recorded
    in accumulated other comprehensive loss of $186 (2007 - $nil) was
    recognized in earnings. During the 53 weeks ended January 3, 2009, an
    amount previously recorded in accumulated other comprehensive income of
    $186 (2007 - $nil) was recognized in earnings.

    Equity forward derivatives

    Based on market values of the equity forward agreements at January 3,
    2009, the Company recognized a liability of $2,093, of which $1,006 is
    presented in accounts payable and accrued liabilities and $1,087 is
    presented in other long-term liabilities. Based on market values of
    equity forward agreements at December 29, 2007, the Company recognized an
    asset of $332 in other assets. During the 13 and 12 weeks ended January
    3, 2009 and December 29, 2007, 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 13 weeks ended January 3, 2009, an amount previously recorded
    in accumulated other comprehensive loss of $14 (2007 - $47) was
    recognized in earnings. During the 53 weeks ended January 3, 2009, an
    amount previously recorded in accumulated other comprehensive income of
    $18 (2007 - $160) 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 long-term receivables, long-term liabilities and long-
    term debt 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.

    Financial risk management objectives and policies

    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 entered into interest rate derivative agreements converting
    an aggregate notional principal amount of $250,000 of floating rate
    commercial paper debt into fixed rate debt. The fixed rates payable by
    the Company under the derivative agreements ranged from 4.03% to 4.18%.
    Agreements covering $150,000 of notional principal amount matured in
    December 2008. The remaining 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.

    Furthermore, the Company may be exposed to losses should any counterparty
    to its derivative agreements fail to fulfill its obligations. The Company
    has sought to minimize counterparty risk by transacting with
    counterparties that are large financial institutions. As at January 3,
    2009, there is no net exposure (2007 - $428), as the interest rate
    derivative agreements are in a liability position.

    As at January 3, 2009 the Company had $904,830 of unhedged floating rate
    debt. During the 13 and 53 weeks ended January 3, 2009, the Company's
    average outstanding unhedged floating rate debt was $837,401 and
    $484,973, respectively. Had interest rates been higher or lower by 50
    basis points during the 13 and 53 weeks ended January 3, 2009, net
    earnings would have decreased or increased, respectively, by
    approximately $726 and $1,701, respectively, as a result of the Company's
    exposure to interest rate fluctuations on its unhedged floating rate
    debt.

    Credit risk

    Credit risk is the risk that the Company's counterparties will fail to
    meet their financial obligations to the Company causing a financial loss.
    Accounts receivable arise primarily in respect of prescription sales
    billed to governments and third-party drug plans and, as a result,
    collection risk is low. There is no concentration of balances with
    debtors in the remaining accounts receivable. The Company does not
    consider its exposure to credit risk to be material.

    Liquidity risk

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

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

    The contractual maturities of the Company's financial liabilities as at
    January 3, 2009 are as follows:

                                   Payments   Payments
                                        due        due
                                    between    between
                        Payments    90 days     1 year
                      due in the   and less   and less   Payments
                         next 90     than a     than 2  due after
    $000's                  days       year      years    2 years      Total
    -------------------------------------------------------------------------
    Bank indebtedness $  240,844 $       - $         - $        - $  240,844
    Commercial paper     341,000         -           -          -    341,000
    Short-term debt            -   200,000           -          -    200,000
    Accounts payable     964,059    18,876           -          -    982,935
    Medium-term note           -         -           -    450,000    450,000
    Revolving term
     facility                  -         -           -    200,000    200,000
    Other long-term
     liabilities          48,806         -      12,573     11,157     72,536
    -------------------------------------------------------------------------
    Total             $1,594,709 $ 218,876 $    12,573 $  661,157 $2,487,315
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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.  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 at the
    end of the periods indicated.

                                                     January 3,  December 29,
                                                          2009          2007
    -------------------------------------------------------------------------
    Cash                                           $   (36,567)  $   (27,588)
    Bank indebtedness                                  240,844       225,152
    Commercial paper                                   339,957       543,847
    Short-term debt                                    197,845             -
    Current portion of long-term debt                        -       298,990
    Long-term debt                                     647,250             -
                                                  ---------------------------
    Net debt                                         1,389,329     1,040,401

    Shareholders' equity                             3,459,413     3,075,710
                                                  ---------------------------
    Total capitalization                           $ 4,848,742   $ 4,116,111
                                                  ---------------------------
                                                  ---------------------------
    Net debt:Shareholders' equity                       0.40:1        0.34:1
    Net debt:Total capitalization                       0.29:1        0.25:1
    EBITDA:Cash interest expense(1)(2)                 17.45:1       18.37:1

    (1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
        for the 53 week and 52 week periods then ended. 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 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
    January 3, 2009:

                                                        Dominion
                                          Standard        Bond
                                          & Poor's   Rating 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 13 and
    53 weeks ended January 3, 2009.

    11. SUBSEQUENT EVENT

    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 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. The Company's senior unsecured 364-day bank credit
    facility was terminated on January 20, 2009.

    Earnings Coverage Exhibit to the Consolidated Financial Statements

    53 Weeks Ended January 3, 2009
    -------------------------------------------------------------------------
    Earnings coverage on long-term debt obligations              31.54 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 that
    were included in interest expense as shown in the consolidated statement
    of earnings of the Company for the period.
    

    %SEDAR: 00016987EF




For further information:

For further information: Media Contact: 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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