Shoppers Drug Mart Corporation announces strong second quarter results - Sales increase 9.4% and net earnings increase 14.4%



    TORONTO, July 16 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the second quarter ended June 14, 2008.

    Second Quarter Results (12 Weeks)

    Second quarter sales increased 9.4% to $2.109 billion, with the Company
continuing to experience strong sales growth in all regions of the country. On
a same-store basis, excluding tobacco products, sales increased 4.6% during
the quarter.
    Prescription sales increased 11.6% in the second quarter to $1.010
billion, accounting for 47.9% of the Company's sales mix compared to 46.9% in
the same period last year. On a same-store basis, prescription sales increased
6.4%. Comparable store prescription sales growth was driven by strong growth
in the number of prescriptions filled, as increased generic prescription
utilization continues to have a deflationary impact on sales dollar growth in
the category.
    Front store sales increased 7.4% in the second quarter to $1.099 billion,
with the Company continuing to experience sales 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 basis and excluding tobacco, front
store sales increased 3.0%, a particularly strong result given the Easter
calendar shift this year which benefited comparable front store sales in the
first quarter of 2008 by approximately 200 basis points.
    Second quarter net earnings increased 14.4% to $128 million or 59 cents
per share (diluted) from $112 million or 52 cents per share (diluted) a year
ago. Solid top line growth and a strong sales mix, combined with improved
purchasing synergies and an ongoing commitment to cost reduction and
efficiency, continued to drive growth in net earnings. Net earnings growth was
also aided by a reduction in the Company's effective income tax rate, driven
by a lower statutory rate, partially offset by increased interest expense.
    Commenting on the results, Jurgen Schreiber, President and CEO stated,
"We are pleased with our second quarter and first half results. Our
performance thus far in fiscal 2008 reflects the successful implementation of
a number of new initiatives, combined with solid execution at store-level
thanks to the dedication and commitment of our Associate-owners and their
teams. We remain confident in our outlook for the rest of the year."

    First Half Results (24 weeks)

    First half sales increased by 9.7% to $4.133 billion, with prescription
sales up 10.2% and front store sales up 9.3%. On a same-store basis, excluding
tobacco products, first half sales increased 5.4%, with prescription sales up
5.7% and front store sales up 5.1%. During the first half of 2008,
prescription sales accounted for 48.0% of the Company's sales mix compared to
47.8% in the same period last year.
    First half net earnings increased 16.3% to $230 million or $1.06 per
share (diluted) from $197 million or $0.91 per share (diluted) a year ago.

    Store Network Development

    During the second quarter, 22 drug stores were opened or acquired, nine
of which were relocations, and two smaller drug stores were closed. At
quarter-end, there were 1,171 stores in the system, comprised of 1,106 drug
stores and 65 Shoppers Home Health Care stores. Drug store selling space was
approximately 10.1 million square feet at the end of the second quarter, an
increase of 13.9% 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 October 15, 2008 to
shareholders of record as of the close of business on September 30, 2008.

    Other Information

    The Company will hold an analyst call at 3:30 p.m. (Eastern Daylight
Time) today to discuss its second 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 July 30, 2008. The call playback can be accessed after
5:00 p.m. (Eastern Daylight Time) on Wednesday, July 16, 2008 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 3264369.

    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 1,091 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 15 medical clinic pharmacies operating under the name Shoppers Simply
Pharmacy (Pharmaprix Simplement Santé in Québec). As well, the Company owns
and operates 65 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.

    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, 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. 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. 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 increased
competition from other retailers; 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;
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
that new, or changes to current, federal and provincial laws, rules and
regulations, including environmental laws, rules and regulations, may
adversely impact the Company's business and operations; 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; 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
                     MANAGEMENT'S DISCUSSION AND ANALYSIS

                             As at July 9, 2008
    

    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 and 24 week periods ended June 14, 2008. The Company's
unaudited interim period financial statements and the notes thereto have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP") and are reported in Canadian dollars. These financial statements do
not contain all disclosures required by Canadian GAAP for annual financial
statements and, accordingly, should be read in conjunction with the most
recently prepared annual consolidated financial statements for the 52 week
period ended December 29, 2007.

    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, 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. The forward-looking information
and statements contained herein are based on certain assumptions by
management, certain of which are set out 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. 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 increased competition from other retailers; 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; 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 that new, or changes to current, federal and
provincial laws, rules and regulations, including environmental laws, rules
and regulations, may adversely impact the Company's business and operations;
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; 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 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 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 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 June 14,
2008, there were 1,091 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 15
medical clinic pharmacies operating under the name Shoppers Simply
Pharmacy(TM) (Pharmaprix Simplement SantéMC in Québec).
    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(TM), Nativa(TM) 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(TM) program, one of the largest retail
loyalty card programs in Canada. In fiscal 2007, the Company recorded
consolidated sales of approximately $8.5 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 notes 7 and 8 to the accompanying
unaudited consolidated financial statements of the Company.)
    Under the licensing arrangement, the Company receives a substantial share
of Associate store profits. The Company's share of Associate store profits is
reflective of its investment in, and commitment to, the operations of the
Associates' stores.
    The Company operates in Québec under the Pharmaprix(R) and Pharmaprix
Simplement SantéMC 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
SantéMC 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 65 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 and 24 week periods ended June 14, 2008 compared to the 12 and 24
week periods ended June 16, 2007, as well as certain other metrics with
respect to investing activities for the 12 and 24 week periods ended June 14,
2008 and financial position as at June 14, 2008.

    
    -   Second quarter sales of $2.109 billion, an increase of 9.4%.

        -  First half sales of $4.133 billion, an increase of 9.7%.

    -   Second quarter comparable store sales growth, excluding tobacco, of
        4.6%, comprised of comparable prescription sales growth of 6.4% and
        comparable front store sales growth of 3.0%.

        -  First half comparable store sales growth, excluding tobacco(1), of
           5.4%, comprised of comparable prescription sales growth of 5.7%
           and comparable front store sales growth of 5.1%.

    -   Second quarter EBITDA(2) of $247 million, an increase of 13.1%.

        -  First half EBITDA of $453 million, an increase of 14.6%.

    -   Second quarter EBITDA margin(3) of 11.72%, an increase of 39 basis
        points.

        -  First half EBITDA margin of 10.96%, an increase of 46 basis
           points.

    -   Second quarter net earnings of $128 million or $0.59 per share
        (diluted), an increase of 14.4%.

        -  First half net earnings of $230 million or $1.06 per share
           (diluted), an increase of 16.3%.

    -   Second quarter capital expenditure program of $97 million compared to
        $78 million in the prior year. Opened or acquired 22 new drug stores,
        nine of which were relocations.

        -  First half capital expenditure program of $243 million compared to
           $122 million in the prior year. Opened or acquired 73 new drug
           stores, 17 of which were relocations, and added one home health
           care store.

        -  Year-over-year increase in drug store selling space of 13.9%.

    -   Maintained desired capital structure and financial position.

        -  Net debt to total capitalization ratio of 0.27:1 at June 14, 2008
           compared to 0.24:1 a year ago.

    (1) The sale of tobacco products is being phased out of the Company's
        remaining stores in Western Canada that list these products.

    (2) 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.)

    (3) 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              24 Weeks Ended
                       --------------------------  --------------------------
    ($000s, except         June 14,      June 16,      June 14,      June 16,
     per share data)          2008          2007          2008          2007
    -------------------------------------------------------------------------
                        (unaudited)   (unaudited)   (unaudited)   (unaudited)

    Sales              $ 2,109,308   $ 1,928,094   $ 4,133,107   $ 3,766,889
    Cost of goods sold
     and other
     operating
     expenses            1,862,190     1,709,587     3,680,065     3,371,469
                       --------------------------  --------------------------

    EBITDA(1)              247,118       218,507       453,042       395,420
    Amortization            46,324        38,575        91,095        75,810
                       --------------------------  --------------------------

    Operating income       200,794       179,932       361,947       319,610
    Interest expense        14,152        11,394        27,912        22,768
                       --------------------------  --------------------------

    Earnings before
     income taxes          186,642       168,538       334,035       296,842
    Income taxes            58,325        56,384       104,385        99,404
                       --------------------------  --------------------------

    Net earnings       $   128,317   $   112,154   $   229,650   $   197,438
                       --------------------------  --------------------------
                       --------------------------  --------------------------

    Per common share
    - Basic net
     earnings          $      0.59   $      0.52   $      1.06   $      0.92
    - Diluted net
     earnings          $      0.59   $      0.52   $      1.06   $      0.91

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

    Sales

    Sales represent the combination of sales of the retail drug stores owned
by the Associates and sales of the Company-owned home health care business and
MediSystem Technologies Inc.
    Sales in the second quarter were $2.109 billion compared to
$1.928 billion in the same period last year, an increase of $181 million or
9.4%, with the Company continuing to experience strong sales growth in all
regions of the country. On a same-store basis, excluding tobacco products,
sales increased 4.6% during the second quarter of 2008. Year-to-date, sales
increased 9.7% to $4.133 billion. The Company's capital investment program,
which resulted in a 13.9% increase in selling square footage versus a year
ago, continues to have a positive impact on sales growth. On a same-store
basis, excluding tobacco products, sales increased 5.4% during the first half
of 2008.
    Prescription sales were $1.010 billion in the second quarter compared to
$905 million in the same period last year, an increase of $105 million or
11.6%. On a same-store basis, prescription sales increased 6.4% during the
second quarter of 2008, with increased generic prescription utilization
continuing to have a deflationary impact on sales growth in the category.
Prescription sales represented 47.9% of the Company's sales mix during the
second quarter of 2008 compared to 46.9% in the same period last year.
Year-to-date, prescription sales increased 10.2% to $1.983 billion and
accounted for 48.0% of the Company's sales mix. On a same-store basis,
prescription sales increased 5.7% during the first half of 2008.
    Front store sales were $1.099 billion in the second quarter compared to
$1.023 billion in the second quarter of 2007, an increase of $76 million or
7.4%, with the Company continuing to experience sales 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 basis and excluding tobacco,
front store sales increased 3.0%, a particularly strong result given the
Easter calendar shift this year which benefited comparable front store sales
in the first quarter of 2008 by approximately 200 basis points. Year-to-date,
front store sales increased 9.3% to $2.151 billion. On a same-store basis,
front store sales, excluding tobacco, increased 5.1% during the first half of
2008.

    Cost of Goods Sold and Other Operating Expenses

    Cost of goods sold is comprised of the cost of goods sold at the retail
drug stores owned by the Associates and the cost of goods sold at the
Company-owned home health care business and MediSystem Technologies Inc. Other
operating expenses include corporate selling, general and administrative
expenses, operating expenses at the retail drug stores owned by the
Associates, including Associates' earnings, and operating expenses at the
Company-owned home health care business and MediSystem Technologies Inc.
    Total cost of goods sold and other operating expenses were $1.862 billion
in the second quarter compared to $1.710 billion in the same period last year,
an increase of $152 million or 8.9%. Expressed as a percentage of sales, cost
of goods sold declined by 82 basis points in the second quarter of 2008 versus
the comparative prior year period, reflecting improvements in cost of goods
and a better sales mix and margin rate. Partially offsetting this improvement
were higher operating expenses which, when expressed as a percentage of sales,
increased by 43 basis points over the prior year period. Higher operating
expenses at store-level, primarily occupancy, wages and benefits associated
with the expansion of the store network, accounted for the bulk of this
increase.
    Year-to-date, total cost of goods sold and other operating expenses
increased 9.2% to $3.680 billion. Expressed as a percentage of sales, cost of
goods sold declined by 90 basis points in the first half of 2008 versus the
comparative prior year period, while other operating expenses increased by 44
basis points.

    Amortization

    Amortization of capital assets and other intangible assets was
$46 million in the second quarter compared to $39 million in the same period
last year, an increase of $7 million or 20.1%. Expressed as a percentage of
sales, amortization increased 20 basis points in the second quarter of 2008
versus the comparative prior year period, reflecting the continued growth of
the Company's capital investment and store development program.
    Year-to-date, amortization of capital assets and other intangible assets
increased 20.2% to $91 million. Expressed as a percentage of sales,
amortization increased 19 basis points in the first half of 2008 versus the
comparative prior year period.

    Operating Income

    Operating income was $201 million in the second quarter of 2008 compared
to $180 million in the same period last year, an increase of $21 million or
11.6%. Solid top line growth and a strong sales mix, combined with improved
purchasing synergies and an ongoing commitment to cost reduction and
efficiency, partially offset by higher operating costs and increased
amortization in new and relocated stores, resulted in a higher operating
margin (operating income divided by sales). In 2008, second quarter operating
margin improved by 19 basis points to 9.52% compared to 9.33% in the second
quarter of last year. The Company's EBITDA margin (EBITDA divided by sales)
was 11.72% in the second quarter of 2008, a 39 basis point improvement over
the EBITDA margin of 11.33% posted in the second quarter of last year.
    Year-to-date, operating income increased 13.2% to $362 million and
operating margin improved by 28 basis points to 8.76%. During the first half
of 2008, EBITDA margin was 10.96%, a 46 basis point improvement over the
EBITDA margin of 10.50% posted during the first half of 2007.

    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 $14 million in the second quarter of 2008 compared
to $11 million in the same period last year, an increase of $3 million or
24.2%. This increase versus the comparative prior year period can be
attributed to an increase in the amount of consolidated net debt outstanding,
coupled with a market-driven increase in short-term interest rates.
Year-to-date, interest expense increased 22.6% to $28 million. (See note 4 to
the accompanying unaudited consolidated financial statements of the Company.)

    Income Taxes

    The Company's effective income tax rate in the second quarter and first
half of 2008 was 31.2% compared to 33.5% in the same periods last year. This
decrease in the effective income tax rate can be attributed to a reduction in
statutory rates.

    Net Earnings

    Second quarter net earnings were $128 million compared to $112 million in
the same period last year, an increase of $16 million or 14.4%. On a diluted
basis, earnings per share were $0.59 in the second quarter of 2008 compared to
$0.52 in the same period last year.
    Year-to-date, net earnings increased 16.3% to $230 million. On a diluted
basis, earnings per share were $1.06 in the first half of 2008 compared to
$0.91 in the same period last year.

    Capital Structure and Financial Position

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

    
                                                       June 14,  December 29,
    ($000s)                                               2008          2007
    -------------------------------------------------------------------------

    Cash                                           $   (80,452)  $   (27,588)
    Bank indebtedness                                  260,441       225,152
    Commercial paper                                   248,713       543,847
    Current portion of long-term debt                  299,899       298,990
    Long-term debt                                     446,845             -
                                                   --------------------------

    Net debt                                         1,175,446     1,040,401

    Shareholders' equity                             3,216,460     3,075,710
                                                   --------------------------

    Total capitalization                           $ 4,391,906   $ 4,116,111
                                                   --------------------------
                                                   --------------------------

    Net debt:Shareholders' equity                       0.37:1        0.34:1
    Net debt:Total capitalization                       0.27:1        0.25:1
    Net debt:EBITDA(1)                                  1.16:1        1.09:1
    EBITDA:Cash interest expense(1)(2)                 17.77:1       18.37:1


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

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

    Outstanding Share Capital

    The Company's outstanding share capital is comprised of common shares. An
unlimited number of common shares is authorized and the Company had
217,061,283 common shares outstanding at July 9, 2008. As at this same date,
the Company had issued options to acquire 1,273,814 of its common shares
pursuant to its stock-based compensation plans, of which 834,198 were
exercisable.

    Financing Activities

    On April 22, 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 million to $800 million. The bank credit facility is
available for general corporate purposes, including refinancing existing
indebtedness, and to backstop the Company's commercial paper program. The
Company's initial credit spread on BA borrowings under the amended credit
facility is 50 basis points. (See note 7 to the accompanying unaudited
consolidated financial statements of the Company).
    In conjunction with this amendment, the Company increased its commercial
paper program from $300 million to $500 million. The Company's commercial
paper program retained its rating of R-1 (low) by DBRS Limited.
    On April 23, the Company issued $200 million of commercial paper and used
the proceeds to purchase loans provided to Associates by an independent trust
(the "Trust") whose activities were financed through the issuance of
short-term, asset-backed notes. The purchase of these loans reduced the
outstanding Trust loans to Associates from $499 million to $299 million. 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
million to $30 million. On a consolidated basis, no incremental debt was
incurred by the Company as a result of the above refinancing activities.
    On May 22, 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 the date of the final receipt.
No incremental debt was incurred by the Company as a result of this filing.
    On June 2, the Company issued $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 2 Notes were issued pursuant to the
Prospectus, as supplemented by a pricing supplement dated May 28, 2008, and
filed by the Company with Canadian securities regulators in all of the
provinces of Canada. At the time of issuance, the Series 2 Notes were assigned
a rating of A (low) from DBRS Limited and BBB+ from Standard & Poor's.
    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 million standby letter of credit provided by the Company to the Trust as a
form of credit enhancement was returned to the Company by the Trust and
cancelled. The Trust itself was terminated on June 10, 2008. As a result of
applying the net proceeds from the issuance of the Series 2 Notes to refinance
existing indebtedness, the consolidated debt position of the Company remained
substantially unchanged.

    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.
    The Company has obtained additional long-term financing from: i) the
issuance of $300 million of five-year medium-term notes maturing October 24,
2008, which bear interest at a fixed rate of 4.97% per annum (the "Series 1
Notes") and were issued pursuant to a short form base shelf prospectus dated
October 10, 2003, as supplemented by a pricing supplement dated October 20,
2003, and filed by the Company with Canadian securities regulators in all of
the provinces of Canada. At the time of issuance, the Series 1 Notes were
assigned a rating of A (low) from DBRS Limited and BBB from Standard & Poor's;
and ii) the issuance of $450 million of Series 2 Notes as described above
under "Financing Activities".
    At the end of the second quarter, $14 million of the Company's
$800 million revolving bank credit facility was utilized, all in respect of
outstanding letters of credit and trade finance guarantees. At December 29,
2007, $61 million of this facility was utilized, all in respect of letters of
credit and trade finance guarantees. As at June 14, 2008, the Company had
$250 million of commercial paper issued and outstanding under its commercial
paper program compared to $45 million at the end of the prior year. At the end
of the second quarter, Associates had drawn an aggregate amount of
$262 million in loans from various Canadian chartered banks compared to
$228 million at the end of the prior year.
    In addition to the above, MediSystem Technologies Inc., a subsidiary of
the Company, has arranged for up to $1 million of revolving demand bank credit
facilities. At the end of the second quarter, no amounts were outstanding on
these facilities, unchanged from the end of the prior year.

    Cash Flows from Operating Activities

    Cash flows from operating activities were $164 million in the second
quarter of 2008 compared to $184 million in the same period last year. This
decrease versus the comparative period is largely the result of growth in net
earnings, adjusted for non-cash items, being more than offset by an increased
investment in non-cash working capital balances in the second quarter of this
year as opposed to last year, when the Company experienced a reduction in the
amount invested in non-cash working capital balances. The increased investment
in non-cash working capital balances in the second quarter of this year can be
largely attributed to growth in inventory, which is tied to store network
growth and increased sales, and the timing of tax payments and trade payables.
    Year-to-date, the Company has generated $158 million of cash from
operating activities compared to $181 million in the first half of 2007.

    Cash Flows Used in Investing Activities

    Cash flows used in investing activities were $103 million in the second
quarter of 2008 compared to $87 million in the same period last year, an
increase of $16 million or 18.5%. Of these totals, investments in property and
equipment, net of proceeds from any dispositions, amounted to $84 million in
the second quarter of this year compared to $71 million in the same period
last year, reflecting the continued expansion of the Company's store network
growth and revitalization program. The Company also invested $10 million in
business acquisitions and $4 million in other assets during the second quarter
of 2008 compared to $7 million and $9 million, respectively, 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. During the second quarter of 2008, the
balance of funds deposited and held in escrow in respect of outstanding offers
to purchase drug stores and land increased by $5 million.
    Year-to-date, cash flows used in investing activities were $206 million
compared to $131 million in the first half of 2007. Of these totals,
investments is property and equipment, net of proceeds from any dispositions,
amounted to $148 million in the first half of 2008 compared to $111 million in
the same period last year. Investments in business acquisitions and other
assets were $87 million and $10 million, respectively, in the first half of
2008 compared to $11 million and $9 million, respectively, in the same period
last year. During the first half of 2008, the balance of funds deposited and
held in escrow in respect of outstanding offers to purchase drug stores and
land decreased by $39 million.
    During the second quarter of 2008, 22 new drug stores were opened or
acquired, nine of which were relocations, and two smaller drug stores were
closed. Year-to-date, 73 new drug stores have been opened or acquired, 17 of
which were relocations, and seven drug stores have been closed. As a result of
this activity, drug store selling space has increased by 13.9% compared to a
year ago. The Company also added one home health care store to its network
during the first half of 2008. At the end of the second quarter there were
1,171 stores in the Company's retail network, comprised of 1,106 drug stores
and 65 Shoppers Home Health Care(R) stores.

    Cash Flows from Financing Activities

    Cash flows used in financing activities were $17 million in the second
quarter of 2008, as cash inflows of $523 million were more than offset by cash
outflows of $540 million. Cash inflows were comprised of an $69 million
increase in the amount of bank indebtedness, $450 million from the issuance of
medium-term notes and $3 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 $487 million decrease in the amount
commercial paper issued and outstanding under the Company's commercial paper
programs (a $499 million decrease in the amount of commercial paper issued by
the Trust, partially offset by a $12 million increase in the amount of
commercial paper issued and outstanding by the Company), $4 million to fund
costs associated with various financing activities, a $2 million reduction in
the amount of Associate investment and $47 million for the payment of
dividends. (See discussion above under "Financing Activities".)
    In the second quarter of 2008, the net result of the Company's operating,
investing and financing activities was an increase in cash of $45 million.
    Year-to-date, cash flows from in financing activities were $100 million
and the net result of the Company's operating, investing and financing
activities was an increase in cash of $53 million.

    Future Liquidity

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

    NEW ACCOUNTING PRONOUNCEMENTS

    Accounting Standards Implemented in 2008

    Capital Disclosures

    In 2006, the Canadian Institute of Chartered Accountants (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. Section 1535
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. The resulting disclosures from
implementation are presented in the Company's interim financial statements.

    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 risks
associated with financial instruments and how those risks are managed. The new
presentation standard carried forward the former presentation requirements
under the replaced CICA Handbook Section 3861. The new accounting 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 their implementation
did not have an impact on the Company's results of operations or financial
position. The resulting disclosures from implementation are presented in the
Company's interim financial statements and this MD&A.

    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 International Accounting Standard 2 and replaced CICA
Handbook 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 new 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 weeks ended June 16, 2007 reflect an increase in
cost of goods sold and other operating expenses and a decrease in operating
income of $26 thousand and a decrease in net earnings of $110 thousand, with
basic and diluted net earnings per share remaining unchanged. The results for
the 24 weeks ended June 16, 2007 reflect a decrease in cost of goods sold and
other operating expenses and an increase in operating income of $377 thousand
and an increase in net earnings of $43 thousand, with basic and diluted net
earnings per share remaining unchanged. The impact for year ended December 29,
2007 is an increase in cost of goods sold and other operating expenses and a
decrease in operating income of $3.7 million and a decrease in net earnings of
$3.2 million, resulting in a decrease of $0.01 in basic and diluted net
earnings per share.
    The implementation of the new standard has resulted in a reduction to
2008 and 2007 opening retained earnings of $21.3 million and $18.2 million,
respectively. The impact on balances as at December 29, 2007 and June 16, 2007
was a decrease in inventory of $31.9 million and $27.8 million, respectively,
an increase in future income tax asset of $9.9 million and $9.3 million,
respectively, and a decrease in income taxes payable of $725 thousand and $473
thousand, respectively.

    Determining Whether a Contract is Routinely Denominated as a Single
    Currency

    In January 2008, the Emerging Issues Committee of the CICA (the "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 and its implementation did not have a significant impact on the
Company's results of operations, financial position or disclosures.

    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
International Financial Reporting Standards ("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 GAAP
to IFRS. These changes are part of a world-wide shift to IFRS, intended to
facilitate global capital flows and bring greater clarity and consistency to
financial reporting in the global marketplace.
    On February 13, 2008, the AcSB confirmed that publicly accountable
enterprises will be required to use IFRS, as issued by the International
Accounting Standards Board, 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, with restatement of comparative periods.
    The AcSB issued an Omnibus Exposure Draft of IFRS in April 2008 for
public comment. The deadline for comments is July 31, 2008. The Omnibus
Exposure Draft contains the text of the standards proposed to be adopted and
the AcSB's guiding principles for the adoption of IFRS.
    The Company is currently assessing the future impact of these new
standards on its consolidated financial statements.

    OFF-BALANCE SHEET ARRANGEMENTS

    Associate Loans

    The Company has provided guarantees to various Canadian chartered banks
that support Associate loans. At the end of the second quarter of 2008, the
Company's maximum obligation in respect of such guarantees was $425 million
compared to $415 million at the end of the first quarter and prior year. At
June 14, 2008, an aggregate amount of $376 million in available lines of
credit had been allocated to the Associates by the various banks compared to
$370 million at the end of the first quarter and $356 million at the end of
the prior year. As at June 14, 2008, Associates had drawn an aggregate amount
of $262 million against these available lines of credit compared to
$218 million at the end of the first quarter and $228 million at the end of
the prior year. 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.

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

    Sales              $ 2,109,308   $ 1,928,094   $ 2,023,799   $ 1,838,795

    Net earnings       $   128,317   $   112,154   $   101,333   $    85,284

    Per common share
    - Basic net
     earnings          $      0.59   $      0.52   $      0.47   $      0.40
    - Diluted net
     earnings          $      0.59   $      0.52   $      0.47   $      0.39


                             Fourth Quarter               Third Quarter
    ($000s, except     --------------------------  --------------------------
    per share data -          2007          2006          2007          2006
    unaudited)           (12 Weeks)    (12 Weeks)    (16 Weeks)    (16 Weeks)
    -------------------------------------------------------------------------

    Sales              $ 2,168,822   $ 2,018,067   $ 2,524,671   $ 2,329,051

    Net earnings       $   151,331   $   132,500   $   141,672   $   123,880

    Per common share
    - Basic net
     earnings          $      0.70   $      0.62   $      0.65   $      0.58
    - Diluted net
     earnings          $      0.70   $      0.61   $      0.65   $      0.57
    

    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 AND RISK MANAGEMENT

    Financial Instruments

    The following discussion on Risks and Risk Management provides certain of
the required disclosures under CICA Handbook Section 3862, "Financial
Instruments - Disclosures" related to the nature and extent of risks arising
from financial instruments, as permitted by the standard. Therefore, this
section forms an integral part of the unaudited interim consolidated financial
statements for the 12 and 24 week periods ended June 14, 2008.
    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 $250 million of floating rate commercial paper debt into fixed rate
debt. The fixed rates payable by the Company under these agreements range from
4.03% to 4.18%. These agreements mature as follows: $150 million in December
2008, $50 million in December 2009 and $50 million in December 2010 with reset
terms from one to three months.
    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 net exposure as at June 14,
2008, as the interest rate derivative agreements are in a liability position.
At June 16, 2007, the maximum exposure was equal to the carrying value of the
interest rate derivative agreements of $3.9 million.
    As at June 14, 2008 the Company had $262 million of unhedged floating
rate debt. During the 12 weeks ended June 14, 2008, the Company's average
outstanding unhedged floating rate debt was $402 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 $0.3 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.

    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.
    For a complete description of the Company's sources of liquidity, see the
discussions under "Sources of Liquidity" and "Future Liquidity" under
"Liquidity and Capital Resources" in this Management's Discussion and
Analysis.

    Current liabilities and long-term liabilities

    The contractual maturities of the Company's current and long-term
liabilities as at June 14, 2008 are as follows:

    
                                   Payments
                                        due   Payments
                                    between        due
                        Payments    90 days  between 1
                          due in   and less   year and   Payments
                        the next     than a  less than  due after
    $000's               90 days       year    2 years    2 years      Total

    Bank indebtedness    260,441          -          -          -    260,441
    Commercial paper     248,713          -          -          -    248,713
    Accounts payable     788,950     32,929      8,815      7,448    838,142
    Current portion
     of long-term debt         -    299,899          -          -    299,899
    Long-term debt             -          -          -    446,845    446,845
    Other long-term
     liabilities          49,462         10     13,662      5,608     68,742

    Total              1,347,566    332,838     22,477    459,901  2,162,782
    

    There is no difference between the carrying value of bank indebtedness
and the amount the Company is required to pay.

    Industry and Regulatory Developments

    As discussed in the Company's Management's Discussion and Analysis in its
2007 Annual Report for the 52 week period ended December 29, 2007, government
payers continue to look to implement measures to control drug costs. One such
measure involves restricting the number of interchangeable prescription drug
products that are eligible for reimbursement. In furtherance of this
objective, at a briefing to pharmacy stakeholders on July 7, 2008, the Ontario
Ministry of Health and Long-Term Care (the "Ministry") indicated that it will
be implementing a competitive bid process for a small number of high volume
off-patent drug products that have been identified as less expensive in
jurisdictions outside of Canada. For those interchangeable drug products that
are made subject to the bid process, the number of interchangeable generic
products eligible for reimbursement under the Ontario Drug Benefit program may
be limited to two or three products in consideration of, among other things,
volume discounts to be provided directly from the manufacturer to the
Ministry. The Ministry indicated that the bid process will not affect the
number of interchangeable generic drug products in the private payer system.
    The volume discounts provided to the Ministry pursuant to the bid process
may decrease the amount of professional allowance funding available in the
system for public sector sales. The small number of interchangeable drug
products which will ultimately be subject to the bid process is not presently
known to industry. Accordingly, at this time, the Company is unable to
determine the impact, if any, of the Ministry's bid process on the Company's
future operating results.

    INTERNAL CONTROLS OVER FINANCIAL REPORTING

    The CEO and CFO 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              24 Weeks Ended
                      -------------------------------------------------------
                           June 14,      June 16,      June 14,      June 16,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------

    Sales              $ 2,109,308   $ 1,928,094   $ 4,133,107   $ 3,766,889
    Operating expenses
      Cost of goods
       sold and other
       operating
       expenses
       (Note 2)          1,862,190     1,709,587     3,680,065     3,371,469
      Amortization          46,324        38,575        91,095        75,810
    -------------------------------------------------------------------------

    Operating income       200,794       179,932       361,947       319,610

    Interest expense
     (Note 4)               14,152        11,394        27,912        22,768
    -------------------------------------------------------------------------

    Earnings before
     income taxes          186,642       168,538       334,035       296,842

    Income taxes
     (Note 2)
      Current               56,025        48,975       104,688        84,179
      Future                 2,300         7,409          (303)       15,225
    -------------------------------------------------------------------------
                            58,325        56,384       104,385        99,404
    -------------------------------------------------------------------------
    Net earnings       $   128,317   $   112,154   $   229,650   $   197,438
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings per
     common share:

      Basic            $      0.59   $      0.52   $      1.06   $      0.92
      Diluted          $      0.59   $      0.52   $      1.06   $      0.91

    Weighted average
     common shares
     outstanding
      - Basic
         (millions)          216.9         216.0         216.8         215.5
      - Diluted
         (millions)          217.5         217.2         217.4         217.1
    Actual common
     shares
     outstanding
     (millions)              217.1         216.2         217.1         216.2



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

                                                           24 Weeks Ended
                                                  ---------------------------
                                                       June 14,      June 16,
                                                          2008          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                                       229,650       197,438
    Dividends                                          (93,293)      (69,055)
    Premium on share capital purchased for
     cancellation                                            -           (24)
    -------------------------------------------------------------------------
    Retained earnings, end of period               $ 1,695,908   $ 1,335,891
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                               12 Weeks Ended              24 Weeks Ended
                      -------------------------------------------------------
                           June 14,      June 16,      June 14,      June 16,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------

    Net earnings       $   128,317   $   112,154   $   229,650   $   197,438
    Other comprehensive
     income (loss),
     net of tax
      Change in
       unrealized
       gain/loss on
       interest rate
       derivatives
       (net of tax of
       $585 and $596
       (2007 - $1,130
       and $1,223),
       respectively)         1,186         2,193        (1,211)        2,375
      Change in unrealized
       gain/loss on
       equity forward
       derivatives (net
       of tax of $371 and
       $222 (2007 - $13
       and $40),
       respectively)           755           (25)          451           (78)
      Amount of
       previously
       unrealized
       gain/loss on
       equity forward
       derivatives
       recognized in
       earnings during
       the period (net of
       tax of $5 and $5
       (2007 - $10 and
       $59),
       respectively)           (11)          (19)          (11)         (115)
    -------------------------------------------------------------------------
    Other comprehensive
     income (loss)           1,930         2,149          (771)        2,182
    -------------------------------------------------------------------------
    Comprehensive
     income            $   130,247   $   114,303   $   228,879   $   199,620
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Accumulated other
     comprehensive
     income, beginning
     of period                                     $       247   $       406
    Other comprehensive
     (loss) income                                        (771)        2,182
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive
     (loss) income,
     end of period                                 $      (524)  $     2,588
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SHOPPERS DRUG MART CORPORATION
    Consolidated Balance Sheets
    (unaudited)
    (in thousands of dollars)
    -------------------------------------------------------------------------
                                         June 14,      June 16,  December 29,
                                            2008          2007          2007
    -------------------------------------------------------------------------

    Assets

    Current
      Cash                           $    80,452   $   111,903   $    27,588
      Accounts receivable                353,643       295,367       372,306
      Inventory (Note 2)               1,537,524     1,315,730     1,545,599
      Future income taxes (Note 2)        67,812        38,492        69,952
      Prepaid expenses and deposits      103,872        49,189       134,692
    -------------------------------------------------------------------------
                                       2,143,303     1,810,681     2,150,137

    Property and equipment             1,194,766       950,367     1,126,513
    Deferred costs                        36,191        25,106        32,966
    Goodwill                           2,316,415     2,130,865     2,245,441
    Other intangible assets               71,921        44,977        57,930
    Other assets                          18,897        19,930         8,990
    -------------------------------------------------------------------------
    Total assets                     $ 5,781,493   $ 4,981,926   $ 5,621,977
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities

    Current
      Bank indebtedness              $   260,441   $   226,411   $   225,152
      Commercial paper (Note 7)          248,713       472,815       543,847
      Accounts payable and accrued
       liabilities                       857,148       714,242       990,545
      Income taxes payable (Note 2)        1,885        55,171        65,100
      Dividends payable                   46,667        34,588        34,686
      Current portion of long-term
       debt                              299,899             -       298,990
    -------------------------------------------------------------------------
                                       1,714,753     1,503,227     2,158,320

    Long-term debt (Note 7)              446,845       298,716             -
    Other long-term liabilities          269,433       206,029       244,657
    Future income taxes                   31,117        21,247        30,171
    -------------------------------------------------------------------------
                                       2,462,148     2,029,219     2,433,148
    -------------------------------------------------------------------------

    Associate interest                   102,885       106,752       113,119

    Shareholders' equity

    Share capital                      1,510,809     1,498,488     1,506,020
    Contributed surplus                   10,267         8,988         9,892

    Accumulated other comprehensive
     (loss) income                          (524)        2,588           247
    Retained earnings (Note 2)         1,695,908     1,335,891     1,559,551
    -------------------------------------------------------------------------
                                       1,695,384     1,338,479     1,559,798
    -------------------------------------------------------------------------
                                       3,216,460     2,845,955     3,075,710
    -------------------------------------------------------------------------
    Total liabilities and
     shareholders' equity            $ 5,781,493   $ 4,981,926   $ 5,621,977
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

                               12 Weeks Ended              24 Weeks Ended
                      -------------------------------------------------------
                           June 14,      June 16,      June 14,      June 16,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------

    Operating
     activities
      Net earnings
       (Note 2)        $   128,317   $   112,154   $   229,650   $   197,438
      Items not
       affecting cash
        Amortization        49,080        40,493        96,672        79,736
        Future income
         taxes (Note 2)      2,300         7,409          (303)       15,225
        Loss on disposal
         of property and
         equipment           1,123         1,083         1,980         1,952
        Stock-based
         compensation          454           907           796         1,914
    -------------------------------------------------------------------------
                           181,274       162,046       328,795       296,265
      Net change in
       non-cash working
       capital balances
       (Note 2)            (20,771)       19,760      (177,428)     (120,243)
      Increase in other
       long-term
       liabilities           9,659         6,519        17,284        12,293
      Store opening costs   (6,073)       (4,688)      (10,312)       (6,942)
    -------------------------------------------------------------------------
    Cash flows from
     operating activities  164,089       183,637       158,339       181,373
    -------------------------------------------------------------------------

    Investing activities
      Purchase of property
       and equipment       (86,641)      (71,027)     (155,830)     (111,285)
      Proceeds from
       disposition of
       property and
       equipment             2,432            41         8,172            89
      Business
       acquisitions
       (Note 3)             (9,920)       (7,011)      (87,462)      (10,806)
      Deposits              (4,908)            -        39,079             -
      Other assets          (3,549)       (8,549)       (9,695)       (9,171)
    -------------------------------------------------------------------------
    Cash flows used in
     investing
     activities           (102,586)      (86,546)     (205,736)     (131,173)
    -------------------------------------------------------------------------

    Financing activities
      Bank indebtedness,
       net                  69,359        23,557        35,289        91,924
      Commercial paper,
       net (Note 7)       (487,150)      (12,425)     (294,350)      (30,125)
      Issuance of long-
       term debt (Note 7)  450,000             -       450,000             -
      Financing costs
       incurred             (3,500)            -        (3,500)            -
      Associate interest    (2,228)       (5,246)      (10,234)       (9,897)
      Proceeds from
       shares issued for
       stock options
       exercised             3,267         3,633         4,155         6,963
      Repayment of share
       purchase loans           43            11           213           266
      Repurchase of share
       capital                   -           (29)            -           (29)
      Dividends paid       (46,626)      (34,467)      (81,312)      (60,264)
    -------------------------------------------------------------------------
    Cash flows (used in)
     from financing
     activities            (16,835)      (24,966)      100,261        (1,162)
    -------------------------------------------------------------------------
    Increase in cash        44,668        72,125        52,864        49,038
      Cash, beginning
       of period            35,784        39,778        27,588        62,865
    -------------------------------------------------------------------------
      Cash, end of
       period          $    80,452   $   111,903   $    80,452   $   111,903
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash
     flow information
    Interest paid      $    18,894   $    15,153   $    29,264   $    22,426
    Income taxes paid  $    92,900   $    56,653   $   167,335   $   108,290



    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 include the accounts of Shoppers
    Drug Mart Corporation (the "Company"), 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 up
    until June 10, 2008, when the Trust was terminated. See Notes 7 and 8
    below 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; the resulting disclosures from
    implementation are presented below.

    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, 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,
    repurchase shares for cancellation pursuant to its normal course issuer
    bid, issue additional equity 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.


                                         June 14,      June 16,  December 29,
                                            2008          2007          2007
    -------------------------------------------------------------------------

    Cash                             $   (80,452)  $  (111,903)  $   (27,588)
    Bank indebtedness                    260,441       226,411       225,152
    Commercial paper                     248,713       472,815       543,847
    Current portion of long-term debt    299,899             -       298,990
    Long-term debt                       446,845       298,716             -
                                    -----------------------------------------

    Net debt                           1,175,446       886,039     1,040,401

    Shareholders' equity               3,216,460     2,845,955     3,075,710
                                    -----------------------------------------

    Total capitalization             $ 4,391,906   $ 3,731,994   $ 4,116,111
                                    -----------------------------------------
                                    -----------------------------------------

    Net debt:Shareholders' equity         0.37:1        0.31:1        0.34:1
    Net debt:Total capitalization         0.27:1        0.24:1        0.25:1
    EBITDA:Cash interest expense(1)(2)   17.77:1       18.64:1       18.37:1


    (1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
        for each of the 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 each of the 52 week periods then ended and
        excludes 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
    June 14, 2008:

                                                                    Dominion
                                                                        Bond
                                                      Standard        Rating
                                                      & Poor's       Service
                                                     ------------------------

    Corporate credit rating                               BBB+             -
    Senior unsecured debt                                 BBB+        A (low)
    Commercial paper                                         -      R-1 (low)

    There were no changes to any of the Company's credit ratings during the
    12 and 24 weeks ended June 14, 2008.

    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; the resulting disclosures from
    implementation are presented below and in the Company's Management's
    Discussion and Analysis for the 12 and 24 week periods ended June 14,
    2008.

    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
    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
        accounts receivable, 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 income; 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 and expense arising from the use of these instruments are 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. 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 range from 4.03%
    to 4.18%. These agreements mature as follows: $150,000 in December 2008,
    $50,000 in December 2009 and $50,000 in December 2010 with reset terms
    from one to three months.

    Based on market values of the interest rate derivative agreements at
    June 14, 2008, the Company has recognized a liability of $1,379, of which
    $555 is presented in accounts payable and accrued liabilities and $824 is
    presented in other long-term liabilities. Based on market values of the
    interest rate derivative agreements at June 16, 2007, the Company
    recognized an asset of $3,937 in other assets. Market values were
    determined based on information received from the Company's
    counterparties to these agreements.

    Equity forward derivatives

    Based on market values of the equity forward agreements at June 14, 2008,
    the Company has recognized an asset of $1,638, of which $666 is presented
    in accounts receivable and $972 is presented in other assets. Based on
    market values of the equity forward agreements at June 16, 2007, the
    Company recognized an asset of $306 in other assets. Market values were
    determined based on information received from the Company's
    counterparties to these agreements.

    During the 12 and 24 weeks ended June 14, 2008, net gains of $11 and $11
    (2007 - net gains of $19 and $115), respectively, were reclassified from
    equity to 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 under the section entitled "Risks and Risk
    Management - Financial Instruments" on pages 16-17 of the Company's
    Management Discussion and Analysis for the 12 and 24 weeks ended June 14,
    2008.

    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 weeks ended June 16, 2007 reflect an increase in
    cost of goods sold and other operating expenses and a decrease in
    operating income of $26 and a decrease in net earnings of $110, with
    basic and diluted net earnings per share remaining unchanged. The results
    for the 24 weeks ended June 16, 2007 reflect a decrease in cost of goods
    sold and other operating expenses and an increase in operating income of
    $377 and an increase in net earnings of $43, with basic and diluted net
    earnings per share remaining unchanged. The impact for year ended
    December 29, 2007 is an increase in cost of goods sold and other
    operating expenses and a decrease in operating income of $3,742 and a
    decrease in net earnings of $3,187, resulting in a decrease of $0.01 in
    basic and diluted net earnings per share.

    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 and June 16,
    2007 was a decrease in inventory of $31,925 and $27,808, respectively, an
    increase in future income tax asset of $9,863 and $9,228, respectively,
    and a decrease in income taxes payable of $725 and $473, respectively.

    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
    expenditure 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 12 and 24 weeks ended
    June 14, 2008 was $1,333,528 and $2,619,740 (2007 - $1,232,826 and
    $2,416,153), 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.

    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

    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 new section provides
    additional guidance on measuring the cost of goodwill and intangible
    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.

    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. 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. The
    implementation of the amendments to Section 1000 will not have an impact
    the Company's results of operations, financial position and disclosures
    because the amendments are clarifications on the application of Section
    1000.

    3.  ACQUISITIONS

    During the 12 and 24 weeks ended June 14, 2008, 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 $9,920 and $87,462 (2007 - $7,011 and $10,806),
    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 significant components of the Company's interest expense are as
    follows:

                               12 Weeks Ended              24 Weeks Ended
                      -------------------------------------------------------
                           June 14,      June 16,      June 14,      June 16,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------

    Interest on bank
     indebtedness      $     2,125   $     2,347   $     4,851   $     4,300
    Interest on
     commercial paper        7,292         5,652        15,034        11,554
    Interest on long-
     term debt               4,735         3,395         8,027         6,914
    -------------------------------------------------------------------------
                       $    14,152   $    11,394   $    27,912   $    22,768
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5.  EMPLOYEE FUTURE BENEFITS

    The net benefit expense included in the results for the 12 and 24 weeks
    ended June 14, 2008 for benefits provided under pension plans was $1,356
    and $2,712 (2007 - $1,561 and $3,122), respectively, and for benefits
    provided under other benefit plans was $23 and $46 (2007 - $23 and $46),
    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 12 and 24
    weeks ended June 14, 2008 and a reduction in net earnings of $77 and $160
    for the 12 and 24 weeks ended June 16, 2007. Basic and diluted earnings
    per share remains unchanged for the 12 and 24 weeks ended June 14, 2008
    and June 16, 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. No incremental debt was incurred by the
    Company as a result of this filing.

    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.

    8.  FINANCING TRUST

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

    9.  SUBSEQUENT EVENT

    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's
    wholly owned subsidiary, Information Healthcare Marketing Corp., which
    operates a related call centre business. The acquired business is based
    in Mississauga and will operate as Shoppers Drug Mart Specialty Health
    Network Inc. and will provide comprehensive patient support services for
    specialty pharmaceutical needs. The assets acquired are composed of
    primarily goodwill, intangible assets and leasehold improvements at two
    locations. The purchase price is currently being finalized.

    Earnings Coverage Exhibit to the Consolidated Financial Statements

    52 Weeks Ended June 14, 2008
    -------------------------------------------------------------------------
    Earnings coverage on long-term debt obligations              54.15 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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