Sears Canada Reports Third Quarter Results

TORONTO, Nov. 18 /CNW/ - Sears Canada Inc. (TSX: SCC) today announced its unaudited third quarter results. Total revenues for the 13-week period ended October 31, 2009 were $1.309 billion compared to $1.442 billion for the 13 weeks ended November 1, 2008, a decrease of 9.2%. Same store sales decreased 6.3%. Total expenses for the quarter were reduced by 11.5%.

Operating net earnings for the third quarter were $47.1 million or 44 cents per share compared to $58.2 million or 54 cents per share in the third quarter last year. There was an unusual item (gain) in the quarter last year of $1.1 million, net of taxes; there were no unusual items in the quarter this year. Consequently, net earnings for the third quarter were $47.1 million or 44 cents per share compared to $59.3 million or 55 cents per share in the third quarter last year.

Operating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was $103.7 million for the quarter compared to $115.5 million for the same period last year, a decrease of 10.2%. Operating EBITDA and operating net earnings are non-GAAP measures; please refer to the "Reconciliation of Net Earnings to Operating EBITDA" table attached.

Cash, restricted cash and investments increased $304.4 million to $1,113.8 million as at October 31, 2009 compared to $809.4 million as at November 1, 2008. Total debt is $360.3 million as at October 31, 2009.

Total revenues for the 39-week period ended October 31, 2009 were $3.676 billion compared to $4.117 billion for the 39-week period ended November 1, 2008. Same store sales decreased 8.8%. Total expenses were reduced by 9.7%.

Operating net earnings for the first nine months this year were $113.0 million compared to $162.2 million for the same period in 2008. The 39-week period this year included an unusual expense of $6.5 million, net of tax, related to restructuring activities taken in the first quarter. The 39-week period last year included an unusual gain of $28.3 million, net of tax, related to property transactions including the sale of a Company property in Calgary, Alberta. Consequently, net earnings for the 39-week period ended October 31, 2009 were $106.5 million or 99 cents per share compared to $191.6 million or $1.78 per share for the 39-week period ended November 1, 2008.

For the 39-week period ending October 31, 2009, Operating EBITDA was $274.7 million compared to $334.9 million for the same period last year. As previously mentioned, please refer to "Reconciliation of Net Earnings to Operating EBITDA" attached.

Commenting on the third quarter and first nine months of the year, Dene Rogers, President and Chief Executive Officer, Sears Canada Inc., said, "The recession is continuing with increasing unemployment resulting in retracted consumer spending. On a positive note, the same store sales decrease of 6.3% is a 410 basis point improvement over Q1 and a 370 basis point improvement over Q2. These results are due to the efforts and skill of the thousands of Sears associates across the country. Sears remains determined to become Canada's No. 1 retailer by improving the lives of Canadians."

"The economic uncertainty continued to affect consumer confidence during the third quarter especially as it relates to future employment," continued Mr. Rogers. "Sears will be aggressively marketing in the fourth quarter to convey to customers that we have the Holiday Season's most wanted products at prices that can't be beat. This will be done in a responsible manner with a focus on driving customer traffic and profitability."

This release contains information which is forward-looking and is subject to important risks and uncertainties. Forward-looking information concerns the Company's future financial performance, business strategy, plans, goals and objectives. Factors which could cause actual results to differ materially from current expectations include, but are not limited to: the ability of the Company to successfully implement its cost reduction, productivity improvement and strategic initiatives and whether such initiatives will yield the expected benefits; the impact of the sale of the Company's Credit and Financial Services operations and the results achieved pursuant to the Company's long-term marketing and servicing alliance with JPMorgan Chase Bank, N.A.; general economic conditions; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonal weather patterns; customer preference toward product offerings; changes in the Company's relationship with its suppliers; interest rate fluctuations and other changes in funding costs; fluctuations in foreign currency exchange rates; the possibility of negative investment returns in the Company's pension plan; the outcome of pending legal proceedings; and changes in laws, rules and regulations applicable to the Company. While the Company believes that its forecasts and assumptions are reasonable, results or events predicted in this forward-looking information may differ materially from actual results or events.

Sears Canada is a multi-channel retailer with a network of 196 corporate stores, 193 dealer stores, 41 home improvement showrooms, over 1,800 catalogue merchandise pick-up locations, 108 Sears Travel offices and a nationwide home maintenance, repair, and installation network. The Company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.

    
    SEARS CANADA INC.
    RECONCILIATION OF NET EARNINGS TO OPERATING EBITDA
    Unaudited

                                     Third Quarter(1)      Year-to-Date(1)
                                  --------------------- ---------------------
    (in millions)                    2009       2008       2009       2008
    -------------------------------------------------------------------------
    Net earnings(2)               $    47.1  $    59.3  $   106.5  $   191.6
    -------------------------------------------------------------------------
    Non-operating activities,
     net of taxes
      Restructuring expense               -          -        6.5          -
      Unusual items(3) (gain)             -       (1.1)         -      (29.4)
    -------------------------------------------------------------------------
    Operating net earnings(2),(4) $    47.1  $    58.2  $   113.0  $   162.2
    -------------------------------------------------------------------------
    Depreciation and amortization      28.2       31.5       87.1       95.5
    Interest expense, net               6.1        2.9       18.0        5.5
    Income taxes expense excluding
     operating adjustments(2)          22.3       22.9       56.6       71.7
    -------------------------------------------------------------------------
    Operating EBITDA(4)           $   103.7  $   115.5  $   274.7  $   334.9
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings per share        $    0.44  $    0.55  $    0.99  $    1.78
    Operating net earnings
     per share                    $    0.44  $    0.54  $    1.05  $    1.51
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) The third quarter and YTD periods of 2009 and 2008 represent the
        13 and 39-week periods ended October 31, 2009 and November 1, 2008,
        respectively.

    (2) Net earnings and income taxes expense for the third quarter and
        year-to-date ("YTD") 2008 have been restated as a result of the
        retrospective application of the change in accounting policy related
        to the adoption of Goodwill and Intangible Assets.

    (3) Primarily due to the sale of a real estate/joint venture and the
        reversal of the remaining severance expense accrued in 2005.

    (4) Operating net earnings and Operating EBITDA are non-GAAP measures
        which exclude non-operating gains and losses and are used by
        management to better assess the Company's underlying performance.



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

    Unaudited

                                                          As at        As at
                                                     November 1,  January 31,
                                             As at         2008         2009
                                        October 31,   (Restated    (Restated
    (in millions)                             2009     - Note 2)    - Note 2)
    -------------------------------------------------------------------------

    ASSETS

    Current Assets
    Cash and short-term investments
     (Note 5)                            $ 1,045.2    $   803.5    $   819.8
    Restricted cash and investments
     (Note 15)                                68.6          5.9        144.8
    Accounts receivable                      161.9        181.1        138.7
    Income taxes recoverable                  27.4         51.7         16.6
    Inventories                            1,025.9      1,179.4        968.3
    Prepaid expenses and other assets         79.0        172.2        147.9
    Current portion of future income
     tax assets                               33.2          5.9          8.7
    -------------------------------------------------------------------------
                                           2,441.2      2,399.7      2,244.8

    Capital assets                           633.3        697.8        696.0
    Deferred charges                         178.4        188.7        185.2
    Intangible assets                         16.9          8.3         16.8
    Goodwill                                  11.2         11.2         11.2
    Future income tax assets                  36.6         27.7         28.4
    Other long-term assets                    47.9         31.6         54.9
    -------------------------------------------------------------------------
                                         $ 3,365.5    $ 3,365.0    $ 3,237.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES

    Current Liabilities
    Accounts payable                     $   717.8    $   816.6    $   640.9
    Accrued liabilities                      377.6        425.0        383.6
    Income and other taxes payable            46.2         48.2         39.4
    Principal payments on long-term
     obligations due within one year
     (Note 6)                                322.6         14.8         32.1
    -------------------------------------------------------------------------
                                           1,464.2      1,304.6      1,096.0

    Long-term obligations (Note 6)            37.7        353.6        332.5
    Accrued benefit liabilities (Note 14)    165.5        156.7        158.5
    Other long-term liabilities              165.2        168.4        167.1
    -------------------------------------------------------------------------
                                           1,832.6      1,983.3      1,754.1
    -------------------------------------------------------------------------

    SHAREHOLDERS' EQUITY
    Capital stock (Note 11)                   15.7         15.7         15.7
    Retained earnings                      1,505.6      1,300.0      1,399.1
    Accumulated other comprehensive
     income                                   11.6         66.0         68.4
    -------------------------------------------------------------------------
                                           1,532.9      1,381.7      1,483.2
    -------------------------------------------------------------------------
                                         $ 3,365.5    $ 3,365.0    $ 3,237.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
    For the 13 and 39-week periods ended October 31, 2009 and November 1,
    2008

    Unaudited

                                     13-Week Period        39-Week Period
                                  --------------------- ---------------------
                                                  2008                  2008
    (in millions, except per                 (Restated             (Restated
     share amounts)                    2009   - Note 2)      2009   - Note 2)
    -------------------------------------------------------------------------

    Total revenues                $ 1,309.0  $ 1,442.2  $ 3,675.5  $ 4,116.9
    -------------------------------------------------------------------------
    Cost of merchandise sold,
     operating, administrative
     and selling expenses           1,205.3    1,326.7    3,410.1    3,782.0
    Depreciation and amortization      28.2       31.5       87.1       95.5
    Interest expense, net (Note 6)      6.1        2.9       18.0        5.5
    Unusual items - (gain) (Note 7)       -       (1.6)         -      (38.8)
    -------------------------------------------------------------------------
    Earnings before income taxes       69.4       82.7      160.3      272.7
    -------------------------------------------------------------------------
    Income taxes expense (recovery)
      Current                          25.7       28.8       60.3      107.6
      Future                           (3.4)      (5.4)      (6.5)     (26.5)
    -------------------------------------------------------------------------
                                       22.3       23.4       53.8       81.1
    -------------------------------------------------------------------------
    Net earnings                  $    47.1  $    59.3  $   106.5  $   191.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net earnings per share
     (Note 8)                     $    0.44  $    0.55  $    0.99  $    1.78
    -------------------------------------------------------------------------
    Diluted net earnings per
     share (Note 8)               $    0.44  $    0.55  $    0.99  $    1.78
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net earnings                  $    47.1  $    59.3  $   106.5  $   191.6
    Other comprehensive income
     (loss), net of taxes:
      Mark-to-market adjustment
       related to short-term
       investments, net of income
       taxes expense of less than
       $0.1 and Nil (2008: Nil
       and recovery of less
       than $0.1)                       0.1          -          -       (0.1)
      Gain (loss) on foreign
       exchange derivatives
       designated as cash flow
       hedges, net of income
       taxes expense of $0.8 and
       recovery of $14.8 (2008:
       expense of $29.3 and $31.7)      1.8       61.8      (32.1)      66.8
      Reclassification to net
       earnings of gain on
       foreign exchange
       derivatives designated as
       cash flow hedges, net of
       income taxes expense of
       $2.8 and $11.5 (2008:
       expense of $0.4 and $0.3)       (6.3)      (0.8)     (24.9)      (0.7)
      Gain on fuel derivatives
       designated as cash flow
       hedges, net of income
       taxes expense of Nil and
       $0.1 (2008: Nil and Nil)           -          -        0.2          -
    -------------------------------------------------------------------------
    Other comprehensive (loss)
     income (Note 17)                  (4.4)      61.0      (56.8)      66.0
    -------------------------------------------------------------------------
    Comprehensive income          $    42.7  $   120.3  $    49.7  $   257.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    AND ACCUMULATED OTHER COMPREHENSIVE INCOME
    For the 13 and 39-week periods ended October 31, 2009 and November 1,
    2008

    Unaudited

                                     13-Week Period        39-Week Period
                                  --------------------- ---------------------
                                                  2008                  2008
                                             (Restated             (Restated
    (in millions)                      2009   - Note 2)      2009   - Note 2)
    -------------------------------------------------------------------------
    Retained earnings
    Opening balance               $ 1,458.5  $ 1,240.7  $ 1,424.0  $ 1,135.4
    Adjustment to opening
     retained earnings resulting
     from adoption of new
     accounting standards for
     goodwill and intangible
     assets, net of income taxes
     of $12.4 (Note 2)                    -          -      (24.9)     (27.0)
    Net earnings                       47.1       59.3      106.5      191.6
    -------------------------------------------------------------------------

    Closing balance               $ 1,505.6  $ 1,300.0  $ 1,505.6  $ 1,300.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive income
    Opening balance               $    16.0  $     5.0  $    68.4  $       -
    Other comprehensive (loss)
     income                            (4.4)      61.0      (56.8)      66.0
    -------------------------------------------------------------------------

    Closing balance               $    11.6  $    66.0  $    11.6  $    66.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Retained earnings and
     accumulated other
     comprehensive income         $ 1,517.2  $ 1,366.0  $ 1,517.2  $ 1,366.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    For the 13 and 39-weeks ended October 31, 2009 and November 1, 2008

    Unaudited

                                     13-Week Period        39-Week Period
                                  --------------------- ---------------------
                                                  2008                  2008
                                             (Restated             (Restated
    (in millions)                      2009   - Note 2)      2009   - Note 2)
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) operating
     activities
      Net earnings                $    47.1  $    59.3  $   106.5  $   191.6
      Non-cash items included in
       net earnings, principally
       depreciation, pension
       expense, future income
       taxes and gain on sale of
       real estate and real
       estate joint ventures           31.3       36.4       94.9       50.7
      Changes in non-cash working
       capital balances related
       to operations                  153.3      (36.2)      (3.7)    (255.2)
      Other, principally pension
       contributions and changes
       to long-term assets and
       liabilities                     (1.9)     (12.3)      (7.1)     (16.8)
    -------------------------------------------------------------------------
                                      229.8       47.2      190.6      (29.7)
    -------------------------------------------------------------------------

    Cash flow generated from
     (used for) investing
     activities
      Purchases of capital assets     (10.6)     (22.5)     (44.4)     (66.7)
      Proceeds from sale of
       capital assets                   0.2        0.1        1.0       40.2
      Deferred charges                    -       (0.2)      (0.7)      (0.5)
      Changes in restricted cash
       and investments (Current
       and Long-term)                  45.2       (3.3)      83.2       (0.7)
      Acquisition, net of cash
       acquired                           -          -          -       (7.0)
    -------------------------------------------------------------------------
                                       34.8      (25.9)      39.1      (34.7)
    -------------------------------------------------------------------------

    Cash flow used for
     financing activities
      Repayment of long-term
       obligations                     (1.4)      (0.8)      (4.3)      (3.7)
    -------------------------------------------------------------------------

    Increase (decrease) in cash
     and short-term investments       263.2       20.5      225.4      (68.1)
    Cash and short-term
     investments at beginning
     of period                        782.0      783.0      819.8      871.6
    -------------------------------------------------------------------------
    Cash and short-term
     investments at end
     of period                    $ 1,045.2  $   803.5  $ 1,045.2  $   803.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Cash at end of period         $    89.5  $    90.3  $    89.5  $    90.3
    Short-term investments at
     end of period                    955.7      713.2      955.7      713.2
    -------------------------------------------------------------------------
    Total cash and short-term
     investments at end
     of period                    $ 1,045.2  $   803.5  $ 1,045.2  $   803.5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    SEARS CANADA INC.
    NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    October 31, 2009

    Unaudited

    1.  BASIS OF PRESENTATION

    These unaudited interim consolidated financial statements (the "Financial
    Statements") of Sears Canada Inc. (the "Company") have been prepared in
    accordance with Canadian Generally Accepted Accounting Principles
    ("GAAP") but do not contain all disclosures required by Canadian GAAP for
    annual financial statements. Accordingly, these Financial Statements
    should be read in conjunction with the most recently prepared audited
    annual consolidated financial statements for the 52-week period ended
    January 31, 2009 ("2008 Annual Financial Statements"). These Financial
    Statements for the third quarter ended October 31, 2009 follow the same
    accounting policies and methods of application as those used in the
    preparation of the 2008 Annual Financial Statements, except as described
    in Note 2, Accounting Policies and Estimates.

    The Company's operations are seasonal in nature. Accordingly, merchandise
    and service revenues, as well as performance payments received from
    JPMorgan Chase & Co, N.A. (Toronto Branch) ("JPMorgan Chase") under the
    long-term credit card marketing and servicing alliance, will vary by
    quarter based upon consumer spending behaviour. Historically, the
    Company's revenues and earnings are higher in the fourth quarter than in
    any of the other three quarters due to the holiday season. The Company is
    able to adjust certain variable costs in response to seasonal revenue
    patterns; however, costs such as occupancy are fixed, causing the Company
    to report a disproportionate level of earnings in the fourth quarter.
    This business seasonality results in quarterly performance that is not
    necessarily indicative of the year's performance.

    2.  ACCOUNTING POLICIES AND ESTIMATES

    New Policies:

    These Financial Statements follow the same accounting policies and
    methods of application as the 2008 Annual Financial Statements, with the
    following exceptions:

        Goodwill and Intangible Assets

        In February 2008, the Canadian Institute of Chartered Accountants
        ("CICA") issued Handbook Section 3064, "Goodwill and Intangible
        Assets" ("Section 3064"), which replaced Section 3062, "Goodwill and
        Other Intangible Assets" and Section 3450, "Research and Development
        Costs". The new standard is effective for interim and annual
        financial statements issued for fiscal years beginning on or after
        October 1, 2008. The new standard provides further guidance on the
        recognition and treatment of internally developed intangibles and
        requires elimination of the practice of deferring costs that do not
        meet the definition and recognition criteria of assets. Section 3064
        reinforces a principle-based approach to the recognition of costs as
        assets in accordance with the definition of an asset and criteria for
        the recognition of an asset in CICA Handbook Section 1000, "Financial
        Statement Concepts".

        The Company has adopted the new accounting standard issued by the
        CICA Section 3064, effective fiscal 2009. The primary impact of
        implementing this standard was with respect to the accounting policy
        for Catalogue Production Costs ("CPC"). On adoption of the standard,
        CPC will be expensed once the catalogue has been mailed to the
        customer. Prior to the adoption of the standard CPC costs were
        capitalized and amortized over the life of the catalogue. As a
        result, certain figures from the prior year have been restated due to
        the retrospective application of a change in accounting policy, as
        required under CICA Handbook Section 1506, "Accounting Changes". As a
        result of this retrospective restatement the following table
        summarizes the increase (decrease) to the 2008 comparative figures
        contained herein as at and for the 13 and 39-week periods ended
        November 1, 2008 and the year ended January 31, 2009 from the figures
        previously reported:

                                           As at         As at         As at
                                         and for       and for       and for
                                     the 13-week   the 39-week   the 52-week
                                    Period Ended  Period Ended  Period Ended
        (increase (decrease)          November 1,   November 1,   January 31,
         in millions)                       2008          2008          2009
        ---------------------------------------------------------------------
        Prepaid expenses and
         other assets                 $    (39.8)   $    (39.8)   $    (34.6)
        Current portion of future
         income tax assets                   5.8           5.8           8.4
        Deferred charges                    (1.8)         (1.8)         (1.7)
        Future income tax assets               -             -           0.5
        Future income tax liabilities       (7.3)         (7.3)         (2.5)
        Net earnings                        (9.6)         (1.5)          2.1
        Opening retained earnings          (18.9)        (27.0)        (27.0)
        Closing retained earnings          (28.5)        (28.5)        (24.9)
        ---------------------------------------------------------------------

        The Company's intangible assets are comprised of software costs.
        These costs were previously recorded as a Capital Asset prior to the
        adoption of Section 3064. Intangible assets are amortized on a
        straight-line basis over their estimated useful lives, and are
        reported separately as "Intangible Assets" in the interim
        Consolidated Statements of Financial Position. Intangible Assets are
        tested for impairment annually or more frequently if changes in
        circumstances indicate a potential impairment. Impairment is
        recognized in net earnings and is measured as the amount by which the
        carrying amount exceeds its fair value.

        Goodwill represents the excess of the cost of acquisition over the
        fair value of the identifiable assets acquired, resulting from the
        acquisition of a duct cleaning business in 2008, Cantrex Group Inc.
        ("Cantrex") in 2005 and a home services operation in 2001. Goodwill
        is not amortized, and is reported separately as "Goodwill" in the
        interim Consolidated Statements of Financial Position. Goodwill is
        tested for impairment annually or more frequently if changes in
        circumstances indicate a potential impairment. Impairment is
        recognized in net earnings and is measured as the amount by which the
        carrying amount of the goodwill exceeds its fair value. No impairment
        has been recognized on the Company's goodwill since acquisition.

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

        The Company adopted Emerging Issues Committee "EIC"-173, "Credit Risk
        and the Fair Value of Financial Assets and Financial Liabilities".
        The EIC reached a consensus that the Company's credit risk and the
        credit risk of the counterparty should be taken into account in
        determining the fair value of financial assets and financial
        liabilities. The abstract is to be applied retrospectively without
        restatement of prior periods to interim and annual financial
        statements for periods ending on or after January 20, 2009. The
        implementation of the new abstract has had no material impact on the
        Company's results of operations, financial position or disclosures.

        Financial Instruments - Recognition and Measurement

        In April 2009, the CICA amended Handbook Section 3855, "Financial
        Instruments - Recognition and Measurement", ("Section 3855") to
        converge with International Accounting Standards 39, "Financial
        Instruments: Recognition and Measurement" ("IAS 39"). The amendment
        was made to clarify the calculation of interest on an interest-
        bearing asset after recognition of an impairment loss. The amendment
        is effective on issuance. The Company adopted the section with no
        impact on the Company's results of operations, financial position or
        disclosures.

        In June 2009, the CICA amended Handbook Section 3855 to converge with
        IAS 39 and International Financial Reporting Interpretations
        Committee 9, "Reassessment of Embedded Derivatives" ("IFRIC 9"). The
        amendment was made to provide guidance concerning the assessment of
        embedded derivatives upon reclassification of a financial asset out
        of the held-for-trading category. The amendment is effective for
        reclassifications made on or after July 1, 2009. The Company adopted
        the section with no impact on the Company's results of operations,
        financial position or disclosures.

    Future Accounting Policies:

        International Financial Reporting Standards ("IFRS")

        The Canadian Accounting Standards Board confirmed, in February 2008,
        that it will require all public companies to adopt IFRS for interim
        and annual financial statements relating to fiscal years beginning on
        or after January 1, 2011. In the year of adoption, companies will be
        required to provide comparative information as if IFRS had been used
        in the preceding fiscal year. The transition from Canadian GAAP to
        IFRS will be applicable to the Company's first quarter of operations
        for fiscal 2011, at which time the Company will prepare both its
        fiscal 2011 and fiscal 2010 comparative financial information using
        IFRS. The Company expects the transition to IFRS to impact financial
        reporting, business processes, internal controls and information
        systems. The Company is currently assessing the impact of the
        transition to IFRS on these areas and will continue to invest in
        training and resources throughout the transition period to facilitate
        a timely conversion.

        Financial Instruments - Recognition and Measurement

        In April 2009, the CICA amended Handbook Section 3855 to converge
        with IAS 39 to provide guidance on when a put, call, surrender or
        prepayment option embedded in a host debt instrument is closely
        related to the host instrument. The amendment is effective for
        interim and annual financial statements relating to fiscal years
        beginning on or after January 1, 2011 with earlier adoption
        permitted. The Company is currently evaluating the future impact of
        this amendment on its consolidated financial statements.

        In July 2009, the CICA amended Handbook Section 3855 to converge with
        IFRS for impairment of debt instruments by changing the categories
        into which debt instruments are required and permitted to be
        classified. The amendments are effective for annual financial
        statements relating to fiscal years beginning on or after November 1,
        2008. An entity is permitted, but not required, to apply these
        amendments to interim financial statements relating to periods within
        the fiscal year of adoption only if those interim financial
        statements are issued on or after August 20, 2009. The Company is
        currently evaluating the future impact of this amendment on its 2009
        consolidated financial statements.

        Financial Instruments - Disclosures

        In June 2009, the CICA amended Handbook Section 3862, "Financial
        Instruments - Disclosures" ("Section 3862"), to adopt the amendments
        recently proposed by the International Accounting Standards Board
        ("IASB") to IFRS 7, "Financial Instruments: Disclosures". The
        amendments were made to enhance disclosures about fair value
        measurements, including the relative reliability of the inputs used
        in those measurements, and about the liquidity risk of financial
        instruments. The amendments are effective for annual financial
        statements relating to fiscal years ending after September 30, 2009
        for publicly accountable enterprises, private enterprises, co-
        operative business enterprises, rate-regulated enterprises and not-
        for-profit organizations that choose to apply Section 3862.
        Comparative information for the disclosures required by the
        amendments is not required in the first year of application. The
        Company is currently evaluating the future impact of this amendment
        on its 2009 consolidated financial statements.

    Estimates:

        Loyalty Program Reserves

        During the second quarter ended August 1, 2009, the Company revised
        certain assumptions used to calculate the loyalty program reserves
        based on new information regarding redemption rates and the
        associated cost of the program. The net impact was an increase to
        pre-tax earning of $7.0 million due to a decrease in the loyalty
        reserve.

        Vendor Rebate Estimates

        During the third quarter ended October 31, 2009, the Company revised
        certain assumptions used to estimate the value of vendor rebates
        remaining in inventory. The net impact was a reduction to inventory
        and pre-tax earnings of $7.1 million.

    3.  INVENTORIES

    The amount of inventories recognized as an expense during the 13 and 39-
    week periods ended October 31, 2009 was $667.5 million (2008:
    $718.5 million) and $1,869.1 million (2008: $2,075.0 million),
    respectively, including $32.9 million (2008: $22.9 million) and
    $75.9 million (2008: $65.3 million), related to write-downs. This expense
    is included in "Cost of merchandise sold, operating, administrative and
    selling expenses" in the Consolidated Statements of Earnings and
    Comprehensive Income. A negligible amount of write-downs were reversed
    during each of the 13 and 39-week periods ended October 31, 2009.

    With the exception of $30.7 million (2008: $32.1 million) of inventories
    from the Company's parts and service and home improvement businesses, the
    Company's entire inventories balance consists of merchandise finished
    goods. (Comparative figures for 2008 represent balances as at January 31,
    2009.)

    4.  VENDOR REBATES

    The Company has recognized $0.4 million and $1.4 million, as a reduction
    in the cost of purchases for the 13 and 39-week periods ended October 31,
    2009 related to binding agreements for which full entitlement has not yet
    been met but is probable.

    5.  CASH AND SHORT-TERM INVESTMENTS

    The components of cash and short-term investments as at October 31, 2009,
    November 1, 2008 and January 31, 2009 were as follows:

                                           As at         As at         As at
                                      October 31,   November 1,   January 31,
    (in millions)                           2009          2008          2009
    -------------------------------------------------------------------------
    Cash                              $     89.5    $     90.3    $     66.4
    Short-term investments
      Government treasury bills            906.7         376.2         732.4
      Corporate commercial paper               -         252.3             -
      Bank term deposits                    42.0             -          15.0
      Other                                  7.0          84.7           6.0
    -------------------------------------------------------------------------
    Total                             $  1,045.2    $    803.5    $    819.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  LONG-TERM OBLIGATIONS

    The Company has a corporate credit rating of BB and BB- from Dominion
    Bond Ratings Service and Standard and Poor's, respectively, and a
    corporate family rating of Ba1 from Moody's Investors Service, Inc.

    During the second quarter $200.0 million of medium-term notes due May 10,
    2010 were reclassified from long-term obligations to current liabilities.
    During the third quarter $100.0 million of medium-term notes due
    September 20, 2010 were reclassified from long-term obligations to
    current liabilities.

    The Company is not subject to any financial covenants and the Company's
    debt consists of unsecured medium-term notes with fixed interest rates
    and payment terms. The Company also includes its proportionate share of
    the long-term debt of its joint venture interests. As at October 31, 2009
    the Company had outstanding letters of credit of U.S. $19.0 million used
    to support the Company's offshore merchandise purchasing program with
    restricted cash and investments pledged as collateral.

    Interest expense on long-term debt including the current portion and the
    Company's proportionate share of interest on long-term debt of joint
    ventures for the 13 and 39-week periods ended October 31, 2009 amounted
    to $6.6 million (2008: $7.2 million) and $19.8 million (2008:
    $21.7 million), respectively. Interest expense on short-term debt for the
    13 and 39-week periods ended October 31, 2009 totaled Nil (2008:
    $0.2 million) and less than $0.1 million (2008: $0.6 million). Interest
    revenue primarily related to cash and short-term investments for the 13
    and 39-week periods ended October 31, 2009 totaled $0.5 million (2008:
    $4.5 million) and $1.8 million (2008: $16.8 million), respectively.

    The Company's cash payments for interest on long-term debt for the 13 and
    39-week periods ended October 31, 2009 totaled $4.6 million (2008:
    $5.2 million) and $17.7 million (2008: $19.4 million), respectively. Cash
    payments for interest on short-term debt for the 13 and 39-week periods
    ended October 31, 2009 totaled Nil (2008: $0.2 million) and less than
    $0.1 million (2008: $0.7 million) respectively. The Company received cash
    related to interest revenue for the 13 and 39-week periods totaling
    $0.4 million (2008: $5.5 million) and $2.2 million (2008: $18.9 million),
    respectively.

    7.  UNUSUAL ITEMS

    There were no unusual items for the 13 and 39-week periods ended
    October 31, 2009.

    During the first quarter ended May 3, 2008, the Company completed the
    sale of property in Calgary, Alberta where it operated a full-line store.
    The Company received proceeds of approximately $40.0 million recording a
    pre-tax gain of $37.2 million, net of transaction costs.

    During the third quarter ended November 1, 2008, the Company reversed
    $1.6 million of severance expense which had been accrued in a prior year.
    As at November 1, 2008, the restructuring accrual has a balance of Nil.

    8.  NET EARNINGS PER SHARE

    A reconciliation of the number of shares used in the net earnings per
    share calculation is as follows:

                           13-week       13-week       39-week       39-week
                      Period Ended  Period Ended  Period Ended  Period Ended
                        October 31,   November 1,   October 31,   November 1,
    (Number of shares)        2009          2008          2009          2008
    -------------------------------------------------------------------------
    Average number of
     shares per basic
     net earnings
     per share
     calculation       107,620,995   107,620,995   107,620,995   107,620,995
    Effect of dilutive
     instruments
     outstanding             5,297         2,595         4,132         7,628
    -------------------------------------------------------------------------
    Average number
     of shares per
     diluted net
     earnings
     per share
     calculation       107,626,292   107,623,590   107,625,127   107,628,623
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the 13 and 39-week periods ended October 31, 2009, 117,021 options
    (2008: 163,251 options) were excluded from the calculation of diluted net
    earnings per share as they were anti-dilutive.

    9.  SEGMENTED INFORMATION

    Segmented Statements of Earnings

                                         13-Week                     39-Week
                                    Period Ended                Period Ended
                           13-Week    November 1,      39-Week    November 1,
                      Period Ended          2008  Period Ended          2008
                        October 31,    (Restated    October 31,    (Restated
    (in millions)             2009      - Note 2)         2009      - Note 2)
    -------------------------------------------------------------------------
    Total revenues
      Merchandising     $  1,296.8    $  1,431.0    $  3,639.0    $  4,081.7
      Real Estate
       Joint Ventures         12.2          11.2          36.5          35.2
    -------------------------------------------------------------------------
    Total revenues      $  1,309.0    $  1,442.2    $  3,675.5    $  4,116.9
    -------------------------------------------------------------------------
    Segmented
     operating profit
      Merchandising     $     70.6    $     79.0    $    163.2    $    223.5
      Real Estate
       Joint Ventures          4.9           5.0          15.1          15.9
    Interest expense, net      6.1           2.9          18.0           5.5
    Unusual items - (gain)       -          (1.6)            -         (38.8)
    Income taxes              22.3          23.4          53.8          81.1
    -------------------------------------------------------------------------
    Net earnings        $     47.1    $     59.3    $    106.5    $    191.6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Segmented Statements of Capital Employed(1)

                                                         As at         As at
                                                    November 1,   January 31,
                                           As at          2008          2009
                                      October 31,    (Restated     (Restated
    (in millions)                           2009      - Note 2)     - Note 2)
    -------------------------------------------------------------------------
    Merchandising                     $  1,794.8    $  1,645.4    $  1,743.5
    Real Estate Joint Ventures              98.4         104.7         104.3
    -------------------------------------------------------------------------
    Total                             $  1,893.2    $  1,750.1    $  1,847.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Capital Employed represents the total of long-term obligations,
        including principal payments on long-term obligations due within one
        year, and shareholders' equity, which includes capital stock,
        retained earnings and accumulated other comprehensive income
        ("AOCI").


    Segmented Statements of Total Assets

                                                         As at         As at
                                                    November 1,   January 31,
                                           As at          2008          2009
                                      October 31,    (Restated     (Restated
    (in millions)                           2009      - Note 2)     - Note 2)
    -------------------------------------------------------------------------
    Merchandising                     $  3,255.6    $  3,254.7    $  3,120.9
    Real Estate Joint Ventures             109.9         110.3         116.4
    -------------------------------------------------------------------------
    Total                             $  3,365.5    $  3,365.0    $  3,237.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    10. INCOME TAXES

    The Company's total net cash payments of income taxes in the 13 and
    39-week periods ended October 31, 2009 were $5.5 million (2008:
    $52.6 million) and $75.2 million (2008: $186.6 million), respectively.

    In the ordinary course of business, the Company is subject to ongoing
    audits by tax authorities. While the Company believes that its tax filing
    positions are appropriate and supportable, periodically, certain matters
    are challenged by tax authorities. As the Company routinely evaluates and
    provides for potentially unfavourable outcomes with respect to any tax
    audits, the Company believes that the final disposition of tax audits
    will not have a material adverse effect on its liquidity, consolidated
    financial position or results of operations. If the result of a tax audit
    materially differs from the existing provisions, the Company's effective
    tax rate and its net earnings may be affected positively or negatively in
    the period in which the tax audits are completed. Included in other long-
    term assets are receivables of $20.2 million related to payments made by
    the Company for tax assessments that are being disputed.

    11. CAPITAL STOCK

    As at October 31, 2009, 107,620,995 common shares were issued and
    outstanding. Sears Holdings Corporation, the controlling shareholder of
    the Company, is the beneficial holder of 78,680,790, or 73.1%, of the
    common shares of the Company as at October 31, 2009. The number of
    outstanding common shares did not change from the end of fiscal 2008.

    12. STOCK-BASED COMPENSATION

    The Employees Stock Plan expired on April 19, 2008 however; the
    expiration of the plan does not affect the rights of current option
    holders. Options were last granted in 2004 which are exercisable within
    10 years from the grant date. All options currently outstanding will
    expire before or in February 2014. As at October 31, 2009 there were
    154,241 stock options outstanding under the Employees Stock Plan.

    At the end of each fiscal period, the Company records a liability for
    previously issued tandem awards equal to the amount by which the market
    price of its shares at the end of the period exceeds the exercise price
    of the vested tandem awards. Stock compensation expense is recorded to
    adjust the liability for changes in the market price of the Company's
    shares and for awards exercised in the period. Total stock-based
    compensation expense related to tandem awards issued from the Employees
    Stock Plan during the 13 and 39-week periods ended October 31, 2009 was
    expense of less than $0.1 million (2008: credit of $0.1 million) and
    expense of $0.2 million (2008: credit of $0.2 million), respectively.

    13. GUARANTEES

    The Company has provided the following significant guarantees to third
    parties:

    Sub-Lease Agreements

    The Company has a number of sub-lease agreements with third parties. The
    Company retains ultimate responsibility to the landlord for payment of
    amounts under the lease agreements should the sub-lessee fail to pay. The
    total future lease payments under such agreements are $20.2 million.

    Royalty License Agreements

    The Company pays royalties under various merchandise license agreements,
    which are generally based on sales of products under these agreements.
    The Company currently has licence agreements for which it pays royalties
    regardless of sales, as guarantee royalties under these license
    agreements. Total future minimum royalty payments under such agreements
    are $5.2 million.

    Other Indemnification Agreements

    In the ordinary course of business the Company has provided
    indemnification commitments to counterparties in transactions such as
    leasing transactions, service arrangements, investment banking
    agreements, director and officer indemnification agreements and
    indemnification of trustees under indentures for outstanding public debt.
    The Company has also provided certain indemnification agreements in
    connection with the sale of the Credit and Financial Services operations
    in November 2005. The foregoing indemnification agreements require the
    Company to compensate the counterparties for costs incurred as a result
    of changes in laws and regulations or as a result of litigation claims or
    statutory claims or statutory sanctions that may be suffered by a
    counterparty as a consequence of the transaction. The terms of these
    indemnification agreements will vary based on the contract and typically
    do not provide for any limit on the maximum potential liability.
    Historically, the Company has not made any significant payments under
    such indemnifications and no amount has been accrued in the Financial
    Statements with respect to these indemnification commitments.

    14. ASSOCIATE FUTURE BENEFITS

    The net expense for the defined benefit, defined contribution and other
    benefit plans for the 13-week period ended October 31, 2009 was
    $0.3 million (2008: recovery of $1.3 million), $3.2 million (2008:
    $6.2 million) and $2.5 million (2008: $2.6 million), respectively. The
    net expense for the defined benefit, defined contribution and other
    benefit plans for the 39-week period ended October 31, 2009 was
    $1.1 million (2008: $3.4 million), $11.9 million (2008: $8.0 million) and
    $7.4 million (2008: $7.8 million), respectively. The Company introduced
    the defined contribution plan on July 1, 2008.

    15. COMMITMENTS AND CONTINGENCIES

    In addition to the class action suit described in the annual financial
    statements, the Company is involved in various legal proceedings
    incidental to the normal course of business. The Company is of the view
    that although the outcome of such legal proceedings cannot be predicted
    with certainty, the final disposition is not expected to have a material
    adverse effect on the Company's consolidated financial position or
    results of operations.

    Restricted Cash and Investments

    Cash and investments are considered to be restricted when it is subject
    to contingent rights of a third party customer, vendor, or government
    agency. As at October 31, 2009, the Company recorded $68.6 million (2008:
    $144.8 million) of restricted cash and investments recorded as current
    assets and Nil (2008: $6.9 million) of restricted cash deposits recorded
    in other long-term assets. These balances represent cash and investments
    pledged as collateral for letter of credit obligations issued under the
    Company's offshore merchandise purchasing program of $27.1 million (2008:
    $110.4 million), current and long-term cash deposits pledged as
    collateral with counterparties related to outstanding derivative
    contracts of $36.8 million (2008: $28.3 million) and Nil (2008:
    $6.9 million), respectively, and funds held in trust in accordance with
    regulatory requirements governing advance ticket sales related to Sears
    Travel of $4.7 million (2008: $6.1 million). (Comparative figures for
    2008 represent balances as at January 31, 2009.)

    16. CAPITAL DISCLOSURES

    The Company's objectives when managing capital are:

    -   Maintain financial flexibility thus allowing the Company to preserve
        its ability to meet financial objectives and continue as a going
        concern;
    -   Provide an appropriate return to shareholders; and
    -   Maintain a capital structure that allows the Company to obtain
        financing should the need arise.

    The Company manages and makes adjustments to its capital structure, when
    necessary, in light of changes in economic conditions, the objectives of
    its shareholders, the cash requirements of the business and the condition
    of capital markets. In order to maintain or adjust the capital structure
    the Company may pay a dividend or return capital to shareholders,
    increase/decrease debt or sell assets.

    The Company defines capital as follows:

    -   Long-term obligations, including the current portion ("Long-term
        obligations"); and
    -   Shareholders' equity.

    The following table presents summary quantitative data with respect to
    the Company's capital:

                                                         As at         As at
                                                    November 1,   January 31,
                                           As at          2008          2009
                                      October 31,    (Restated     (Restated
    (in millions)                           2009      - Note 2)     - Note 2)
    -------------------------------------------------------------------------
    Long-term obligations             $    360.3    $    368.4    $    364.6
    Shareholders' equity                 1,532.9       1,381.7       1,483.2
    -------------------------------------------------------------------------
                                      $  1,893.2    $  1,750.1    $  1,847.8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at October 31, 2009, the Company is not subject to any financial
    covenants or ratios and the outstanding notes are unsecured. The Company
    has a U.S. $120.0 million letter of credit facility with restricted cash
    and investments pledged as collateral against outstanding amounts.

    17. FINANCIAL INSTRUMENTS

    In the ordinary course of business, the Company enters into financial
    agreements with banks and other financial institutions to reduce
    underlying risks associated with interest rates and foreign currency. The
    Company does not hold or issue derivative financial instruments for
    trading or speculative purposes.

    Financial Instrument Risk Management

    The Company's adoption of Section 3862, "Financial Instruments-
    Disclosure" and Section 3863, "Financial Instruments-Presentation" on
    February 3, 2008, has resulted in additional disclosure relating to the
    Company's exposure to risks arising from financial instruments. The
    Company is exposed to credit, liquidity and market risk as a result of
    holding financial instruments. Market risk consists of foreign exchange,
    interest rate and commodity price risk.

    Credit Risk

    Credit risk refers to the possibility that the Company can suffer
    financial losses due to the failure of the Company's counterparties to
    meet their payment obligations. Exposure to credit risk exists for
    derivative instruments, cash and short-term investments, restricted cash
    and investments and accounts receivable.

    As at October 31, 2009, the Company's only exposure to counterparty risk
    as it relates to derivative instruments is represented by the fair value
    of the derivative contracts of $13.6 million. These contracts are placed
    with financial institutions with secure credit ratings.

    Cash and short-term investments, restricted cash and investments and
    other long-term assets of $1,115.3 million also expose the Company to
    credit risk should the borrower default on maturity of the investment.
    The Company manages this exposure through policies that require borrowers
    to have a minimum credit rating of A, and limiting investments with
    individual borrowers at maximum levels based on credit rating.

    The Company is exposed to minimal credit risk from customers as a result
    of ongoing credit evaluations and review of accounts receivable
    collectability. As at October 31, 2009, approximately 54% of the
    Company's accounts receivable are due from two customers who are both
    current on their account.

    Liquidity Risk

    Liquidity risk is the risk that the Company may not have cash available
    to satisfy financial liabilities as they come due. The Company actively
    maintains access to adequate funding sources to ensure it has sufficient
    available funds to meet current and foreseeable financial requirements at
    a reasonable cost.

    The following table summarizes the carrying amount and the contractual
    maturities of both the interest and principal portion of significant
    financial liabilities as at October 31, 2009:

                                     Contractual Cash Flow Maturities
                  -----------------------------------------------------------
                                                  1 year   3 years
                  Carrying              Within        to        to    Beyond
    (in millions)   Amount     Total    1 year   3 years   5 years   5 years
    -------------------------------------------------------------------------
    Accounts
     payable      $  717.8  $  717.8  $  717.8  $      -  $      -  $      -
    Accrued
     liabilities     377.6     377.6     377.6         -         -         -
    Long-term
     obligations
     and payments
     due within
     1 year          360.3     395.7     351.2      20.9      22.4       1.2
    Operating
     lease
     obligations(2)      -     670.1     105.5     178.1     130.6     255.9
    -------------------------------------------------------------------------
                  $1,455.7  $2,161.2  $1,552.1  $  199.0  $  153.0  $  257.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (2) Operating lease obligations are not reported on the consolidated
        statement of financial position.


    Of the $670.1 million of operating lease commitments disclosed in the
    table above, $5.1 million relate to the Company's proportionate share of
    the commitments of its Real Estate Joint Ventures.

    Management believes that cash on hand, future cash flows generated from
    operations and availability of current and future funding will be
    adequate to support these financial liabilities.

    Market Risk

    Market risk exists as a result of the potential for losses caused by
    changes in market factors such as interest rates, foreign currency
    exchange rates and commodity prices.

    Foreign Exchange Risk

    The Company enters into foreign exchange contracts to reduce the foreign
    exchange risk with respect to U.S. dollar denominated assets,
    liabilities, goods or services.

    -   As at October 31, 2009, there were derivative contracts outstanding
        with a notional value of U.S. $272.2 million and a combined carrying
        value of $12.8 million, included in prepaid expenses and other
        assets. These derivative contracts have settlement dates extending to
        October 2010. Option contracts with a notional value of U.S
        $269.6 million and a carrying value of $12.8 million have been
        designated as a cash flow hedge for hedge accounting treatment under
        CICA Handbook Section 3865, "Hedges" ("Section 3865"). These
        contracts are intended to reduce the foreign exchange risk with
        respect to anticipated purchases of U.S. dollar denominated goods and
        services, including goods purchased for resale ("hedged item"). As at
        October 31, 2009 all hedges were considered effective with no
        ineffectiveness recognized in income.
    -   As at October 31, 2009, there were swap contracts outstanding with a
        notional value of U.S. $25.0 million and a carrying value of
        $1.0 million, included in accrued liabilities. These contracts are
        intended to reduce the foreign exchange risk on U.S. dollar
        denominated short-term investments pledged as collateral for letter
        of credit obligations issued under the Company's offshore merchandise
        purchasing program.

    While the notional principal amounts of these outstanding financial
    instruments are not recorded on the consolidated statements of financial
    position, the fair value of the contracts is included on the consolidated
    statements of financial position in one of the following categories,
    depending on the derivative's maturity and value: prepaid expenses and
    other assets, other long-term assets, accrued liabilities or other long-
    term liabilities. Changes in fair value of those contracts designated as
    hedges are included in other comprehensive income ("OCI") for cash flow
    hedges to the extent the hedges continue to be effective. Amounts
    previously included in OCI are reclassified to net earnings in the same
    period in which the hedged item impacts net earnings.

    For the 13 and 39-week periods ended October 31, 2009, the Company
    recorded a gain of $1.9 million and $9.2 million, respectively relating
    to the translation or settlement of U.S. dollar denominated monetary
    items.

    Based on historic movements, volatilities in foreign exchange and
    management's current assessment of the financial markets, the Company
    believes a variation of +10% (appreciation of the Canadian dollar) and -
    10% (depreciation of the Canadian dollar) in foreign exchange rate
    against the U.S. dollar is reasonably possible over a 12 month period.
    The period end rate was 0.9243 U.S. dollar to Canadian dollar. Cash and
    short-term investments (other than those discussed above), derivative
    contracts that have not been designated as cash flow hedges, accounts
    receivable and accounts payable include U.S. dollar denominated balances
    which net to an insignificant balance, therefore, any changes in the
    U.S./Canadian dollar exchange rates would have an immaterial impact on
    net earnings.

    Interest Rate Risk

    From time to time the Company enters into interest rate swap contracts
    with Schedule I banks, to manage exposure to interest rate risks. As at
    October 31, 2009, the Company had no interest rate swap contracts in
    place.

    Interest rate risk reflects the sensitivity of the Company's financial
    condition to movements in interest rates. Financial assets and
    liabilities which do not bear interest or bear interest at fixed rates
    are classified as non-interest rate sensitive. Based on historic
    movements, volatilities in interest rates and management's current
    assessment of the financial markets, the Company believes a variation of
    +1%/-1% in the interest rates applicable to the Company's cash and short-
    term investments and restricted cash and investments are reasonably
    possible over a 12 month period.

    Cash and short-term investments and restricted cash and investments are
    subject to interest rate risk. The total subject to interest rate risk as
    at October 31, 2009 was $1,110.6 million. A movement in interest rate of
    +/-1% would cause a variance in net earnings in the amount of
    $7.6 million.

    Fuel Price Risk

    The Company entered into a fuel derivative contract to manage the
    exposure to diesel fuel prices to help mitigate volatility in cash flow
    for the transportation service business. As at October 31, 2009 there was
    a fixed to floating rate swap contract outstanding for a notional volume
    of 3.4 million litres and a carrying value of $0.5 million. This
    derivative contract has settlement dates extending to February 2010 and a
    portion has been designated as a cash flow hedge for hedge accounting
    treatment under Section 3865. Changes in the fair value of the effective
    portion of the designated component of the derivative contract that
    qualifies as a cash flow hedge is recognized in accumulated other
    comprehensive income. Upon maturity of the designated component of the
    swap contract, the effective gains and losses are recorded in net
    earnings. Any gain or loss in fair value relating to the ineffective
    portion is recognized immediately in net earnings.

    Classification and Fair Value of Financial Instruments

    The estimated fair values of financial instruments as at October 31,
    2009, November 1, 2008 and January 31, 2009, are based on relevant market
    prices and information available at those dates. The following tables
    summarize the classification and fair value ("FV") of certain financial
    instruments as at October 31, 2009, November 1, 2008 and January 31, 2009
    and the pre-tax change in fair value of those instruments during the 13
    and 39-week periods ended October 31, 2009 and the 13 and 39-week periods
    ended November 1, 2008 with the offset included in either OCI or net
    earnings. The Company determines the classification of a financial
    instrument when it is originally recorded, based on the underlying
    purpose of the instrument. As a significant number of the Company's
    assets and liabilities, including inventories and capital assets, do not
    meet the definition of financial instruments, values in the tables below
    do not reflect the fair value of the Company as a whole.


    (in millions)
    -------------------------------------------------------------------------
                                                   As at     As at     As at
                      Balance Sheet           October 31, August 1,  January
    Classification    Category                      2009      2009  31, 2009
    -------------------------------------------------------------------------

    Available
     for sale

    Short-term        Cash and short-term
     investments       investments(3)            $ 955.7   $ 707.7   $ 753.4
    Long-term         Other long-term
     investments       assets                        1.5       1.5       1.6
    -------------------------------------------------------------------------

    Held for trading

    Cash              Cash and short-term
                       investments                  89.5      74.3      66.4
    Cash and          Restricted cash and
     investments       investments(3)               68.6     113.1     144.8
    U.S. $            Prepaid expenses &
     derivative        other assets                 12.8      16.3      90.4
     contracts
    U.S. $            Prepaid expenses &
     derivative        other assets
     contracts         (Accrued liabilities)        (1.0)      4.2       0.7
    Cash              Other long-term assets           -       0.7       6.9
    Fixed price
     energy           Accrued liabilities              -         -         -
     contracts
    Commodity         Accrued liabilities            0.8       1.2      (0.1)
     derivative
     contracts
    -------------------------------------------------------------------------


                                          13-week Period      39-week Period
                                               Ended               Ended
                                             October 31,         October 31,
                                                2009                2009
                                       --------------------------------------
    (in millions)                         Pre-tax change in FV included in
    -------------------------------------------------------------------------

                      Balance Sheet                  Net                 Net
    Classification    Category             OCI  earnings       OCI  earnings
    -------------------------------------------------------------------------

    Available
     for sale

    Short-term        Cash and
     investments       short-term
                       investments(3)  $  (0.1)  $     -   $     -   $     -
    Long-term         Other long-term
     investments       assets                -         -         -       0.1
    -------------------------------------------------------------------------

    Held for trading

    Cash              Cash and short-term
                       investments           -         -         -         -
    Cash and          Restricted cash and
     investments       investments(3)        -         -         -         -
    U.S. $            Prepaid expenses &
     derivative        other assets        6.5      (3.0)     83.3      (5.7)
     contracts
    U.S. $            Prepaid expenses
     derivative        & other assets
     contracts         (Accrued
                       liabilities)          -       5.2         -       1.7
    Cash              Other long-term
                       assets                -         -         -         -
    Fixed price       Accrued
     energy            liabilities           -         -         -         -
     contracts
    Commodity         Accrued
     derivative        liabilities           -       0.4      (0.2)     (0.7)
     contracts
    -------------------------------------------------------------------------
                                       $   6.4   $   2.6   $  83.1   $  (4.6)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    (in millions)
    -------------------------------------------------------------------------
                                                   As at     As at     As at
                      Balance Sheet           November 1, August 2, February
    Classification    Category                      2008      2008   2, 2008
    -------------------------------------------------------------------------

    Available
     for sale

    Short-term        Cash and short-term
     investments       investments(3)            $ 713.2   $ 725.3   $ 806.9
    Long-term         Other long-term
     investments       assets                        2.2       2.2       2.6
    -------------------------------------------------------------------------

    Held for trading

    Cash              Cash and short-term
                       investments                  90.3      57.7      64.7
    Cash and          Restricted cash and
     investments       investments(3)                5.9       2.6       5.2
    U.S. $            Prepaid expenses &
     derivative        other assets
     contracts         (Accrued liabilities)        94.5       7.9      (0.2)
    U.S. $
     derivative       Accrued liabilities              -         -         -
     contracts
    Cash              Other long-term assets           -         -         -
    Fixed price
     energy           Accrued liabilities              -         -      (0.1)
     contracts
    Commodity
     derivative       Accrued liabilities              -         -         -
     contracts
    -------------------------------------------------------------------------


                                          13-week Period      39-week Period
                                               Ended               Ended
                                             November 1,         November 1,
                                                2008                2008
                                       --------------------------------------
    (in millions)                         Pre-tax change in FV included in
    -------------------------------------------------------------------------

                      Balance Sheet                  Net                 Net
    Classification    Category             OCI  earnings       OCI  earnings
    -------------------------------------------------------------------------

    Available
     for sale

    Short-term        Cash and
     investments       short-term
                       investments(3)  $   0.1   $     -   $   0.2   $     -
    Long-term         Other long-term
     investments       assets                -         -         -       0.4
    -------------------------------------------------------------------------

    Held for trading

    Cash              Cash and short-term
                       investments           -         -         -         -
    Cash and          Restricted cash and
     investments       investments(3)        -         -         -         -
    U.S. $            Prepaid expenses
     derivative        & other assets
     contracts         (Accrued
                       liabilities)      (89.9)      3.3     (97.4)      2.7
    U.S. $            Accrued
     derivative        liabilities           -         -         -         -
    Cash              Other long-term
                       assets                -         -         -         -
    Fixed price       Accrued
     energy            liabilities           -         -         -      (0.1)
     contracts
    Commodity         Accrued
     derivative        liabilities           -         -         -         -
     contracts
    -------------------------------------------------------------------------
                                       $ (89.8)  $   3.3   $ (97.2)  $   3.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (3) Interest revenue related to short-term investments is disclosed in
        Note 6 Long-term Obligations.


    All other assets that are financial instruments, excluding long-term
    notes discussed below, have been classified as "loans and receivables"
    and all other financial instrument liabilities have been classified as
    "other liabilities" and are measured at amortized cost on the
    consolidated statements of financial position. The carrying value of
    these financial instruments, with the exception of long-term obligations,
    approximates fair value. Long-term obligations with a carrying value of
    $357.9 million, including the portion due within one year, but excluding
    all capital lease obligations, have a fair value as at October 31, 2009
    of $361.5 million. The fair value of the Company's proportionate share of
    long-term debt of joint ventures, with a carrying value of $57.9 million
    as at October 31, 2009, was calculated using a valuation technique based
    on assumptions that are not supported by observable market prices or
    rates. The term and interest rate applicable to each joint venture's debt
    together with management's estimate of a risk-adjusted discount rate were
    used to determine the fair value of $57.8 million. The fair value of the
    Company's medium term notes, with a carrying value of $300.0 million as
    at October 31, 2009, is $303.7 million and was determined with reference
    to observable market prices and rates.

    Included in other long-term assets on the consolidated statement of
    financial position is an investment in long-term notes, with an original
    cost of $3.0 million and a fair value as at October 31, 2009 of
    $1.5 million, which has been classified as available for sale. The fair
    value as at October 31, 2009, has been calculated using a valuation
    technique based on assumptions that are not supported by observable
    market prices or rates. Information disclosed in the Master Asset Vehicle
    2 (MAV2) trust indenture together with management's estimates based
    thereon regarding interest rate, risk-adjusted discount rate and expected
    term of the various classes of restructured notes, resulted in a Nil and
    $0.1 million reduction for the 13 and 39-week periods ended October 31,
    2009 respectively, in the investment's fair value. The Company does not
    intend to dispose of the investment within a year.
    

SOURCE Sears Canada Inc.

For further information: For further information: Contact for Media: Vincent Power, Sears Canada, Corporate Communications, (416) 941-4422, vpower@sears.ca

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Sears Canada Inc.

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