Press Releases

Shoppers Drug Mart Corporation announces second quarter results - Continued strong growth in sales and net earnings

Jul 22, 2009

TORONTO, July 22 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the second quarter ended June 20, 2009.

Second Quarter Results (12 Weeks)

Second quarter sales increased 8.5% to $2.289 billion, with the Company
continuing to experience strong sales growth in all regions of the country. On
a same-store basis and excluding tobacco products, sales increased 5.7% during
the quarter.
Prescription sales increased 9.8% in the second quarter to $1.109
billion, accounting for 48.5% of the Company's sales mix compared to 47.9% in
the same period last year. On a same-store basis, prescription sales increased
5.6%, driven by strong growth in the number of prescriptions filled, while
increased generic utilization continued to have a deflationary impact on sales
growth in the category. In the second quarter of 2009, generic molecules
represented 52.7% of prescriptions dispensed compared to 50.9% of
prescriptions dispensed in the second quarter of 2008.
Front store sales increased 7.4% in the second quarter to $1.180 billion,
with the Company continuing to experience sales gains in all categories except
tobacco. On a same-store basis and excluding tobacco products, front store
sales increased 5.8%. The Company estimates that the shift in the Easter
selling season to the second quarter of this year from the first quarter last
year had a positive impact on comparable front store sales growth of
approximately 150 basis points.
Second quarter net earnings increased 7.5% to $136 million or 63 cents
per share (diluted) from $127 million or 58 cents per share (diluted) a year
ago. Net earnings growth was driven by strong top line performance, improved
purchasing synergies and a continued emphasis on cost reduction, productivity
and efficiency, the benefits of which were partially offset by increased
amortization and higher expenses at store-level associated with the continued
expansion of the store network, along with stepped-up investments in marketing
and promotional activities.
Commenting on the results, Jurgen Schreiber, President and CEO stated,
"We are pleased with our second quarter and first half results. In what
remains a difficult and challenging economic environment, these results are a
testament to the resiliency of our format, the strength of our brand and the
dedication and commitment of our Associate-owners and their teams."

First Half Results (24 weeks)

First half sales increased 8.5% to $4.484 billion, with prescription
sales up 10.7% and front store sales up 6.4%. On a same-store basis and
excluding tobacco products, first half sales increased 4.8%, with prescription
sales up 5.7% and front store sales up 4.0%. During the first half of 2009,
prescription sales accounted for 49.0% of the Company's sales mix compared to
48.0% in the same period last year.
First half net earnings increased 6.9% to $243 million or $1.12 per share
(diluted) from $227 million or $1.05 per share (diluted) a year ago.

Store Network Development

During the second quarter, 27 drug stores were opened or acquired, eight
of which were relocations, and two smaller drug stores were closed. At
quarter-end, there were 1,259 stores in the system, comprised of 1,191 drug
stores (1,159 Shoppers Drug Mart/Pharmaprix stores and 32 Shoppers Simply
Pharmacy/Pharmaprix Simplement Santé stores), 66 Shoppers Home Health Care
stores and two Murale stores. Drug store selling space was approximately 11.3
million square feet at the end of the second quarter, an increase of 11.9%
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, 2009 to
shareholders of record as of the close of business on September 30, 2009.

Board of Directors

The Company also announced that it has increased the size of its Board of
Directors from ten to eleven members and that Sarah Raiss has been appointed
to the Board effective July 21, 2009 and will serve as a member of the
Compensation Committee. Ms. Raiss is currently Executive Vice President,
Corporate Services at TransCanada Corporation, where she has been employed
since 1999, having progressed through many senior management positions. Ms.
Raiss attended the University of Michigan where she graduated with a B. Sc.
(1979) and an M.B.A (1987).
In announcing this appointment David Williams, Chair of the Board of
Directors said, "We are very pleased to welcome Sarah to our Board. Her
extensive experience and public company background make her an ideal candidate
to serve on our Board and Compensation Committee. We look forward to her many
contributions as we continue to grow our business."

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 August 5, 2009. The call playback can be accessed after 5:00
p.m. (Eastern Daylight Time) on Wednesday, July 22, 2009 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 8318238.

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 1,159 Shoppers Drug Mart and Pharmaprix stores
operating in prime locations in each province and two territories, the Company
is one of the most convenient retailers in Canada. The Company also licenses
or owns more than 32 medical clinic pharmacies operating under the name
Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and two
luxury beauty destinations operating as Murale. As well, the Company also owns
and operates 66 Shoppers Home Health Care stores, making it the largest
Canadian retailer of home health care products and services. In addition to
its retail store network, the Company owns Shoppers Drug Mart Specialty Health
Network Inc., a provider of specialty drug distribution, pharmacy and
comprehensive patient support services, and MediSystem Technologies Inc., a
provider of pharmaceutical products and services to long-term care facilities
in Ontario and Alberta.
For more information, visit www.shoppersdrugmart.ca.

Forward-looking Information and Statements

This news release, including the Management's Discussion and Analysis
(collectively, the "News Release"), contains forward-looking information and
statements which constitute "forward-looking information" under Canadian
securities law and which may be material, regarding, among other things, the
Company's beliefs, plans, objectives, estimates, intentions and expectations.
Forward-looking information and statements are typically identified by words
such as "anticipate", "believe", "expect", "estimate", "forecast", "goal",
"intend", "plan", "will", "may", "should", "could" and similar expressions.
Specific forward-looking information in this News Release includes, but is not
limited to, statements with respect to the Company's future operating and
financial results, its capital expenditure plans, the ability to execute on
its future operating, investing and financing strategies and the impact on the
Company's financial results of the potential changes to the Ontario drug
system.
The forward-looking information and statements contained herein are based
on certain factors and assumptions, certain of which appear proximate to the
applicable forward-looking information and statements contained herein.
Inherent in the forward-looking information and statements are known and
unknown risks, uncertainties and other factors beyond the Company's ability to
control or predict, which give rise to the possibility that the Company's
predictions, forecasts, expectations or conclusions will not prove to be
accurate, that its assumptions may not be correct and that the Company's
plans, objectives and statements will not be achieved. Actual results or
developments may differ materially from those contemplated by the
forward-looking information and statements.
The material risk factors that could cause actual results to differ
materially from the forward-looking information and statements contained
herein include, without limitation: the risk of adverse changes to laws and
regulations relating to prescription drugs and their sale, including pharmacy
reimbursement programs and the availability of manufacturer allowances, or
changes to such laws and regulations that increase compliance costs; the risk
of adverse changes in economic and financial conditions in Canada and
globally; the risk of increased competition from other retailers; the risk of
an inability of the Company to manage growth and maintain its profitability;
the risk of exposure to fluctuations in interest rates; the risk of material
adverse changes in foreign currency exchange rates; the risk of an inability
to attract and retain pharmacists and key employees; the risk of an inability
of the Company's information technology systems to support the requirements of
the Company's business; the risk of changes to estimated contributions of the
Company in respect of its pension plans or post-employment benefit plans which
may adversely impact the Company's financial performance; the risk of changes
to the relationships of the Company with third-party service providers; the
risk that the Company will not be able to lease or obtain suitable store
locations on economically favourable terms; the risk of adverse changes to the
Company's results of operations due to seasonal fluctuations; the risk that
new, or changes to current, federal and provincial laws, rules and
regulations, including environmental and privacy laws, rules and regulations,
may adversely impact the Company's business and operations; the risk that
violations of law, breaches of Company policies or unethical behaviour may
adversely impact the Company's financial performance; property and casualty
risks; the risk of injuries at the workplace or health issues; the risk that
changes in tax law, or changes in the way that tax law is expected to be
interpreted, may adversely impact the Company's business and operations; the
risk that new, or changes to existing, accounting pronouncements may adversely
impact the Company; the risks associated with the performance of the
Associate-owned store network; and the risk of damage to the reputation of
brands promoted by the Company, or to the reputation of any supplier or
manufacturer of these brands.
This is not an exhaustive list of the factors that may affect any of the
Company's forward-looking information and statements. Investors and others
should carefully consider these and other risk factors and not place undue
reliance on the forward-looking information and statements. Further
information regarding these and other risk factors is included in the
Company's public filings with provincial securities regulatory authorities
including, without limitation, the sections entitled "Risks and Risk
Management" and "Risks Associated with Financial Instruments" in the Company's
Management's Discussion and Analysis for the 53 week period ended January 3,
2009. The forward-looking information and statements contained in this News
Release represent the Company's views only as of the date of this release.
Forward-looking information and statements contained in this News Release
about prospective results of operations, financial position or cash flows that
are based upon assumptions about future economic conditions and courses of
action are presented for the purpose of assisting the Company's shareholders
in understanding management's current views regarding those future outcomes
and may not be appropriate for other purposes. While the Company anticipates
that subsequent events and developments may cause the Company's views to
change, the Company does not undertake to update any forward-looking
information and statements, except to the extent required by applicable
securities laws.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

<<
SHOPPERS DRUG MART CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

As at July 14, 2009
>>

The following is a discussion of the consolidated financial condition and
results of operations of Shoppers Drug Mart Corporation (the "Company") for
the periods indicated and of certain factors that the Company believes may
affect its prospective financial condition, cash flows and results of
operations. This discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements of the Company and the notes
thereto for the 12 and 24 week periods ended June 20, 2009. The Company's
unaudited interim period financial statements and the notes thereto have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP") and are reported in Canadian dollars. These financial statements do
not contain all disclosures required by Canadian GAAP for annual financial
statements and, accordingly, should be read in conjunction with the most
recently prepared annual consolidated financial statements for the 53 week
period ended January 3, 2009.

FORWARD-LOOKING INFORMATION AND STATEMENTS

This discussion of the consolidated financial condition and results of
operations of the Company contains forward-looking information and statements
which constitute "forward-looking information" under Canadian securities law
and which may be material regarding, among other things, the Company's
beliefs, plans, objectives, strategies, estimates, intentions and
expectations. Forward-looking information and statements are typically
identified by words such as "anticipate", "believe", "expect", "estimate",
"forecast", "goal", "intend", "plan", "will", "may", "should", "could" and
similar expressions. Specific forward-looking information in this discussion
includes, but is not limited to, statements with respect to the Company's
future operating and financial results, its capital expenditure plans, the
ability to execute on its future operating, investing and financing strategies
and the impact on the Company's financial results of the potential changes to
the Ontario drug system.
The forward-looking information and statements contained herein are based
on certain factors and assumptions, certain of which appear proximate to the
applicable forward-looking information and statements contained herein.
Inherent in the forward-looking information and statements are known and
unknown risks, uncertainties and other factors beyond the Company's ability to
control or predict, which give rise to the possibility that the Company's
predictions, forecasts, expectations or conclusions will not prove to be
accurate, that its assumptions may not be correct and that the Company's
plans, objectives and statements will not be achieved. Actual results or
developments may differ materially from those contemplated by the
forward-looking information and statements.
The material risk factors that could cause actual results to differ
materially from the forward-looking information and statements contained
herein include, without limitation: the risk of adverse changes to laws and
regulations relating to prescription drugs and their sale, including pharmacy
reimbursement programs and the availability of manufacturer allowances, or
changes to such laws and regulations that increase compliance costs; the risk
of adverse changes in economic and financial conditions in Canada and
globally; the risk of increased competition from other retailers; the risk of
an inability of the Company to manage growth and maintain its profitability;
the risk of exposure to fluctuations in interest rates; the risk of material
adverse changes in foreign currency exchange rates; the risk of an inability
to attract and retain pharmacists and key employees; the risk of an inability
of the Company's information technology systems to support the requirements of
the Company's business; the risk of changes to the estimated contributions of
the Company in respect of its pension plans or post-employment benefit plans
which may adversely impact the Company's financial performance; the risk of
changes to the relationships of the Company with third-party service
providers; the risk that the Company will not be able to lease or obtain
suitable store locations on economically favourable terms; the risk of adverse
changes to the Company's results of operations due to seasonal fluctuations;
the risk that new, or changes to current, federal and provincial laws, rules
and regulations, including environmental and privacy laws, rules and
regulations, may adversely impact the Company's business and operations; the
risk that violations of law, breaches of Company policies or unethical
behaviour may adversely impact the Company's financial performance; property
and casualty risks; the risk of injuries at the workplace or health issues;
the risk that changes in tax law, or changes in the way that tax law is
expected to be interpreted, may adversely impact the Company's business and
operations; the risk that new, or changes to existing, accounting
pronouncements may adversely impact the Company; the risks associated with the
performance of the Associate-owned store network; and the risk of damage to
the reputation of brands promoted by the Company, or to the reputation of any
supplier or manufacturer of these brands.
This is not an exhaustive list of the factors that may affect any of the
Company's forward-looking information and statements. Investors and others
should carefully consider these and other factors and not place undue reliance
on the forward-looking information and statements. Further information
regarding these and other risk factors is included in the Company's public
filings with provincial securities regulatory authorities including, without
limitation, the sections entitled "Risks and Risk Management" and "Risks
Associated with Financial Instruments" in the Company's Management's
Discussion and Analysis for the 53 week period ended January 3, 2009. The
forward-looking information and statements contained in this discussion of the
consolidated financial condition and results of operations of the Company
represent the Company's views only as of the date hereof. Forward-looking
information and statements contained in this Management's Discussion and
Analysis about prospective results of operations, financial position or cash
flows that are based upon assumptions about future economic conditions and
courses of action are presented for the purpose of assisting the Company's
shareholders in understanding management's current views regarding those
future outcomes and may not be appropriate for other purposes. While the
Company anticipates that subsequent events and developments may cause the
Company's views to change, the Company does not undertake to update any
forward-looking information and statements, except to the extent required by
applicable securities laws.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

OVERVIEW

The Company is the licensor of full-service retail drug stores operating
under the name Shoppers Drug Mart® (Pharmaprix® in Québec). As at June 20,
2009, there were 1,159 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 32
medical clinic pharmacies operating under the name Shoppers Simply
Pharmacy™ (Pharmaprix Simplement Santé(MC) in Québec) and two luxury beauty
destinations operating as Murale™.
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®, Quo®, Everyday
Market®, Bio-Life®, Nativa® and Easypix®, among others, and
value-added services such as the HealthWatch® program, which offers patient
counselling and advice on medications, disease management and health and
wellness, and the Shoppers Optimum® program, one of the largest retail
loyalty card programs in Canada. In fiscal 2008, the Company recorded
consolidated sales in excess of $9.4 billion.
Under the licensing arrangement with Associates, the Company provides the
capital and financial support to enable Associates to operate Shoppers Drug
Mart® and Pharmaprix® stores without any initial investment. The Company
also provides a package of services to facilitate the growth and profitability
of each Associate's business. These services include the use of trademarks,
operational support, marketing and advertising, purchasing and distribution,
information technology and accounting. In return for being provided these and
other services, Associates pay fees to the Company. Fixtures, leasehold
improvements and equipment are purchased by the Company and leased to
Associates over periods ranging from two to 15 years, with title retained by
the Company. The Company also provides its Associates with assistance in
meeting their working capital and long-term financing requirements through the
provision of loans and loan guarantees. (See discussion on "Associate Loans
Guarantees" under "Off-balance Sheet Arrangements" in this Management's
Discussion and Analysis.)
Under the licensing arrangement, the Company receives a substantial share
of Associate store profits. The Company's share of Associate store profits is
reflective of its investment in, and commitment to, the operations of the
Associates' stores.
The Company operates in Québec primarily under the Pharmaprix® and
Pharmaprix Simplement Santé(MC) trade names. Under Québec law, profits
generated from the prescription area or dispensary may only be earned by a
pharmacist or a corporation controlled by a pharmacist. As a result of these
restrictions, the licence agreement used for Québec Associates differs from
the Associate agreement used in other provinces. Pharmaprix® and Pharmaprix
Simplement Santé(MC) stores and their Associates benefit from the same
infrastructure and support provided to all other Shoppers Drug Mart® and
Shoppers Simply Pharmacy™ stores and Associates.
The Company has determined that the individual Associate-owned stores
that comprise its store network are deemed to be variable interest entities
and that the Company is the primary beneficiary in accordance with the
Canadian Institute of Chartered Accountants Accounting Guideline 15,
"Consolidation of Variable Interest Entities" ("AcG-15"). As such, the
Associate-owned stores are subject to consolidation by the Company. However,
as the Associate-owned stores remain separate legal entities from the Company,
consolidation of these stores has no impact on the underlying risks facing the
Company. (See note 1 to the accompanying unaudited consolidated financial
statements of the Company.)
The Company also owns and operates 66 Shoppers Home Health Care®
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 20, 2009 compared to the 12 and 24
week periods ended June 14, 2008, as well as certain other metrics with
respect to investing activities for the 12 and 24 week periods ended June 20,
2009 and financial position as at that same date.

<<
- Second quarter sales of $2.289 billion, an increase of 8.5%.

- First half sales of $4.484 billion, an increase of 8.5%.

- Second quarter comparable store sales growth, excluding tobacco
products, of 5.7%, comprised of comparable prescription sales growth
of 5.6% and comparable front store sales growth, excluding tobacco
products of 5.8%.

- First half comparable store sales growth, excluding tobacco
products, of 4.8%, comprised of comparable prescription sales
growth of 5.7% and comparable front store sales growth, excluding
tobacco products, of 4.0%.

- Second quarter EBITDA(1) of $266 million, an increase of 8.6%.

- First half EBITDA of $489 million, an increase of 8.8%.

- Second quarter EBITDA margin(2) of 11.61%, an increase of 1 basis
point.

- First half EBITDA margin of 10.92%, an increase of 4 basis points.

- Second quarter net earnings of $136 million or $0.63 per share
(diluted), an increase of 7.5%.

- First half net earnings of $243 million or $1.12 per share
(diluted), an increase of 6.9%.

- Second quarter capital expenditure program of $129 million compared
to $97 million in the prior year. Opened or acquired 27 new drug
stores, eight of which were relocations.

- First half capital expenditure program of $240 million compared to
$244 million in the prior year. Opened or acquired 67 new drug
stores, 22 of which were relocations.

- Year-over-year increase in drug store selling space of 11.9%.

- Maintained desired capital structure and financial position.

- Net debt to total capitalization ratio of 0.29:1 at June 20, 2009
compared to 0.27:1 a year ago.

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

Results of Operations

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

12 Weeks Ended 24 Weeks Ended
------------------------- -------------------------
($000s, except June 20, June 14, June 20, June 14,
per share data) 2009 2008 2009 2008
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Sales $ 2,288,789 $ 2,109,308 $ 4,484,049 $ 4,133,107
Cost of goods
sold and other
operating
expenses(1) 2,023,150 1,864,620 3,994,572 3,683,287
------------------------- -------------------------

EBITDA(2) 265,639 244,688 489,477 449,820
Amortization 56,279 46,324 111,882 91,095
------------------------- -------------------------

Operating income 209,360 198,364 377,595 358,725
Interest expense 13,881 14,152 28,387 27,912
------------------------- -------------------------

Earnings before
income taxes 195,479 184,212 349,208 330,813
Income taxes 59,367 57,619 106,254 103,480
------------------------- -------------------------

Net earnings $ 136,112 $ 126,593 $ 242,954 $ 227,333
------------------------- -------------------------
------------------------- -------------------------

Per common share
- Basic net
earnings $ 0.63 $ 0.58 $ 1.12 $ 1.05
- Diluted net
earnings $ 0.63 $ 0.58 $ 1.12 $ 1.05

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

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

Sales

Sales represent the combination of sales of the retail drug stores owned
by the Associates, sales at the Murale™ stores and sales of the
Company-owned home health care business, Shoppers Drug Mart Specialty Health
Network Inc. and MediSystem Technologies Inc.
Sales in the second quarter were $2.289 billion compared to $2.109
billion in the same period last year, an increase of $180 million or 8.5%,
with the Company continuing to experience strong sales growth in all regions
of the country. The Company's capital investment program, which resulted in an
11.9% increase in selling square footage compared to a year ago, continues to
have a positive impact on sales growth. On a same-store basis and excluding
tobacco products, sales increased 5.7% during the second quarter of 2009.
Year-to-date, sales increased 8.5% to $4.484 billion. On a same-store basis
and excluding tobacco products, sales increased 4.8% during the first half of
2009.
Prescription sales were $1.109 billion in the second quarter compared to
$1.010 billion in the second quarter of 2008, an increase of $99 million or
9.8%. During the second quarter of 2009, prescription sales accounted for
48.5% of the Company's sales mix compared to 47.9% in the same period last
year. On a same-store basis, prescription sales increased 5.6% during the
second quarter of 2009, driven by strong growth in the number of prescriptions
filled, while increased generic utilization continued to have a deflationary
impact on sales growth in the category. In the second quarter of 2009, generic
molecules represented 52.7% of prescriptions dispensed compared to 50.9% of
prescriptions dispensed in the second quarter of 2008. Year-to-date,
prescription sales increased 10.7% to $2.195 billion and accounted for 49.0%
of the Company's sales mix. On a same-store basis, prescription sales
increased 5.7% during the first half of 2009.
Front store sales were $1.180 billion in the second quarter compared to
$1.099 billion in the second quarter of 2008, an increase of $81 million or
7.4%, with the Company continuing to experience sales gains in all categories
except tobacco. On a same-store basis and excluding tobacco products, front
store sales increased 5.8% during the second quarter of 2009. The Company
estimates that the shift in the Easter selling season to the second quarter of
this year from the first quarter last year had a positive impact on comparable
front store sales growth of approximately 150 basis points. Year-to-date,
front store sales increased 6.4% to $2.289 billion. On a same-store basis and
excluding tobacco products, front store sales increased 4.0% during the first
half of 2009.

Cost of Goods Sold and Other Operating Expenses

Cost of goods sold is comprised of the cost of goods sold at the retail
drug stores owned by the Associates, the cost of goods sold at the Murale™
stores and the cost of goods sold at the Company-owned home health care
business, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem
Technologies Inc. Other operating expenses include corporate selling, general
and administrative expenses, operating expenses at the retail drug stores
owned by the Associates, including Associates' earnings, operating expenses at
the Murale™ stores and operating expenses at the Company-owned home health
care business, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem
Technologies Inc.
Total cost of goods sold and other operating expenses were $2.023 billion
in the second quarter compared to $1.865 billion in the same period last year,
an increase of $158 million or 8.5%. Expressed as a percentage of sales, cost
of goods sold declined by 66 basis points in the second quarter of 2009 versus
the comparative prior year period, reflecting an enhanced sales mix and the
benefits from improved buying synergies. Offsetting this improvement were
higher operating expenses which, when expressed as a percentage of sales,
increased by 65 basis points over the prior year period. Operating expenses
were higher due in large part to increased store-level expenses, primarily
occupancy, wages and benefits associated with the continued growth and
expansion of the store network.
Year-to-date, total cost of goods sold and other operating expenses
increased by 8.5% to $3.995 billion. Expressed as a percentage of sales, cost
of goods sold declined by 62 basis points in the first half of 2009 versus the
comparative prior year period, while other operating expenses increased by 58
basis points.

Amortization

Amortization of capital assets and other intangible assets was $56
million in the second quarter compared to $46 million in the same period last
year, an increase of $10 million or 21.5%. Expressed as a percentage of sales,
amortization increased 26 basis points in the second quarter of 2009 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 22.8% to $111.9 million. Expressed as a percentage of sales,
amortization increased 30 basis points in the first half of 2009 versus the
comparative prior year period.

Operating Income

Operating income was $209 million in the second quarter of 2009 compared
to $198 million in the same period last year, an increase of $11 million or
5.5%. This increase was driven by strong top line growth, improved purchasing
synergies and a continued emphasis on cost reduction, productivity and
efficiency, the benefits of which were partially offset by increased
amortization and higher expenses at store-level associated with the continued
expansion of the store network, along with stepped-up investments in marketing
and promotional activities. In 2009, second quarter operating margin
(operating income divided by sales) declined by 25 basis points to 9.15%
compared to 9.40% in the second quarter of last year. The Company's EBITDA
margin (EBITDA divided by sales) was 11.61% in the second quarter of 2009, a
one basis point improvement over the EBITDA margin of 11.60% posted in the
second quarter of last year.
Year-to-date, operating income increased 5.3% to $378 million and
operating margin declined by 26 basis points to 8.42%. During the first half
of 2009, EBITDA margin was 10.92%, a four basis point improvement over the
EBITDA margin of 10.88% posted during the first half of 2008.

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 2009 and $28
million year-to-date, essentially unchanged from the amounts recorded in the
same periods last year. Growth in the amount of consolidated net debt
outstanding and the Company's decision to extend the term on a portion of its
floating rate, short-term debt obligations, along with higher amortization of
deferred financing costs related to the Company's financing activities in 2008
and the first quarter of 2009, were offset by a market-driven decrease in
short-term interest rates on the Company's remaining floating rate debt
obligations. (See note 5 to the accompanying unaudited consolidated financial
statements of the Company.)

Income Taxes

The Company's effective income tax rate in the second quarter and first
half of 2009 was 30.4% compared to 31.3% 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 $136 million compared to $127 million in
the same period last year, an increase of $9 million or 7.5%. On a diluted
basis, earnings per share were $0.63 in the second quarter of 2009 compared to
$0.58 in the same period last year.
Year-to-date, net earnings increased 6.9% to $243 million. On a diluted
basis, earnings per share were $1.12 in the first half of 2009 compared to
$1.05 in the same period last year.

Capitalization and Financial Position

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

<<
($000s) June 20, January 3,
2009 2009
-------------------------------------------------------------------------

Cash $ (26,059) $ (36,567)
Bank indebtedness 277,617 240,844
Commercial paper 240,148 339,943
Short-term debt - 197,845
Long-term debt 943,809 647,250
--------------------------

Net debt 1,435,515 1,389,315

Shareholders' equity(1) 3,575,032 3,420,529
--------------------------

Total capitalization $ 5,010,547 $ 4,809,844
--------------------------
--------------------------

Net debt:Shareholders' equity 0.40:1 0.41:1
Net debt:Total capitalization 0.29:1 0.29:1
Net debt:EBITDA(2) 1.29:1 1.30:1
EBITDA:Cash interest expense(2)(3) 17.86:1 17.21:1

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

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

(3) Cash interest expense is comprised of interest expense for each of
the 53 week periods then ended and excludes the amortization of
deferred financing costs.
>>

Outstanding Share Capital

The Company's outstanding share capital is comprised of common shares.
An unlimited number of common shares is authorized and the Company had
217,393,945 common shares outstanding at July 14, 2009. As at this same date,
the Company had issued options to acquire 928,015 of its common shares
pursuant to its stock-based compensation plans, of which 705,142 were
exercisable.

Financing Activities

On January 20, 2009, the Company issued $250 million of three-year
medium-term notes maturing January 20, 2012, which bear interest at a fixed
rate of 4.80% per annum (the "Series 3 Notes") and $250 million of five-year
medium-term notes maturing January 20, 2014, which bear interest at a fixed
rate of 5.19% per annum (the "Series 4 Notes"). The Series 3 Notes and Series
4 Notes were issued pursuant to a final short form base shelf prospectus dated
May 22, 2008 (the "Prospectus"), as supplemented by pricing supplements dated
January 14, 2009, and filed by the Company with Canadian securities regulators
in all of the provinces of Canada. At the time of issuance, the Series 3 Notes
and Series 4 Notes were assigned ratings of A (low) from DBRS Limited and BBB+
from Standard & Poor's. The net proceeds from the issuance of the Series 3
Notes and Series 4 Notes were used to refinance existing indebtedness,
including repayment of all amounts outstanding under the Company's then
existing senior unsecured 364-day bank credit facility. As a result of
applying the net proceeds from the issuance of the Series 3 Notes and Series 4
Notes to refinance existing indebtedness, the consolidated net debt position
of the Company remained substantially unchanged. (See note 8 to the
accompanying unaudited consolidated financial statements of the Company.)
Subsequent to the end of the second quarter, on June 22, 2009, the
Company filed with the securities regulators in all of the provinces of
Canada, an amendment (the "Amendment") to the Prospectus (as amended, the
"Amended Prospectus") increasing the aggregate principal amount of medium-term
notes that can be issued from time to time pursuant to the Amended Prospectus
to $1.5 billion from $1.0 billion. To date, the Company has issued an
aggregate principal amount of $950 million of medium-term notes pursuant to
the Prospectus. No incremental debt was incurred by the Company as a result of
filing the Amendment.

Liquidity and Capital Resources

Sources of Liquidity

The Company has the following sources of liquidity: (i) cash provided by
operating activities; (ii) cash available from a committed $800 million
revolving bank credit facility maturing June 6, 2011, less what is currently
drawn and/or being utilized to support commercial paper issued and
outstanding; and (iii) up to $500 million in availability under its commercial
paper program, less what is currently issued. The Company's commercial paper
program is rated R-1 (low) by DBRS Limited. In the event that the Company's
commercial paper program is unable to maintain this rating, the program is
supported by the Company's $800 million revolving bank credit facility. The
Company does not currently foresee any reasonable circumstances under which
this credit rating would not be maintained.
The Company has also arranged for its Associates to obtain financing to
facilitate their purchase of inventory and fund their working capital
requirements by providing guarantees to various Canadian chartered banks that
support Associate loans. (See discussion on "Associate Loans Guarantees" under
"Off-balance Sheet Arrangements" in this Management's Discussion and
Analysis.)
The Company has obtained additional long-term financing from the issuance
of $450 million of five-year medium-term notes maturing June 3, 2013, which
bear interest at a fixed rate of 4.99% per annum (the "Series 2 Notes"), the
Series 3 Notes and the Series 4 Notes. The Series 2 Notes were issued pursuant
to the Prospectus, as supplemented by a pricing supplement dated May 28, 2008.
The Series 3 Notes and Series 4 Notes were issued pursuant to the Prospectus,
as supplemented by pricing supplements dated January 14, 2009. The pricing
supplements were filed by the Company with Canadian securities regulators in
all of the provinces of Canada. At the time of issuance, the medium-term notes
were assigned ratings of A (low) from DBRS Limited and BBB+ from Standard &
Poor's.
At the end of the second quarter of 2009, $8 million of the Company's
$800 million revolving bank credit facility was utilized, all in respect of
outstanding letters of credit. At January 3, 2009, $209 million of this
facility was utilized, including $9 million in respect of outstanding letters
of credit. At June 20, 2009, the Company had $241 million of commercial paper
issued and outstanding under its commercial paper program compared to $341
million at the end of 2008. At the end of the second quarter of 2009,
Associates had drawn an aggregate amount of $293 million in the form of
Associate loans from various Canadian chartered banks compared to $264 million
at the end of the 2008. (See discussion on "Associate Loans Guarantees" under
"Off-balance Sheet Arrangements" in this Management's Discussion and
Analysis.)

Cash Flows from Operating Activities

Cash flows from operating activities were $210 million in the second
quarter of 2009 compared to $160 million in the same period last year. This
increase can be largely attributed to growth in net earnings adjusted for
non-cash items, principally amortization, combined with a reduction in the
amount invested in non-cash working balances versus an increased investment in
the comparative quarter.
Year-to-date, the Company has generated $282 million of cash from
operating activities compared to $153 million in the first half of 2008.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $122 million in the second
quarter of 2009 compared to $99 million in the same period last year. Of these
totals, investments in property and equipment, net of proceeds from any
dispositions, amounted to $77 million in the second quarter of this year
compared to $78 million in the same period last year, as the Company continues
to invest in the expansion and optimization of its store network. The Company
also invested $33 million in business acquisitions and a combined $10 million
in the purchase and development of intangible and other assets during the
second quarter of 2009 compared to $10 and $6 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 2009, the
balance of funds deposited and held in escrow in respect of outstanding offers
to purchase drug stores and land increased by $2 million compared to an
increase of $5 million in the same period last year.
Year-to-date, cash flows used in investing activities were $227 million
compared to $201 million in the first half of 2008. Of these totals,
investments in property and equipment, net of proceeds from any dispositions,
amounted to $153 million in the first half of 2009 compared to $135 million in
the same period last year. Investments in business acquisitions and in the
purchase and development of intangible and other assets were $60 million and
$12 million, respectively, in the first half of 2009 compared to $87 million
and $17 million, respectively, in the same period last year. During the first
half of 2009, the balance of funds deposited and held in escrow in respect of
outstanding offers to purchase drug stores and land increased by $1 million
compared to a decrease of $39 million in the same period last year.
During the second quarter of 2009, 27 new drug stores were opened or
acquired, eight of which were relocations, and two smaller drug stores were
closed. Year-to-date, 67 new drug stores have been opened or acquired, 22 of
which were relocations, and three smaller drug stores were closed. As a result
of this activity, drug store selling space increased by 11.9% compared to a
year ago. At the end of the second quarter of 2009, there were 1,259 stores in
the Company's retail network, comprised of 1,191 drug stores (1,159 Shoppers
Drug Mart/Pharmaprix stores and 32 Shoppers Simply Pharmacy/Pharmaprix
Simplement Santé stores), 66 Shoppers Home Health Care® stores and two
Murale™ stores.

Cash Flows Used in Financing Activities

Cash flows used in financing activities were $89 million in the second
quarter of 2009, as cash inflows of $14 million were more than offset by cash
outflows of $103 million. Cash inflows were comprised of a $13 million
increase in the amount of bank indebtedness and $1 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 $53
million decrease in the amount of commercial paper issued and outstanding by
the Company under its commercial paper program, a $3 million reduction in the
amount of Associate investment and $47 million for the payment of dividends.
In the second quarter of 2009, the net result of the Company's operating,
investing and financing activities was a decrease in cash balances of less
than $1 million.
Year-to-date, cash flows used in financing activities was $66 million and
the net result of the Company's operating, investing and financing activities
was a decrease in cash of $11 million.

Future Liquidity

The Company believes that its current credit facilities, commercial paper
program and financing programs available to its Associates, together with cash
generated from operating activities, will be sufficient to fund its
operations, including the operations of its Associate-owned store network,
investing activities and commitments for the foreseeable future. While credit
markets in Canada and globally have tightened, causing credit spreads to widen
and liquidity risk to intensify, the Company does not foresee any major
difficulty in obtaining additional short or long-term financing given its
current credit ratings and past experiences in the capital markets.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Implemented in 2009

Financial Statement Concepts

In February 2008, the Canadian Institute of Chartered Accountants (the
"CICA") issued amendments to CICA Handbook Section 1000, "Financial Statement
Concepts" ("Section 1000"), to clarify the criteria for recognition of an
asset and the timing of expense recognition; specifically deleting the
guidance permitting the deferral of costs. The new requirements are effective
for interim and annual financial statements relating to fiscal years beginning
on or after October 1, 2008. The Company applied the amendments to Section
1000 at the beginning of its current fiscal year in conjunction with CICA
Handbook Section 3064, "Goodwill and Intangible Assets".

Goodwill and Intangible Assets

In February 2008, the CICA issued a new accounting standard concerning
Goodwill and Intangible Assets ("Section 3064"), which is based on the
International Accounting Standards Board's (the "IASB") International
Accounting Standard 38, "Intangible Assets". The new section replaced the
existing guidance on goodwill and other intangible assets and research and
development costs. The objective of the new standard is to eliminate the
practice of deferring costs that do not meet the definition and recognition
criteria of assets. The standard is effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008. The Company
applied the new accounting standard retrospectively at the beginning of its
current fiscal year, with restatement of prior periods. Intangible assets
recognized prior to the Company's current fiscal year that no longer meet the
new recognition or measurement criteria and the definition of an asset were
removed from the consolidated balance sheets in accordance with CICA Handbook
Section 1506, "Accounting Changes". The balance of such deferred costs as at
the end of the Company's 2007 and 2008 fiscal years was reflected as a charge
to opening retained earnings.
The implementation of the new standard has resulted in a reduction to the
Company's 2009 and 2008 fiscal years' opening retained earnings of $38.9
million and $27.8 million, respectively. The impacts on other balances are
described in the following paragraphs.
The impact for the year ended January 3, 2009 is an increase in cost of
goods sold and other operating expenses and a decrease in operating income of
$15.3 million and a decrease in net earnings of $11.1 million, resulting in a
decrease of $0.05 in basic and diluted net earnings per share. The adjustment
relates to previously deferred costs that no longer qualify for recognition as
an asset, primarily store opening costs.
The impact for the 12 and 24 week periods ended June 14, 2008 is an
increase in cost of goods sold and other operating expenses and a decrease in
operating income of $2.4 million and $3.2 million, respectively, and a
decrease in net earnings of $1.7 million and $2.3 million, respectively,
resulting in a decrease in basic and diluted earnings per share of $0.01 and
$0.02, respectively. The adjustment relates to previously deferred costs that
no longer qualify for recognition as an asset, primarily store opening costs.
The impact on balances as at January 3, 2009 was primarily an increase in
net future income tax assets of $17.7 million, a decrease in prepaid expenses
and deposits of $4.7 million, a decrease in property and equipment of $110.8
million, a decrease in deferred costs of $47.2 million, an increase in
intangible assets of $114.5 million and a decrease in other assets of $8.3
million. The increase in intangible assets and decrease in property and
equipment primarily reflects the reclassification of certain computer software
costs previously included in property and equipment.
The impact on balances as at June 14, 2008 was primarily an increase in
net future income tax assets of $14.3 million, a decrease in prepaid expenses
and deposits of $3.4 million, a decrease in property and equipment of $84.8
million, a decrease in deferred costs of $36.2 million, an increase in
intangible assets of $86.9 million and a decrease in other assets of $6.9
million. The increase in intangible assets and decrease in property and
equipment primarily reflects the reclassification of certain computer software
costs previously included in property and equipment.
Goodwill is recorded as the excess amount of the purchase price of an
acquired business over the fair value of the underlying net assets, including
intangible assets, at the date of acquisition. Goodwill is not amortized but
is tested for impairment at least on an annual basis. In the event of
impairment, the excess of the carrying amount over the fair value of goodwill
would be charged to earnings.
Intangible assets are amortized on a straight-line basis over the
estimated useful lives of the assets. Intangible assets are tested for
impairment at least on an annual basis. In the event of impairment, the excess
of the carrying amount over the fair value of intangible assets would be
charged to earnings.

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

The Emerging Issues Committee of the CICA (the "EIC") issued a new
abstract on January 20, 2009 concerning the measurement of financial assets
and financial liabilities ("EIC-173 - Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities") (the "Abstract"). There had been
diversity in practice as to whether an entity's own credit risk and the credit
risk of the counterparty were taken into account in determining the fair value
of financial instruments. The EIC reached a consensus that these risks should
be taken into account in the measurement of financial assets and financial
liabilities. The Abstract is effective for all financial assets and financial
liabilities measured at fair value in interim and annual financial statements
issued for periods ending on or after the date of issuance of the Abstract,
with retrospective application without restatement of prior periods. The
Company applied the new Abstract at the beginning of its current fiscal year.
The implementation did not have a significant impact on the Company's results
of operations, financial position and disclosures.

Financial Instruments - Disclosures

In June 2009, the CICA issued amendments to CICA Handbook Section 3862,
"Financial Instruments - Disclosures" ("Section 3862"), to adopt the
amendments recently issued by the IASB to International Financial Reporting
Standard 7, "Financial Instruments: Disclosures" ("IFRS 7"), in March 2009.
These amendments are applicable to publicly accountable enterprises and those
private enterprises, co-operative business enterprises, rate-regulated
enterprises and not-for-profit organizations that choose to apply Section
3862. 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 for fiscal
years ending after September 30, 2009, with early adoption permitted. To
provide relief for preparers, and consistent with IFRS 7, the CICA decided
that an entity need not provide comparative information for the disclosures
required by the amendments in the first year of application. The Company will
apply these amendments for its 2009 annual consolidated financial statements.
The impacts of the amendments to the fair value measurement and liquidity risk
disclosure requirements of the Company are not expected to be significant.

Future Accounting Standards

Business Combinations

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

Financial Instruments - Recognition and Measurement

On April 29, 2009, the CICA amended CICA Handbook Section 3855,
"Financial Instruments - Recognition and Measurement", adding and amending
paragraphs regarding the application of the effective interest method to
previously impaired financial asset and embedded prepayment options. The
amendments are effective for interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2011, with early adoption
permitted. The amendments are not expected to have a significant impact on the
Company's accounting for its financial instruments.

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
generally accepted accounting principles to IFRS.
On February 13, 2008, the AcSB confirmed that publicly accountable
enterprises will be required to use IFRS, as issued by the 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.
The Company launched its IFRS transition project in 2008 with a high
level assessment of the key areas where conversion to IFRS may have a
significant impact, or present a significant challenge. The Company has
engaged an external advisor, established a working team and developed
documentation and status reporting protocols. The Company has delivered its
initial training program and is ensuring that the working team has an in-depth
understanding of relevant IFRS as well as new developments in IFRS.
The Company's working team is completing a detailed assessment of IFRS
focused on the identification of differences between the Company's current
policies and those under IFRS. In this regard, a topic specific issues list is
being developed, identifying the activities required for resolution and
timelines for completion including potential impacts on taxation, information
technology and data systems. In conjunction with this analysis, the Company is
scoping the associated disclosure requirements.
The options under IFRS 1, First-time Adoption of International Reporting
Standards, have been identified and will be further analyzed as the Company
progresses through its detailed assessment of the individual standards. The
impact on other business activities, disclosure controls and procedures and
internal control over financial reporting will be assessed once the impacts of
the standards as a whole are identified.

OFF-BALANCE SHEET ARRANGEMENTS

Associate Loans Guarantees

The Company has provided guarantees to various Canadian chartered banks
that support Associate loans. At the end of the second quarter of 2009, the
Company's maximum obligation in respect of such guarantees was $505 million
compared to $425 million at the end of the first quarter and prior year. At
June 20, 2009, an aggregate amount of $415 million in available lines of
credit had been allocated to the Associates by the various banks compared to
$407 million at the end of the first quarter and $398 million at the end of
the prior year. As at June 20, 2009, Associates had drawn an aggregate amount
of $293 million against these available lines of credit compared to $278
million at the end of the first quarter and $264 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 2009 2008 2009 2008
- unaudited) (12 Weeks) (12 Weeks) (12 Weeks) (12 Weeks)
------------------------------------------------------------------------

Sales $ 2,288,789 $ 2,109,308 $ 2,195,260 $ 2,023,799

Net earnings $ 136,112 $ 126,593 $ 106,842 $ 100,740

Per common share
- Basic net
earnings $ 0.63 $ 0.58 $ 0.49 $ 0.46
- Diluted net
earnings $ 0.63 $ 0.58 $ 0.49 $ 0.46

Fourth Quarter Third Quarter
($000s, except -------------------------- --------------------------
per share data 2008 2007(1) 2008 2007(1)
- unaudited) (13 Weeks) (12 Weeks) (16 Weeks) (16 Weeks)
------------------------------------------------------------------------

Sales $ 2,496,799 $ 2,168,822 $ 2,793,005 $ 2,542,671

Net earnings $ 166,537 $ 151,331 $ 160,276 $ 141,672

Per common share
- Basic net
earnings $ 0.77 $ 0.70 $ 0.74 $ 0.65
- Diluted net
earnings $ 0.77 $ 0.70 $ 0.74 $ 0.65

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

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

RISKS AND RISK MANAGEMENT

Industry and Regulatory Developments

The Company is reliant on prescription drug sales for a significant and
growing portion of its sales and profits. Information regarding industry and
regulatory risk factors is included in the section entitled "Risks and Risk
Management" in the Company's Management's Discussion and Analysis for the 53
week period ended January 3, 2009.
On July 10, 2009, the Ontario Ministry of Health and Long-Term Care (the
"Ministry") announced at a "Drug System Renewal Forum" that it will be
introducing reforms to the Ontario drug system intended to implement
substantive changes across the supply chain for prescription drug products and
pharmacy services. The stated objective of these reforms is to ensure that
Ontario receives value for money in all aspects of the provincial drug plan
while maintaining or improving patient care. The Ministry indicated that it
will be considering a range of options to improve the value for money
equation, including reducing professional allowance funding, expanding the
scope of pharmacy services and reimbursing pharmacy appropriately for the
services provided, promoting alternative drug distribution channels and
pricing mechanisms to decrease the costs of prescription drugs, any of which
may have an adverse impact on the Company's business, sales and profitability.
As part of the reforms, the Ministry stated that it will also be considering
applying some of the options for reform to the private sector. The Ministry
indicated that it would be unlikely that any of the options for reform will be
implemented in isolation but that the integration of multiple options would be
part of the solution. The Ministry intends to make decisions on the options
after a series of consultations and discussions with industry participants and
other parties which are scheduled for late July and early August of 2009. The
Ministry stated that, with respect to those options that are ultimately
determined to be part of the reforms implemented by the Ministry, the
introduction of certain of the reforms could begin as early as the fall or
winter of 2009 if such reform could be accommodated under the existing
legislative regime. If any reforms require legislative changes to the Ontario
Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act for
implementation, the Ministry anticipates that to accommodate the legislative
process required for such change, such reforms would not be implemented before
the spring of 2010.

RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

The Company is exposed to a number of risks associated with financial
instruments that have the potential to affect its operating and financial
performance. The Company's primary financial instrument risk exposures are
interest rate risk and liquidity risk. The Company's exposures to foreign
currency risk, credit risk and other price risk are not considered to be
material. The Company may use derivative financial instruments to manage
certain of these risks. The Company does not use derivative financial
instruments for trading or speculative purposes.

Exposure to Interest Rate Fluctuations

The Company, including its Associate-owned store network, is exposed to
fluctuations in interest rates by virtue of its borrowings under its bank
credit facilities, commercial paper program and financing programs available
to its Associates. Increases or decreases in interest rates will positively or
negatively impact the financial performance of the Company.
The Company uses interest rate derivatives to manage this exposure and
monitors market conditions and the impact of interest rate fluctuations on its
fixed and floating rate debt instruments on an ongoing basis. The Company has
interest rate derivative agreements converting an aggregate notional principal
amount of $100 million (2008 - $250 million) of floating rate debt into fixed
rate debt. The fixed rates payable by the Company under these agreements range
from 4.11% to 4.18% (2008 - 4.03% to 4.18%). These agreements mature as
follows: $50 million in December 2009 and $50 million in December 2010, with
reset terms of one month.
Furthermore, the Company may be exposed to losses should any counterparty
to its derivative agreements fail to fulfil its obligations. The Company has
sought to minimize counterparty risk by transacting with counterparties that
are large financial institutions. There is no unrecognized exposure as at June
20, 2009, as the interest rate derivative agreements are in a liability
position, unchanged from a year ago.
As at June 20, 2009, the Company had $434 million (2008 - $262 million)
of unhedged floating rate debt. During the 12 and 24 week periods ended June
20, 2009, the Company's average outstanding unhedged floating rate debt was
$581 million and $626 million (2008 - $716 million and $733 million),
respectively. Had interest rates been higher or lower by 50 basis points
during the 12 and 24 week periods ended June 20, 2009, net earnings would have
decreased or increased, respectively, by approximately $0.5 million and $1.0
million (2008 - $0.6 million and $1.2 million), respectively, as a result of
the Company's exposure to interest rate fluctuations on its unhedged floating
rate debt.

Foreign Currency Exchange Risk

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

Credit Risk

Accounts receivable arise primarily in respect of prescription sales
billed to governments and third-party drug plans and as a result, collection
risk is low. There is no concentration of balances with debtors in the
remaining accounts receivable. The Company does not consider its exposure to
credit risk to be material.

Other Price Risk

The Company uses cash-settled equity forward agreements to limit its
exposure to future changes in the market price of its common shares by virtue
of its obligations under its long-term incentive plan ("LTIP"). The income or
expense arising from the use of these instruments is included in cost of goods
sold and other operating expenses.
Based on market values of the equity forward agreements in place at June
20, 2009, the Company recognized a net liability of $0.7 million, of which
$0.9 million is presented in other assets, $0.8 million is presented in
accounts payable and accrued liabilities and $0.8 million is presented in
other long-term liabilities. Based on market values of the equity forward
agreements in place at June 14, 2008, the Company recognized an asset of $1.6
million, of which $0.6 million was presented in accounts receivable and $1.0
million was presented in other assets. During the 12 and 24 week periods ended
June 20, 2009 and June 14, 2008, the Company assessed that the percentage of
the equity forward agreements in place related to unearned units under the
LTIP were an effective hedge for its exposure to future changes in the market
price of its common shares in respect of the unearned units. Market values
were determined based on information received from the Company's counterparty
to these equity forward agreements.

Capital Management and Liquidity Risk

The Company's primary objectives when managing its capital and liquidity
are to profitably grow its business while maintaining adequate financing
flexibility to fund attractive new investment opportunities and other
unanticipated requirements or opportunities that may arise. Profitable growth
is defined as earnings growth commensurate with the additional capital being
invested in the business in order that the Company earns an attractive rate of
return on that capital. The primary investments undertaken by the Company to
drive profitable growth include additions to the selling square footage of its
store network via the construction of new, relocated and expanded stores,
including related leasehold improvements and fixtures, the acquisition of
sites as part of a land bank program, as well as through the acquisition of
independent drug stores or their prescription files. In addition, the Company
makes capital investments in information technology and its distribution
capabilities to support an expanding store network. The Company also provides
working capital to its Associates via loans and/or loan guarantees. The
Company largely relies on its cash flow from operations to fund its capital
investment program and dividend distributions to its shareholders. This cash
flow is supplemented, when necessary, through the borrowing of additional
debt. No changes were made to these objectives during the period.
The Company considers its total capitalization to be bank indebtedness,
commercial paper, short-term debt, long-term debt (including the current
portion thereof) and shareholders' equity, net of cash. The Company also gives
consideration to its obligations under operating leases when assessing its
total capitalization. The Company manages its capital structure with a view to
maintaining investment grade credit ratings from two credit rating agencies.
In order to maintain its desired capital structure, the Company may adjust the
level of dividends paid to shareholders, issue additional equity, repurchase
shares for cancellation or issue or repay indebtedness. The Company has
certain debt covenants and is in compliance with those covenants.
The Company monitors its capital structure principally through measuring
its net debt to shareholders' equity ratio and net debt to total
capitalization ratio, and ensures its ability to service its debt and meet
other fixed obligations by tracking its interest and other fixed charges
coverage ratios. (See discussion under "Capitalization and Financial Position"
in this Management's Discussion and Analysis.)
Liquidity risk is the risk that the Company will be unable to meet its
obligations relating to its financial liabilities. The Company prepares cash
flow budgets and forecasts to ensure that it has sufficient funds through
operations, access to bank credit facilities and access to debt and capital
markets to meet its financial obligations, capital investment program and fund
new investment opportunities or other unanticipated requirements as they
arise. The Company manages its liquidity risk as it relates to financial
liabilities by monitoring its cash flow from operating activities to meet its
short-term financial liability obligations and planning for the repayment of
its long-term financial liability obligations through cash flow from operating
activities and/or the issuance of new debt.
For a complete description of the Company's sources of liquidity, see the
discussions on "Sources of Liquidity" and "Future Liquidity" under "Liquidity
and Capital Resources" in this Management's Discussion and Analysis.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Chief Executive Officer and the Chief Financial Officer have
designed, or caused to be designed under their supervision, internal controls
over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting, its compliance with Canadian GAAP and the
preparation of financial statements for external purposes. Internal control
systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be designed effectively can provide only
reasonable assurance with respect to financial reporting and financial
statement preparation.
There were no changes in internal control over financial reporting that
occurred during the Company's most recent interim period that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.

NON-GAAP FINANCIAL MEASURES

The Company reports its financial results in accordance with Canadian
GAAP. However, the foregoing contains references to non-GAAP financial
measures, such as operating margin, EBITDA (earnings before interest, taxes,
depreciation and amortization), EBITDA margin and cash interest expense.
Non-GAAP financial measures do not have standardized meanings prescribed by
GAAP and therefore may not be comparable to similar measures presented by
other reporting issuers.
These non-GAAP financial measures have been included in this Management's
Discussion and Analysis as they are measures which management uses to assist
in evaluating the Company's operating performance against its expectations and
against other companies in the retail drug store industry. Management believes
that non-GAAP financial measures assist in identifying underlying operating
trends.
These non-GAAP financial measures, particularly EBITDA and EBITDA margin,
are also common measures used by investors, financial analysts and rating
agencies. These groups may use EBITDA and other non-GAAP financial measures to
value the Company and assess the Company's ability to service its debt.

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

12 Weeks Ended 24 Weeks Ended
------------------------------------------------------
June 20, June 14, June 20, June 14,
2009 2008 2009 2008
-------------------------------------------------------------------------

Sales $ 2,288,789 $ 2,109,308 $ 4,484,049 $ 4,133,107
Operating expenses
Cost of goods
sold and other
operating
expenses
(Notes 2
and 3) 2,023,150 1,864,620 3,994,572 3,683,287
Amortization 56,279 46,324 111,882 91,095
-------------------------------------------------------------------------

Operating income 209,360 198,364 377,595 358,725

Interest expense
(Note 5) 13,881 14,152 28,387 27,912
-------------------------------------------------------------------------

Earnings before
income taxes 195,479 184,212 349,208 330,813

Income taxes (Note 2)
Current 57,495 56,025 104,219 104,688
Future 1,872 1,594 2,035 (1,208)
-------------------------------------------------------------------------
59,367 57,619 106,254 103,480
-------------------------------------------------------------------------
Net earnings $ 136,112 $ 126,593 $ 242,954 $ 227,333
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net earnings per
common share:

Basic $ 0.63 $ 0.58 $ 1.12 $ 1.05
Diluted $ 0.63 $ 0.58 $ 1.12 $ 1.05

Weighted average
common shares
outstanding
- Basic
(millions) 217.4 216.9 217.3 216.8
- Diluted
(millions) 217.5 217.5 217.5 217.4
Actual common
shares outstanding
(millions) 217.4 217.1 217.4 217.1

SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Retained Earnings
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
24 Weeks Ended
--------------------------
June 20, June 14,
2009 2008
-------------------------------------------------------------------------

Retained earnings, beginning of period
as reported $ 1,938,023 $ 1,559,551
Impact of the adoption of new accounting
standard, Handbook Section 3064, Goodwill
and Intangible Assets (Note 2) (38,884) (27,817)
-------------------------------------------------------------------------
Retained earnings, beginning of period as
restated 1,899,139 1,531,734
Net earnings 242,954 227,333
Dividends (93,465) (93,293)
-------------------------------------------------------------------------
Retained earnings, end of period $ 2,048,628 $ 1,665,774
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

12 Weeks Ended 24 Weeks Ended
------------------------------------------------------
June 20, June 14, June 20, June 14,
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings $ 136,112 $ 126,593 $ 242,954 $ 227,333
Other comprehensive
income (loss),
net of tax
Change in unrealized
gain/loss on
interest rate
derivatives
(net of tax of
$355 and $476
(2008 - $585 and
$596)) 516 1,186 773 (1,211)
Change in unrealized
gain/loss on equity
forward derivatives
(net of tax of $190
and $192 (2008 - $371
and $222)) 447 755 456 451
Amount of previously
unrealized
gain/loss recognized
in earnings during
the period (net of
tax of $48 and $71
(2008 - $5 and $5)) 76 (11) 167 (11)
-------------------------------------------------------------------------
Other comprehensive
income (loss) 1,039 1,930 1,396 (771)
-------------------------------------------------------------------------
Comprehensive
income $ 137,151 $ 128,523 $ 244,350 $ 226,562
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Accumulated other
comprehensive (loss)
income, beginning
of period $ (3,442) $ 247
Other comprehensive
income (loss) 1,396 (771)
-------------------------------------------------------------------------
Accumulated other
comprehensive loss,
end of period $ (2,046) $ (524)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

June 20, June 14, January 3,
2009 2008 2009
-------------------------------------------------------------------------

Assets

Current
Cash $ 26,059 $ 80,452 $ 36,567
Accounts receivable 431,678 353,643 448,476
Inventory (Note 3) 1,712,574 1,537,524 1,743,253
Income taxes recoverable 37,490 - 8,835
Future income taxes (Note 2) 81,129 73,843 84,770
Prepaid expenses and deposits
(Note 2) 69,101 100,448 59,327
-------------------------------------------------------------------------
2,358,031 2,145,910 2,381,228

Property and equipment (Note 2) 1,396,183 1,109,930 1,331,363
Goodwill (Note 2) 2,458,884 2,316,415 2,427,239
Intangible assets (Note 2) 238,879 158,773 212,279
Other assets (Note 2) 15,160 12,029 12,114
-------------------------------------------------------------------------
Total assets $ 6,467,137 $ 5,743,057 $ 6,364,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current
Bank indebtedness (Note 6) $ 277,617 $ 260,441 $ 240,844
Commercial paper 240,148 248,696 339,943
Short-term debt (Note 8) - - 197,845
Accounts payable and accrued
liabilities 907,971 857,148 1,018,505
Income taxes payable - 1,885 -
Dividends payable 46,738 46,667 46,709
Current portion of long-term
debt - 299,899 -
-------------------------------------------------------------------------
1,472,474 1,714,736 1,843,846

Long-term debt (Note 8) 943,809 446,845 647,250
Other long-term liabilities 332,589 269,433 303,117
Future income taxes 34,645 22,832 30,803
-------------------------------------------------------------------------
2,783,517 2,453,846 2,825,016

Associate interest 108,588 102,885 118,678

Shareholders' equity

Share capital 1,517,992 1,510,809 1,514,207
Contributed surplus 10,458 10,267 10,625

Accumulated other comprehensive
loss (2,046) (524) (3,442)
Retained earnings (Note 2) 2,048,628 1,665,774 1,899,139
-------------------------------------------------------------------------
2,046,582 1,665,250 1,895,697
-------------------------------------------------------------------------
3,575,032 3,186,326 3,420,529
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 6,467,137 $ 5,743,057 $ 6,364,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

12 Weeks Ended 24 Weeks Ended
------------------------------------------------------
June 20, June 14, June 20, June 14,
2009 2008 2009 2008
-------------------------------------------------------------------------

Operating activities
Net earnings
(Note 2) $ 136,112 $ 126,593 $ 242,954 $ 227,333
Items not
affecting cash
Amortization
(Note 2) 56,259 45,508 110,476 89,588
Future income
taxes (Note 2) 1,872 1,594 2,035 (1,208)
Loss on disposal
of property and
equipment 548 1,123 2,413 1,980
Stock-based
compensation 200 454 380 796
-------------------------------------------------------------------------
194,991 175,272 358,258 318,489
Net change in
non-cash working
capital
Balances (Note 2) 4,121 (24,893) (97,409) (182,286)
Increase in other
long-term
liabilities 11,324 9,659 20,947 17,284
-------------------------------------------------------------------------
Cash flows from
operating activities 210,436 160,038 281,796 153,487
-------------------------------------------------------------------------

Investing activities
Purchase of
property and
equipment (Note 2) (88,886) (79,952) (170,093) (143,359)
Proceeds from
disposition of
property and
equipment 11,833 2,432 17,037 8,172
Business
acquisitions
(Note 4) (33,152) (9,920) (60,432) (87,462)
Deposits (1,786) (4,908) (1,231) 39,079
Purchase and
development of
intangible assets
(Note 2) (7,379) (6,706) (9,805) (13,117)
Other assets
(Note 2) (2,418) 518 (2,176) (4,198)
-------------------------------------------------------------------------
Cash flows used in
investing activities (121,788) (98,536) (226,700) (200,885)
-------------------------------------------------------------------------

Financing activities
Bank indebtedness,
net (Note 6) 12,559 69,359 36,773 35,289
Commercial paper,
net (53,000) (487,149) (100,000) (294,349)
Repayment of
short-term debt
(Note 8) - - (200,000) -
Issuance of
Series 2 notes - 450,000 - 450,000
Issuance of
Series 3 notes
(Note 8) - - 250,000 -
Issuance of
Series 4 notes
(Note 8) - - 250,000 -
Revolving term debt,
net - - (200,000) -
Financing costs
incurred - (3,500) (2,088) (3,500)
Associate interest (2,793) (2,228) (10,090) (10,234)
Proceeds from
shares issued for
stock options
exercised 1,165 3,267 3,110 4,155
Repayment of share
purchase loans 18 43 128 213
Dividends paid (46,728) (46,626) (93,437) (81,312)
-------------------------------------------------------------------------
Cash flows (used in)
from financing
activities (88,779) (16,834) (65,604) 100,262
-------------------------------------------------------------------------
(Decrease) increase
in cash (131) 44,668 (10,508) 52,864
Cash, beginning of
period 26,190 35,784 36,567 27,588
-------------------------------------------------------------------------
Cash, end of
period $ 26,059 $ 80,452 $ 26,059 $ 80,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash
flow information
Interest paid $ 13,601 $ 18,894 $ 18,481 $ 29,264
Income taxes paid $ 85,818 $ 92,900 $ 134,094 $ 167,335

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

1. BASIS OF PRESENTATION

The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and follow the same accounting policies and methods
of application with those used in the preparation of the audited annual
consolidated financial statements for the 53 week period ended January 3,
2009, except as described in Note 2, Changes in Accounting Policies.
These financial statements do not contain all disclosures required by
Canadian GAAP for annual financial statements and, accordingly, should be
read in conjunction with the most recently prepared annual consolidated
financial statements and the accompanying notes included in the Company's
2008 Annual Report.

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

The individual Associate-owned stores that comprise the Company's store
network are variable interest entities and the Company is the primary
beneficiary. As such, the Associate-owned stores are subject to
consolidation by the Company. The Associate-owned stores remain separate
legal entities and consolidation of the Associate-owned stores has no
impact on the underlying risks facing the Company.

2. CHANGES IN ACCOUNTING POLICIES

Adoption of New Accounting Standards

Financial Statement Concepts

In February 2008, the CICA issued amendments to Section 1000, "Financial
Statement Concepts" ("Section 1000"), to clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically, deleting the guidance permitting the deferral of costs. The
new requirements are effective for interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2008. The Company applied the amendments to Section 1000 at the beginning
of its current fiscal year in conjunction with Section 3064, "Goodwill
and Intangible Assets".

Goodwill and Intangible Assets

In February 2008, the CICA issued a new accounting standard concerning
Goodwill and Intangible Assets ("Section 3064"), which is based on the
International Accounting Standards Board's ("IASB") International
Accounting Standard 38, "Intangible Assets". The new section replaced the
existing guidance on goodwill and other intangible assets and research
and development costs. The objective of the new standard is to eliminate
the practice of deferring costs that do not meet the definition and
recognition criteria of assets. The standard is effective for interim and
annual financial statements for fiscal years beginning on or after
October 1, 2008. The Company applied the new accounting standard
retrospectively at the beginning of its current fiscal year, with
restatement of prior periods. Intangible assets recognized prior to the
Company's current fiscal year that no longer meet the new recognition or
measurement criteria and the definition of an asset were removed from the
consolidated balance sheets in accordance with CICA Handbook Section
1506, "Accounting Changes". The balance of any such deferred costs as at
the end of the Company's 2007 and 2008 fiscal years was reflected as a
charge to opening retained earnings.

Goodwill is recorded as the excess amount of the purchase price of an
acquired business over the fair value of the underlying net assets,
including intangible assets, at the date of acquisition. Goodwill is not
amortized but is tested for impairment at least on an annual basis. In
the event of an impairment, the excess of the carrying amount over the
fair value of goodwill would be charged to earnings.

Net Earnings Impact

The following table summarizes the impact of the implementation of the
new standard on the Company's consolidated statements of earnings for the
12 and 24 weeks ended June 14, 2008 and 53 weeks ended January 3, 2009,
respectively:

12 weeks 24 weeks 53 weeks
ended ended ended
June 14, June 14, January 3,
2008 2008 2009
-------------------------------------------------------------------------
Adjustment - pre-tax $ (2,430) $ (3,222) $ (15,329)
Income taxes 706 905 4,262
-------------------------------------------------------------------------
Net earnings impact $ (1,724) $ (2,317) $ (11,067)
Net earnings per common share
(diluted) impact $ (0.01) $ (0.02) $ (0.05)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings, as reported $ 128,317 $ 229,650 $ 565,212
Net earnings per common share
(diluted), as reported $ 0.59 $ 1.06 $ 2.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings, as restated $ 126,593 $ 227,333 $ 554,145
Net earnings per common share
(diluted), as restated $ 0.58 $ 1.05 $ 2.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

Opening Retained Earnings Adjustment

The implementation of the new standard has resulted in a reduction to the
Company's 2009 and 2008 fiscal years' opening retained earnings of
$38,884 and $27,817, respectively.

Balance Sheet Adjustments

The following paragraphs summarize the impact of the implementation of
the new standard on the Company's consolidated balance sheets as at
January 3, 2009 and June 14, 2008, respectively.

The impact on balances as at January 3, 2009 was primarily an increase in
net future income tax assets of $17,676, a decrease in prepaid expenses
and deposits of $4,727, a decrease in property and equipment of $110,772,
a decrease in deferred costs of $47,213, an increase in intangible assets
of $114,466, and a decrease in other assets of $8,328. The increase in
intangible assets and decrease in property and equipment primarily
reflects the reclassification of certain computer software costs,
previously included in property and equipment.

The impact on balances as at June 14, 2008 was primarily an increase in
net future income tax assets of $14,316, a decrease in prepaid expenses
and deposits of $3,424, a decrease in property and equipment of $84,836,
a decrease in deferred costs of $36,191, an increase in intangible assets
of $86,852, and a decrease in other assets of $6,868.

Financial Assets and Financial Liabilities

The Emerging Issues Committee ("EIC") issued a new abstract on January
20, 2009, concerning the measurement of financial assets and financial
liabilities ("EIC-173 - Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities") (the "Abstract"). There has been
diversity in practice as to whether an entity's own credit risk and the
credit risk of the counterparty are taken into account in determining the
fair value of financial instruments. The EIC reached a consensus that
these risks should be taken into account in the measurement of financial
assets and financial liabilities. The Abstract is effective for all
financial assets and financial liabilities measured at fair value in
interim and annual financial statements issued for periods ending on or
after the date of issuance of the Abstract with retrospective application
without restatement of prior periods. The Company applied the new
Abstract at the beginning of its current fiscal year. The implementation
did not have a significant impact on the Company's results of operations,
financial position or disclosures.

Future Accounting Standards

Financial Instruments - Recognition and Measurement

On April 29, 2009, the CICA amended Section 3855, "Financial Instruments
- Recognition and Measurement" ("Section 3855"), adding/amending
paragraphs regarding the application of the effective interest method to
previously impaired financial assets and embedded prepayment options. The
amendments are effective for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011 with early
adoption permitted. The amendments are not expected to have a significant
impact on the Company's accounting for its financial instruments.

Financial Instruments - Disclosures

In June 2009, the CICA amended Section 3862, "Financial Instruments -
Disclosures" ("Section 3862"), to adopt the amendments recently issued by
the IASB to International Financial Reporting Standard 7, "Financial
Instruments: Disclosures" ("IFRS 7"), in March 2009. These amendments are
applicable to publicly accountable enterprises and those private
enterprises, co-operative business enterprises, rate-regulated
enterprises and not-for-profit organizations that choose to apply Section
3862. 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 for fiscal
years ending after September 30, 2009, with early adoption permitted. To
provide relief for preparers, and consistent with IFRS 7, the CICA
decided that an entity need not provide comparative information for the
disclosures required by the amendments in the first year of application.
The Company will apply these amendments for its 2009 annual consolidated
financial statements. The impact of the amendments to the fair value
measurement and liquidity risk disclosure requirements of the Company are
not expected to be significant.

3. INVENTORY

During the 12 and 24 weeks ended June 20, 2009, the Company recognized
cost of inventory of $1,438,920 and $2,823,242 (2008 - $1,333,528 and
$2,619,740), respectively, as an expense. This expense is included in
cost of goods sold and other operating expenses in the consolidated
statements of earnings for the period.

During the 12 and 24 weeks ended June 20, 2009 and June 14, 2008, there
were no significant write-downs of inventory as a result of net
realizable values being lower than cost and no inventory write-downs
recognized in previous years were reversed.

4. ACQUISITIONS

HealthAccess and Information Healthcare Marketing Corp.

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

The total cost of the acquisition in cash, including costs incurred in
connection with the acquisition, was $88,742. The cost of the acquisition
was allocated to the assets acquired on the basis of their fair values as
follows:

Net working capital $ 3,841
Property and equipment 162
Goodwill 70,739
Customer relationships(1) 14,000
-------------------------------------------------------------------------
Purchase price $ 88,742
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The carrying value of the Company's customer relationships is
included in intangible assets in the consolidated balance sheets.

Other Business Acquisitions

During the 12 and 24 weeks ended June 20, 2009, the Company acquired the
assets or shares of a number of pharmacies, each of which is individually
immaterial to the Company's total acquisitions. The total cost of
acquisitions of $33,152 and $60,432 (2008 - $9,920 and $87,462),
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.

5. INTEREST EXPENSE

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

12 Weeks Ended 24 Weeks Ended
----------------------------------------------------
June 20, June 14, June 20, June 14,
2009 2008 2009 2008
-------------------------------------------------------------------------

Interest on bank
indebtedness $ 1,256 $ 2,125 $ 2,790 $ 4,851
Interest on
commercial paper 1,372 7,292 3,372 15,034
Interest on
short-term debt - - 504 -
Interest on long-term
debt 11,253 4,735 21,721 8,027
-------------------------------------------------------------------------
$ 13,881 $ 14,152 $ 28,387 $ 27,912
-------------------------------------------------------------------------
-------------------------------------------------------------------------

6. BANK INDEBTEDNESS

Bank indebtedness is comprised of lines of credit borrowings by both the
Company and the Associate-owned stores. The Associate-owned stores borrow
under agreements guaranteed by the Company. The Company has entered into
agreements with banks to guarantee a total of $505,000 (2008 - $425,000)
of lines of credit. As at June 20, 2009, the Associate-owned stores have
utilized $293,335 (2008 - $261,943) of the available lines of credit.

7. EMPLOYEE FUTURE BENEFITS

The net benefit expense included in the results for the 12 and 24 weeks
ended June 20, 2009, for benefits provided under pension plans was $1,082
and $2,164 (2008 - $1,356 and $2,712), respectively, and for benefits
provided under other benefit plans was $23 and $46 (2008 - $23 and $46),
respectively.

8. DEBT REFINANCING

On January 20, 2009, the Company issued $250,000 of three-year
medium-term notes maturing January 20, 2012, which bear interest at a
fixed rate of 4.80% (the "Series 3 notes") and $250,000 of five-year
medium-term notes maturing January 20, 2014, which bear interest at a
fixed rate of 5.19% (the "Series 4 notes"). The Series 3 notes and the
Series 4 notes were issued pursuant to the Company's shelf prospectus, as
supplemented by pricing supplements dated January 14, 2009.

The net proceeds from the issuance of the Series 3 notes and the Series 4
notes were used to refinance existing indebtedness, including repayment
of all amounts outstanding under the Company's senior unsecured 364-day
bank credit facility ("short-term debt"). The Company's senior unsecured
364-day bank credit facility was terminated on January 20, 2009.

9. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES RELATED TO
FINANCIAL INSTRUMENTS

In the normal course of business, the Company is exposed to financial
risks that have the potential to negatively impact its financial
performance. The Company may use derivative financial instruments to
manage certain of these risks. The Company does not use derivative
financial instruments for trading or speculative purposes. These risks
are discussed in more detail below:

Interest Rate Risk

Interest rate risk is the risk that fair value or future cash flows
associated with the Company's financial assets or liabilities will
fluctuate due to changes in market interest rates.

The Company, including its Associate-owned store network, is exposed to
fluctuations in interest rates by virtue of its borrowings under its bank
credit facilities, commercial paper program and financing programs
available to its Associates. Increases or decreases in interest rates
will positively or negatively impact the financial performance of the
Company.

The Company uses interest rate derivatives to manage this exposure and
monitors market conditions and the impact of interest rate fluctuations
on its fixed and floating rate debt instruments on an ongoing basis. The
Company has interest rate derivative agreements converting an aggregate
notional principal amount of $100,000 of floating rate commercial paper
debt into fixed rate debt.

As at June 20, 2009, the Company had $434,335 (2008 - $261,943) of
unhedged floating rate debt. During the 12 and 24 weeks ended June 20,
2009, the Company's average outstanding unhedged floating rate debt was
$581,492 and $626,231 (2008 - $716,330 and $733,384), respectively. Had
interest rates been higher or lower by 50 basis points during the 12 and
24 weeks ended June 20, 2009, net earnings would have decreased or
increased, respectively, by approximately $462 and $994 (2008 - $569 and
$1,165), respectively, as a result of the Company's exposure to interest
rate fluctuations on its unhedged floating rate debt.

Furthermore, the Company may be exposed to losses should any counterparty
to its derivative agreements fail to fulfill its obligations. The Company
has sought to minimize counterparty risk by transacting with
counterparties that are large financial institutions. As at June 20, 2009
and June 14, 2008, there are no net exposures, as the interest rate
derivative agreements are in a liability position.

Credit Risk

Credit risk is the risk that the Company's counterparties will fail to
meet their financial obligations to the Company causing a financial loss.

Accounts receivable arise primarily in respect of prescription sales
billed to governments and third-party drug plans and, as a result,
collection risk is low. There is no concentration of balances with
debtors in the remaining accounts receivable. The Company does not
consider its exposure to credit risk to be material.

Liquidity Risk

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

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

The contractual maturities of the Company's financial liabilities as at
June 20, 2009, are as follows:

Payments Payments
due due
Payments between 90 between 1
due in days and year and Payments
the next less than less than due after
$000's 90 days a year 2 years 2 years Total
-------------------------------------------------------------------------
Bank
indebtedness $ 277,617 $ - $ - $ - $ 277,617
Commercial
paper 241,000 - - - 241,000
Accounts
payable 852,284 37,834 - - 890,118
Dividends
payable 46,738 - - - 46,738
Medium-term
notes - - - 950,000 950,000
Other
long-term
liabilities - - 14,482 14,663 29,145
-------------------------------------------------------------------------
Total $1,417,639 $ 37,834 $ 14,482 $ 964,663 $2,434,618
-------------------------------------------------------------------------
-------------------------------------------------------------------------

There is no difference between the carrying value of bank indebtedness
and the amount the Company is required to pay. The accounts payable and
other long-term liabilities amounts exclude certain liabilities that are
not considered financial liabilities.

10. FINANCIAL INSTRUMENTS

Interest Rate Derivatives

The Company has interest rate derivative agreements converting an
aggregate notional principal amount of $100,000 of floating rate
commercial paper debt into fixed rate debt. The fixed rates payable by
the Company under the derivative agreements range from 4.11% to 4.18%.
The agreements mature as follows: $50,000 with a fixed rate payable of
4.11% in December 2009 and $50,000 with a fixed rate payable of 4.18% in
December 2010, with reset terms of one month.

Based on market values of the interest rate derivative agreements at
June 20, 2009, the Company recognized a liability of $3,399 (2008 -
$1,379), of which $915 (2008 - $555) is presented in accounts payable and
accrued liabilities and $2,484 (2008 - $824) is presented in other
long-term liabilities. During the 12 and 24 weeks ended June 20, 2009 and
June 14, 2008, the Company assessed that the interest rate derivatives
were an effective hedge for the floating interest rates on the associated
commercial paper debt. Market values were determined based on information
received from the Company's counterparties to these agreements.

Equity Forward Derivatives

The Company uses cash-settled equity forward agreements to limit its
exposure to future price changes in the Company's share price for share
unit awards under the Company's long-term incentive plan ("LTIP"). The
income or expense arising from the use of these instruments is included
in cost of goods sold and other operating expenses for the year.

Based on market values of the equity forward agreements at June 20, 2009,
the Company recognized a net liability of $692, of which $870 is
presented in other assets, $750 is presented in accounts payable and
accrued liabilities and $812 is presented in other long-term liabilities.
Based on market values of equity forward agreements at June 14, 2008, the
Company recognized an asset of $1,638, of which $666 was presented in
accounts receivable and $972 was presented in other assets. During the 12
and 24 weeks ended June 20, 2009 and June 14, 2008, the Company assessed
that the percentage of the equity forward derivatives related to unearned
units under the LTIP were an effective hedge for the common share price
of the unearned units. Market values were determined based on information
received from the Company's counterparties to these agreements.

During the 12 and 24 weeks ended June 20, 2009, amounts previously
recorded in accumulated other comprehensive loss of $76 and $167 (2008 -
$11 and $11), respectively, were recognized in earnings.

Fair Value of Financial Instruments

The fair value of a financial instrument is the estimated amount that the
Company would receive or pay to settle the financial assets and financial
liabilities as at the reporting date.

The fair values of cash, accounts receivable, deposits, bank
indebtedness, commercial paper, short-term debt, accounts payable and
dividends payable approximate their carrying values given their
short-term maturities. The fair values of long-term receivables,
long-term debt and other long-term liabilities approximate their carrying
values given the current market rates associated with these instruments.

The interest rate and equity forward derivatives are recognized at fair
value, which is determined based on current market rates and on
information received from the Company's counterparties to these
agreements.

11. CAPITAL MANAGEMENT

The Company's primary objectives when managing capital are to profitably
grow its business while maintaining adequate financing flexibility to
fund attractive new investment opportunities and other unanticipated
requirements or opportunities that may arise. Profitable growth is
defined as earnings growth commensurate with the additional capital being
invested in the business in order that the Company earns an attractive
rate of return on that capital. The primary investments undertaken by the
Company to drive profitable growth include additions to the selling
square footage of its store network via the construction of new,
relocated and expanded stores, including related leasehold improvements
and fixtures, the purchase of sites for future store construction, as
well as through the acquisition of independent drug stores or their
prescription files. In addition, the Company makes capital investments in
information technology and its distribution capabilities to support an
expanding store network. The Company also provides working capital to its
Associates via loans and/or loan guarantees. The Company largely relies
on its cash flow from operations to fund its capital investment program
and dividend distributions to its shareholders. This cash flow is
supplemented, when necessary, through the borrowing of additional debt.
No changes were made to these objectives during the period.

The Company considers its total capitalization to be bank indebtedness,
commercial paper, short-term debt, long-term debt (including the current
portion thereof) and shareholders' equity, net of cash. The Company also
gives consideration to its obligations under operating leases when
assessing its total capitalization. The Company manages its capital
structure with a view to maintaining investment grade credit ratings from
two credit rating agencies. In order to maintain its desired capital
structure, the Company may adjust the level of dividends paid to
shareholders, issue additional equity, repurchase shares for cancellation
or issue or repay indebtedness. The Company has certain debt covenants
and is in compliance with those covenants.

The Company monitors its capital structure principally through measuring
its net debt to shareholders' equity and net debt to total capitalization
ratios, and ensures its ability to service its debt and meet other fixed
obligations by tracking its interest and other fixed charges coverage
ratios.

The following table provides a summary of certain information with
respect to the Company's capital structure and financial position as at
the dates indicated.

June 20, June 14, January 3,
2009 2008 2009
-------------------------------------------------------------------------

Cash $ (26,059) $ (80,452) $ (36,567)
Bank indebtedness 277,617 260,441 240,844
Commercial paper 240,148 248,696 339,943
Short-term debt - - 197,845
Current portion of long-term debt - 299,899 -
Long-term debt 943,809 446,845 647,250
---------------------------------------

Net debt 1,435,515 1,175,429 1,389,315

Shareholders' equity 3,575,032 3,186,326 3,420,529
---------------------------------------

Total capitalization $ 5,010,547 $ 4,361,755 $ 4,809,844
---------------------------------------
---------------------------------------

Net debt:Shareholders' equity 0.40:1 0.37:1 0.41:1
Net debt:Total capitalization 0.29:1 0.27:1 0.29:1
EBITDA:Cash interest expense(1)(2) 17.86:1 17.72:1 17.21:1

(1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
for the 53 week and 52 week periods then ended, as appropriate.
EBITDA (earnings before interest, taxes, depreciation and
amortization) is a non-GAAP financial measure. Non-GAAP financial
measures do not have standardized meanings prescribed by GAAP and
therefore may not be comparable to similar measures presented by
other reporting issuers.
(2) Cash interest expense is also a non-GAAP measure and is comprised of
interest expense for the 53 week and 52 week periods then ended, as
appropriate, and exclude the amortization of deferred financing
costs.

As measured by the ratios set out above, the Company maintained its
desired capital structure and financial position during the period.

The following table provides a summary of the Company's credit ratings at
June 20, 2009:

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 the Company's credit ratings during the 12 and
24 weeks ended June 20, 2009.

12. SUBSEQUENT EVENTS

On June 22, 2009, the Company filed with the securities regulators in
each of the provinces of Canada an amendment to its short form base shelf
prospectus dated May 22, 2008 (the "Amended Prospectus") to increase the
aggregate principal amount of medium-term notes to be issued from
$1,000,000 to $1,500,000. Subject to the requirements of applicable law,
the Company may issue medium-term notes under the Amended Prospectus for
up to 25 months from May 22, 2008.

To date, no incremental debt has been incurred by the Company as a result
of the filing of the Amended Prospectus.

Earnings Coverage Exhibit to the Consolidated Financial Statements

53 Weeks Ended June 20, 2009
-------------------------------------------------------------------------
Earnings coverage on long-term debt obligations 21.34 times
-------------------------------------------------------------------------

The earnings coverage ratio on long-term debt (including any current
portion) is equal to earnings (before interest and income taxes) divided
by interest expense on long-term debt (including any current portion).
Interest expense excludes any amounts in respect of amortization and
includes amounts capitalized to property and equipment that were included
in and excluded from, respectively, interest expense as shown in the
consolidated statement of earnings of the Company for the period.
>>

%SEDAR: 00016987EF

For further information: 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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