Press Releases

Shoppers Drug Mart Corporation Announces Strong Third Quarter Results

Nov 6, 2008

- SALES INCREASE 9.8% AND NET EARNINGS INCREASE 14.7%

TORONTO, Nov. 6 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the third quarter ended October 4, 2008.

Third Quarter Results (16 Weeks)

Third quarter sales increased 9.8% to $2.793 billion, with the Company
continuing to experience strong sales growth in all regions of the country. On
a same-store basis, excluding tobacco products, sales increased 5.0% during
the quarter.
Prescription sales increased 11.1% in the third quarter to
$1.350 billion, accounting for 48.3% of the Company's sales mix compared to
47.8% in the same period last year. On a same-store basis, prescription sales
increased 5.2%. Comparable store prescription sales growth was driven by
strong growth in the number of prescriptions filled, as increased generic
prescription utilization continues to have a deflationary impact on sales
growth in the category.
Front store sales increased 8.7% in the third quarter to $1.443 billion,
with the Company continuing to experience sales gains in all categories except
tobacco, which is being phased out of its remaining stores in Western Canada
that list these products. On a same-store basis and excluding tobacco, front
store sales increased 4.8%.
Third quarter net earnings increased 14.7% to $163 million or 75 cents
per share (diluted) from $142 million or 65 cents per share (diluted) a year
ago. Solid top line growth and a strong sales mix, combined with improved
purchasing synergies and an ongoing commitment to cost reduction and
efficiency, continued to drive growth in net earnings.
Commenting on the results, Jurgen Schreiber, President and CEO stated,
"We are pleased with our third quarter results. Our performance thus far in
fiscal 2008 is a testament to the strength of our concept and the commitment
to operational excellence on the part of our Associate-owners and their teams
at store-level. In these times of softening economic conditions, we consider
ourselves to be relatively well-positioned to deal with challenges in the
marketplace."

Year-to-date Results (40 weeks)

Sales for the first three quarters of 2008 increased by 9.8% to
$6.926 billion, with prescription sales up 10.6% and front store sales up
9.0%. On a same-store basis, excluding tobacco products, sales increased 5.3%,
with prescription sales up 5.5% and front store sales up 5.0%. During the
first three quarters of 2008, prescription sales accounted for 48.1% of the
Company's sales mix compared to 47.8% in the same period last year.
Net earnings for the first three quarters of 2008 increased 15.6% to
$392 million or $1.80 per share (diluted) from $339 million or $1.56 per share
(diluted) a year ago.

Store Network Development

During the third quarter, 41 drug stores were opened or acquired, 13 of
which were relocations, and two smaller drug stores were closed. The Company
also added one home health care store to its network during the quarter. At
quarter-end, there were 1,198 stores in the system, comprised of 1,132 drug
stores and 66 Shoppers Home Health Care stores. Drug store selling space was
approximately 10.4 million square feet at the end of the third quarter, an
increase of 12.6% compared to a year ago.

Dividend

The Company also announced today that its Board of Directors has declared
a dividend of 21.5 cents per common share, payable January 15, 2009 to
shareholders of record as of the close of business on December 31, 2008.

Other Information

The Company will hold an analyst call at 3:30 p.m. (Eastern Standard
Time) today to discuss its third 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
Standard Time) on November 20, 2008. The call playback can be accessed after
5:00 p.m. (Eastern Standard Time) on Thursday, November 6, 2008 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 3271527.

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 1,108 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 24 medical clinic pharmacies operating under the name Shoppers Simply
Pharmacy (Pharmaprix Simplement Santé in Québec). As well, the Company 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.

Forward-looking Information and Statements

This news release, including the Management's Discussion and Analysis,
contains forward-looking information and statements which constitute
"forward-looking information" (under Canadian securities law), and which may
be material, regarding, among other things, the Company's beliefs, plans,
objectives, estimates, intentions and expectations, including as they relate
to its operating and financial results, capital expenditures, dividend policy
and the ability to execute on its operating, investing and financing
strategies. The forward-looking information and statements contained herein
are based on certain assumptions by management, certain of which are set out
in this news release. Inherent in the forward-looking information and
statements are known and unknown risks, uncertainties and other factors beyond
the Company's ability to control or predict. Actual results or developments
may differ materially from those contemplated by the forward-looking
information and statements. The material risk factors that could cause actual
results to differ materially from the forward-looking information and
statements contained herein include, without limitation: the risk of adverse
changes to laws and regulations relating to prescription drugs and their sale,
including pharmacy reimbursement and the availability of manufacturer
allowances, or changes to such laws and regulations that increase compliance
costs; the risk of adverse changes to existing pharmacy reimbursement programs
and the availability of manufacturer allowance funding; the risk of increased
competition from other retailers; the risk of exposure to fluctuations in
interest rates; the risk of material adverse changes in foreign currency
exchange rates; the risk of an inability to attract and retain pharmacists;
the risk of changes to the relationships of the Company with third-party
service providers; the risk that the Company will not be able to lease or
obtain suitable store locations on economically favourable terms; the risk
that new, or changes to current, federal and provincial laws, rules and
regulations, including environmental laws, rules and regulations, may
adversely impact the Company's business and operations; the risk that changes
in tax law, or changes in the way that tax law is expected to be interpreted,
may adversely impact the Company's business and operations; the risk that new,
or changes to existing, accounting pronouncements may adversely impact the
Company; 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;
and the risk of adverse changes to the economic and financial conditions in
Canada and globally.
This is not an exhaustive list of the factors that may affect any of the
Company's forward-looking information and statements. Investors and others
should carefully consider these and other risk factors and not place undue
reliance on the forward-looking information and statements. Further
information regarding these and other risk factors is included in the
Company's public filings with provincial securities regulatory authorities
including, without limitation, the section entitled "Risks and Risk
Management" in the Company's Management's Discussion and Analysis for the 52
week period ended December 29, 2007 and in the section entitled "Risk Factors"
in the Company's Annual Information Form for the same period. The
forward-looking information and statements contained in this news release
represent the Company's views only as of the date of this release.
Forward-looking information and statements contained in this news release
about prospective results of operations, financial position or cash flows that
are based upon assumptions about future economic conditions and courses of
action are presented for the purpose of assisting the Company's shareholders
in understanding management's current views regarding those future outcomes,
and may not be appropriate for other purposes. While the Company anticipates
that subsequent events and developments may cause the Company's views to
change, the Company does not undertake to update any forward-looking
information and statements, except to the extent required by applicable
securities laws.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

<<

SHOPPERS DRUG MART CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

As at October 27, 2008
>>

The following is a discussion of the consolidated financial condition and
results of operations of Shoppers Drug Mart Corporation (the "Company") for
the periods indicated and of certain factors that the Company believes may
affect its prospective financial condition, cash flows and results of
operations. This discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements of the Company and the notes
thereto for the 16 and 40 week periods ended October 4, 2008. The Company's
unaudited interim period financial statements and the notes thereto have been
prepared in accordance with Canadian generally accepted accounting principles
("GAAP") and are reported in Canadian dollars. These financial statements do
not contain all disclosures required by Canadian GAAP for annual financial
statements and, accordingly, should be read in conjunction with the most
recently prepared annual consolidated financial statements for the 52 week
period ended December 29, 2007.

FORWARD-LOOKING INFORMATION AND STATEMENTS

This discussion of the consolidated financial condition and results of
operations of the Company contains forward-looking information and statements
which constitute "forward-looking information" (under Canadian securities
law), and which may be material regarding, among other things, the Company's
beliefs, plans, objectives, strategies, estimates, intentions and
expectations, including as they relate to its operating and financial results,
capital expenditures, dividend policy and the ability to execute on its
operating, investing and financing strategies. The forward-looking information
and statements contained herein are based on certain assumptions by
management, certain of which are set out herein. Inherent in the
forward-looking information and statements are known and unknown risks,
uncertainties and other factors beyond the Company's ability to control or
predict. Actual results or developments may differ materially from those
contemplated by the forward-looking information and statements. The material
risk factors that could cause actual results to differ materially from the
forward-looking information and statements contained herein include, without
limitation: the risk of adverse changes to laws and regulations relating to
prescription drugs and their sale, including pharmacy reimbursement and the
availability of manufacturer allowances, or changes to such laws and
regulations that increase compliance costs; the risk of adverse changes to
existing pharmacy reimbursement programs and the availability of manufacturer
allowance funding; the risk of increased competition from other retailers; the
risk of exposure to fluctuations in interest rates; the risk of material
adverse changes in foreign currency exchange rates; the risk of an inability
to attract and retain pharmacists; the risk of changes to the relationships of
the Company with third-party service providers; the risk that the Company will
not be able to lease or obtain suitable store locations on economically
favourable terms; the risk that new, or changes to current, federal and
provincial laws, rules and regulations, including environmental laws, rules
and regulations, may adversely impact the Company's business and operations;
the risk that changes in tax law, or changes in the way that tax law is
expected to be interpreted, may adversely impact the Company's business and
operations; the risk that new, or changes to existing, accounting
pronouncements may adversely impact the Company; 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; and the risk of adverse changes to
the economic and financial conditions in Canada and globally.
This is not an exhaustive list of the factors that may affect any of the
Company's forward-looking information and statements. Investors and others
should carefully consider these and other factors and not place undue reliance
on the forward-looking information and statements. Further information
regarding these and other risk factors is included in the Company's public
filings with provincial securities regulatory authorities including, without
limitation, the section entitled "Risks and Risk Management" in the Company's
Management's Discussion and Analysis for the 52 week period ended December 29,
2007 and the section entitled "Risk Factors" in the Company's Annual
Information Form for the same period. The forward-looking information and
statements contained in this discussion of the consolidated financial
condition and results of operations of the Company represent the Company's
views only as of the date hereof. Forward-looking information and statements
contained in this Management's Discussion and Analysis about prospective
results of operations, financial position or cash flows that are based upon
assumptions about future economic conditions and courses of action are
presented for the purpose of assisting the Company's shareholders in
understanding management's current views regarding those future outcomes and
may not be appropriate for other purposes. While the Company anticipates that
subsequent events and developments may cause the Company's views to change,
the Company does not undertake to update any forward-looking information and
statements, except to the extent required by applicable securities laws.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

OVERVIEW

The Company is the licensor of full-service retail drug stores operating
under the name Shoppers Drug Mart® (Pharmaprix® in Québec). As at October
4, 2008, there were 1,108 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 24
medical clinic pharmacies operating under the name Shoppers Simply
Pharmacy™ (Pharmaprix Simplement Santé(MC) in Québec).
The Company has successfully leveraged its leadership position in
pharmacy and its convenient store locations to capture a significant share of
the market in front store merchandise. Front store merchandise categories
include over-the-counter medications, health and beauty aids, cosmetics and
fragrances (including prestige brands), everyday household needs and seasonal
products. The Company also offers a broad range of high-quality private label
products marketed under the trademarks Life Brand®, 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 2007, the Company recorded
consolidated sales of approximately $8.5 billion.
Under the licensing arrangement with Associates, the Company provides the
capital and financial support to enable Associates to operate Shoppers Drug
Mart® 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 notes 7 and 8 to the accompanying
unaudited consolidated financial statements of the Company.)
Under the licensing arrangement, the Company receives a substantial share
of Associate store profits. The Company's share of Associate store profits is
reflective of its investment in, and commitment to, the operations of the
Associates' stores.
The Company operates in Québec under the Pharmaprix® 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 16 and 40 week periods ended October 4, 2008 compared to the 16 and 40
week periods ended October 6, 2007, as well as certain other metrics with
respect to investing activities for the 16 and 40 week periods ended
October 4, 2008 and financial position as at October 4, 2008.

<<
- Third quarter sales of $2.793 billion, an increase of 9.8%.

- Year-to-date sales of $6.926 billion, an increase of 9.8%.

- Third quarter comparable store sales growth, excluding tobacco(1), of
5.0%, comprised of comparable prescription sales growth of 5.2% and
comparable front store sales growth of 4.8%.

- Year-to-date comparable store sales growth, excluding tobacco, of
5.3%, comprised of comparable prescription sales growth of 5.5%
and comparable front store sales growth of 5.0%.

- Third quarter EBITDA(2) of $319 million, an increase of 13.1%.

- Year-to-date EBITDA of $772 million, an increase of 13.9%.

- Third quarter EBITDA margin(3) of 11.44%, an increase of 33 basis
points.

- Year-to-date EBITDA margin of 11.15%, an increase of 41 basis
points.

- Third quarter net earnings of $163 million or $0.75 per share
(diluted), an increase of 14.7%.

- Year-to-date net earnings of $392 million or $1.80 per share
(diluted), an increase of 15.6%.

- Third quarter capital expenditure program of $272 million, which
includes the acquisition of the assets of the HealthAccess division
of Calea Ltd. and 100% of the shares of Calea Ltd.'s wholly-owned
subsidiary, Information Healthcare Marketing Corp. ($88 million).
This compares to $248 million in the prior year, which included the
acquisition of the assets of Centre d'Escomptes Racine ($78 million).
Opened or acquired 41 new drug stores, 13 of which were relocations,
and added one home health care store.

- Year-to-date capital expenditure program of $515 million compared
to $370 million in the prior year. Opened or acquired 114 new drug
stores, 30 of which were relocations, and added two home health
care stores.

- Year-over-year increase in drug store selling space of 12.6%.

- Maintained desired capital structure and financial position.

- Net debt to total capitalization ratio of 0.28:1 at October 4,
2008 compared to 0.26:1 a year ago.

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

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

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

(3) EBITDA divided by sales.

Results of Operations

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

16 Weeks Ended 40 Weeks Ended
-------------------------- --------------------------
($000s, except October 4, October 6, October 4, October 6,
per share data) 2008 2007 2008 2007
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Sales $ 2,793,005 $ 2,542,671 $ 6,926,112 $ 6,309,560
Cost of goods
sold and other
operating
expenses 2,473,584 2,260,187 6,153,649 5,631,656
-------------------------- --------------------------

EBITDA(1) 319,421 282,484 772,463 677,904
Amortization 63,799 54,942 154,894 130,752
-------------------------- --------------------------

Operating income 255,622 227,542 617,569 547,152
Interest expense 20,100 15,920 48,012 38,688
-------------------------- --------------------------

Earnings before
income taxes 235,522 211,622 569,557 508,464
Income taxes 73,011 69,950 177,396 169,354
-------------------------- --------------------------

Net earnings $ 162,511 $ 141,672 $ 392,161 $ 339,110
-------------------------- --------------------------
-------------------------- --------------------------

Per common share
- Basic net
earnings $ 0.75 $ 0.65 $ 1.81 $ 1.57
- Diluted net
earnings $ 0.75 $ 0.65 $ 1.80 $ 1.56

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

Sales

Sales represent the combination of sales of the retail drug stores owned
by the Associates and sales of the Company-owned home health care business,
Shoppers Drug Mart Specialty Health Network Inc. and MediSystem Technologies
Inc.
Sales in the third quarter were $2.793 billion compared to $2.543 billion
in the same period last year, an increase of $250 million or 9.8%, with the
Company continuing to experience strong sales growth in all regions of the
country. On a same-store basis, excluding tobacco products, sales increased
5.0% during the third quarter of 2008. Year-to-date, sales increased 9.8% to
$6.926 billion. The Company's capital investment program, which has resulted
in a 12.6% increase in drug store selling square footage versus a year ago,
continues to have a positive impact on sales growth. On a same-store basis,
excluding tobacco products, sales increased 5.3% during the first three
quarters of 2008.
Prescription sales were $1.350 billion in the third quarter compared to
$1.215 billion in the same period last year, an increase of $135 million or
11.1%. On a same-store basis, prescription sales increased 5.2% during the
third quarter of 2008, with increased generic prescription utilization
continuing to have a deflationary impact on sales growth in the category.
Prescription sales represented 48.3% of the Company's sales mix during the
third quarter of 2008 compared to 47.8% in the same period last year.
Year-to-date, prescription sales increased 10.6% to $3.333 billion and
accounted for 48.1% of the Company's sales mix. On a same-store basis,
prescription sales increased 5.5% during the first three quarters of 2008.
Front store sales were $1.443 billion in the third quarter compared to
$1.328 billion in the third quarter of 2007, an increase of $115 million or
8.7%, with the Company continuing to experience sales gains in all categories
except tobacco, which is being phased out of its remaining stores in Western
Canada that list these products. On a same-store basis and excluding tobacco,
front store sales increased 4.8%. The incremental selling space stemming from
the Company's store network growth and revitalization program, along with
effective merchandising and the continued maturation of the sales mix in these
stores, combined with solid execution of programs at store-level, continues to
drive front store sales growth and market share gains. Additionally,
stepped-up promotional activity, in the context of softening economic
conditions, also contributed to top-line growth. Year-to-date, front store
sales increased 9.0% to $3.594 billion. On a same-store basis, front store
sales, excluding tobacco, increased 5.0% during the first three quarters of
2008.

Cost of Goods Sold and Other Operating Expenses

Cost of goods sold is comprised of the cost of goods sold at the retail
drug stores owned by the Associates and the cost of goods sold at the
Company-owned home health care business, 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, 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 $2.474 billion
in the third quarter compared to $2.260 billion in the same period last year,
an increase of $214 million or 9.4%. Expressed as a percentage of sales, cost
of goods sold declined by 98 basis points in the third quarter of 2008 versus
the comparative prior year period, reflecting improvements in cost of goods
and a better sales mix and margin rate. Partially offsetting this improvement
were higher operating expenses which, when expressed as a percentage of sales,
increased by 65 basis points over the prior year period. Higher operating
expenses at store-level, primarily occupancy, wages and benefits associated
with the expansion of the store network, accounted for the bulk of this
increase, with marketing expenses also higher, a result of the stepped-up
promotional activity referred to above.
Year-to-date, total cost of goods sold and other operating expenses
increased 9.3% to $6.154 billion. Expressed as a percentage of sales, cost of
goods sold declined by 93 basis points in the first three quarters of 2008
versus the comparative prior year period, while other operating expenses
increased by 52 basis points.

Amortization

Amortization of capital assets and other intangible assets was
$64 million in the third quarter compared to $55 million in the same period
last year, an increase of $9 million or 16.1%. Expressed as a percentage of
sales, amortization increased 12 basis points in the third quarter of 2008
versus the comparative prior year period, reflecting the continued growth of
the Company's capital investment and store development program.
Year-to-date, amortization of capital assets and other intangible assets
increased 18.5% to $155 million. Expressed as a percentage of sales,
amortization increased 16 basis points in the first three quarters of 2008
versus the comparative prior year period.

Operating Income

Operating income was $256 million in the third quarter of 2008 compared
to $228 million in the same period last year, an increase of $28 million or
12.3%. Solid top line growth and a strong sales mix, combined with improved
purchasing synergies and an ongoing commitment to cost reduction and
efficiency, partially offset by higher marketing expenses and increased
operating costs and amortization in new and relocated stores, resulted in a
higher operating margin (operating income divided by sales). In 2008, third
quarter operating margin improved by 20 basis points to 9.15% compared to
8.95% in the third quarter of last year. The Company's EBITDA margin (EBITDA
divided by sales) was 11.44% in the third quarter of 2008, a 33 basis point
improvement over the EBITDA margin of 11.11% posted in the third quarter of
last year.
Year-to-date, operating income increased 12.9% to $618 million and
operating margin improved by 25 basis points to 8.92%. During the first three
quarters of 2008, EBITDA margin was 11.15%, a 41 basis point improvement over
the EBITDA margin of 10.74% posted during the first three quarters of 2007.

Interest Expense

Interest expense is comprised of interest expense arising from borrowings
at the Associate-owned stores and from debt obligations of the Company.
Interest expense was $20 million in the third quarter of 2008 compared to
$16 million in the same period last year, an increase of $4 million or 26.3%.
This increase versus the comparative prior year period can be attributed to an
increase in the amount of consolidated net debt outstanding, partially offset
by a decrease in average interest rates. Year-to-date, interest expense
increased 24.1% to $48 million. (See note 4 to the accompanying unaudited
consolidated financial statements of the Company.)

Income Taxes

The Company's effective income tax rate in the third quarter and first
three quarters of 2008 was 31.0% and 31.1%, respectively, compared to 33.1%
and 33.3% in the same respective periods of the prior year. These
year-over-year decreases in the effective income tax rate can be attributed to
a reduction in statutory rates.

Net Earnings

Third quarter net earnings were $163 million compared to $142 million in
the same period last year, an increase of $21 million or 14.7%. On a diluted
basis, earnings per share were $0.75 in the third quarter of 2008 compared to
$0.65 in the same period last year.
Year-to-date, net earnings increased 15.6% to $392 million. On a diluted
basis, earnings per share were $1.80 in the first three quarters of 2008
compared to $1.56 in the same period last year.

Capital Structure and Financial Position

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

<<
October 4, December 29,
($000s) 2008 2007
-------------------------------------------------------------------------

Cash $ (49,817) $ (27,588)
Bank indebtedness 259,394 225,152
Commercial paper 343,847 543,847
Current portion of long-term debt 299,986 298,990
Long-term debt 447,069 -
--------------------------

Net debt 1,300,479 1,040,401

Shareholders' equity 3,332,026 3,075,710

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

Total capitalization $ 4,632,505 $ 4,116,111
--------------------------
--------------------------

Net debt:Shareholders' equity 0.39:1 0.34:1
Net debt:Total capitalization 0.28:1 0.25:1
Net debt:EBITDA(1) 1.24:1 1.09:1
EBITDA:Cash interest expense(1)(2) 17.23:1 18.37:1

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

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

Outstanding Share Capital

The Company's outstanding share capital is comprised of common shares. An
unlimited number of common shares is authorized and the Company had
217,101,828 common shares outstanding at October 27, 2008. As at this same
date, the Company had issued options to acquire 1,224,595 of its common shares
pursuant to its stock-based compensation plans, of which 909,585 were
exercisable.

Financing Activities

On October 17, 2008, the Company entered into a new senior unsecured
364-day bank credit facility in the amount of up to $200 million. This
facility was available for a single drawdown to provide for a partial
refinancing of the Company's $300 million of medium-term notes maturing on
October 24, 2008. On October 23, 2008, the Company elected to drawdown all of
this facility to refinance a portion of its $300 million of maturing
medium-term notes. The Company's credit spread on the initial $200 million of
prime rate borrowings under this facility was 75 basis points. The balance of
funds required to complete the refinancing of the $300 million of maturing
medium-term notes were drawn from funds available under the Company's
pre-existing $800 million revolving term bank credit facility maturing June 6,
2011. On October 24, 2008, the $300 million of medium-term notes were repaid
in full, along with all accrued and unpaid interest owing on the final
semi-annual interest payment. On a consolidated basis, after giving effect to
the repayment of the maturing medium-term notes, the net debt position of the
Company remained substantially unchanged as a result of these refinancing
activities.
In addition to the refinancing activities described above, the Company
completed certain refinancing activities in the second quarter of 2008 which
are described below.
On April 22, 2008, the Company completed an amendment to its existing
bank credit facility which matures in June of 2011, increasing the size of the
facility from $550 million to $800 million. The bank credit facility is
available for general corporate purposes, including refinancing existing
indebtedness, and to backstop the Company's commercial paper program. The
Company's initial credit spread on BA borrowings under the amended credit
facility is 50 basis points. (See note 7 to the accompanying unaudited
consolidated financial statements of the Company).
In conjunction with this amendment, the Company increased its commercial
paper program from $300 million to $500 million. The Company's commercial
paper program retained its rating of R-1 (low) by DBRS Limited.
On April 23, 2008, the Company issued $200 million of commercial paper
and used the proceeds to purchase loans provided to Associates by an
independent trust (the "Trust") whose activities were financed through the
issuance of short-term, asset-backed notes. The purchase of these loans
reduced the outstanding Trust loans to Associates from $499 million to
$299 million. In conjunction with this reduction, the standby letter of credit
provided by the Company to the Trust as a form of credit enhancement was
reduced from $50 million to $30 million. On a consolidated basis, no
incremental debt was incurred by the Company as a result of these refinancing
activities.
On May 22, 2008, the Company filed with the securities regulators in each
of the provinces of Canada, a final short form base shelf prospectus (the
"Prospectus') for the issuance of up to $1 billion of medium-term notes.
Subject to the requirements of applicable law, medium-term notes can be issued
under the Prospectus for up to 25 months from the date of the final receipt.
No incremental debt was incurred by the Company as a result of this filing.
On June 2, 2008, the Company issued $450 million of five-year medium-term
notes maturing June 3, 2013, which bear interest at a fixed rate of 4.99% per
annum (the "Series 2 Notes"). The Series 2 Notes were issued pursuant to the
Prospectus, as supplemented by a pricing supplement dated May 28, 2008, and
filed by the Company with Canadian securities regulators in all of the
provinces of Canada. At the time of issuance, the Series 2 Notes were assigned
a rating of A (low) from DBRS Limited and BBB+ from Standard & Poor's.
The net proceeds from the issuance of the Series 2 Notes were used to
purchase the remaining outstanding Trust loans to Associates, with the balance
applied to reduce outstanding commercial paper issued by the Company. In
conjunction with the purchase of all remaining Trust loans to Associates, the
$30 million standby letter of credit provided by the Company to the Trust as a
form of credit enhancement was returned to the Company by the Trust and
cancelled. The Trust itself was terminated on June 10, 2008. As a result of
applying the net proceeds from the issuance of the Series 2 Notes to refinance
existing indebtedness, the consolidated net debt position of the Company
remained substantially unchanged.

Liquidity and Capital Resources

Sources of Liquidity

The Company has the following sources of liquidity: (i) cash provided by
operating activities; (ii) cash available from a committed $800 million
revolving bank credit facility maturing June 6, 2011, less what is currently
drawn and/or being utilized to support commercial paper issued and
outstanding; and (iii) up to $500 million in availability under its commercial
paper program, less what is currently issued. The Company's commercial paper
program is rated R-1 (low) by DBRS Limited. In the event that the Company's
commercial paper program is unable to maintain this rating, the program is
supported by the Company's $800 million revolving bank credit facility. The
Company does not currently foresee any reasonable circumstances under which
this credit rating would not be maintained.
The Company has also arranged for its Associates to obtain financing to
facilitate their purchase of inventory and fund their working capital
requirements by providing guarantees to various Canadian chartered banks that
support Associate loans.
The Company has obtained additional short-term financing from a new
senior unsecured 364-day bank credit facility in the amount of up to
$200 million. As described above under "Financing Activities", this facility
was available for a single drawdown to provide for a partial refinancing of
the Company's $300 million of medium-term notes maturing on October 24, 2008.
On October 23, 2008, the Company elected to drawdown all of the funds
available under this facility. This facility matures on October 16, 2009.
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 2 Notes were issued pursuant to the Prospectus, as supplemented by a
pricing supplement dated May 28, 2008, and filed by the Company with Canadian
securities regulators in all of the provinces of Canada. At the time of
issuance, the Series 2 Notes were assigned a rating of A (low) from DBRS
Limited and BBB+ from Standard & Poor's. (See description under "Financing
Activities" above.)
At the end of the third quarter, $8 million of the Company's $800 million
revolving bank credit facility was utilized, all in respect of outstanding
letters of credit and trade finance guarantees. At December 29, 2007,
$61 million of this facility was utilized, all in respect of letters of credit
and trade finance guarantees. As at October 4, 2008, the Company had
$345 million of commercial paper issued and outstanding under its commercial
paper program compared to $45 million at the end of the prior year. At the end
of the third quarter, Associates had drawn an aggregate amount of $285 million
in loans from various Canadian chartered banks compared to $228 million at the
end of the prior year.
In addition to the above, MediSystem Technologies Inc., a subsidiary of
the Company, has arranged for up to $1 million of revolving demand bank credit
facilities. At the end of the third quarter, no amounts were outstanding on
these facilities, unchanged from the end of the prior year.

Cash Flows from Operating Activities

Cash flows from operating activities were $165 million in the third
quarter of 2008 compared to $164 million in the same period last year, as
growth in net earnings, adjusted for non-cash items, was essentially offset by
an increased investment in non-cash working capital balances. The increased
investment in non-cash working capital balances in the third quarter of this
year can be attributed to growth in inventory and accounts receivable, which
are tied to store network expansion and increased sales, partially offset by
the timing of trade payables. A shift in the timing of tax payments also
contributed to the growth in non-cash working capital balances.
Year-to-date, the Company has generated $323 million of cash from
operating activities compared to $345 million in the first three quarters of
2007.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $243 million in the third
quarter of 2008 compared to $308 million in the same period last year, a
decrease of $65 million or 21.0%. Of these totals, investments in property and
equipment, net of proceeds from any dispositions, amounted to $151 million in
the third quarter of this year compared to $131 million in the same period
last year, reflecting the continued expansion of the Company's store network
growth and revitalization program. The Company also invested $110 million in
business acquisitions and $3 million in other assets during the third quarter
of 2008 compared to $110 million invested in business acquisitions in the same
period last year. Of the $110 million invested in business acquisitions in the
third quarter of this year, $88 million was used to acquire the assets of the
HealthAccess division of Calea Ltd. and 100% of the shares of Calea Ltd.'s
wholly-owned subsidiary, Information Healthcare Marketing Corp. The acquired
businesses now operate as Shoppers Drug Mart Specialty Health Network Inc. and
provide comprehensive patient support services for specialty pharmaceutical
needs. Of the $110 million invested in business acquisitions in the same
period last year, $78 million was used to acquire the assets of Centre
d'Escomptes Racine, a seven store pharmacy chain in the Québec City region.
(See note 3 to the accompanying unaudited financial statements of the
Company.) Consistent with the Company's stated growth objectives, the
remaining amounts invested in business acquisitions in the third quarter of
the current and prior year relate primarily to acquisitions of drug stores and
prescription files, as the Company continues to pursue attractive
opportunities in the marketplace. During the third quarter of 2008, the
balance of funds deposited and held in escrow in respect of outstanding offers
to purchase drug stores and land decreased by $21 million compared to an
increase of $67 million in the third quarter of last year.
Year-to-date, cash flows used in investing activities were $449 million
compared to $439 million in the first three quarters of 2007. Of these totals,
investments is property and equipment, net of proceeds from any dispositions,
amounted to $299 million in the first three quarters of 2008 compared to
$242 million in the same period last year. Investments in business
acquisitions and other assets were $198 million and $12 million, respectively,
in the first three quarters of 2008 compared to $121 million and $1 million,
respectively, in the same period last year. During the first three quarters of
2008, the balance of funds deposited and held in escrow in respect of
outstanding offers to purchase drug stores and land decreased by $60 million
compared to an increase of $75 million in the same period last year.
During the third quarter of 2008, 41 new drug stores were opened or
acquired, 13 of which were relocations, and two smaller drug stores were
closed. The Company also added one home health care store to its network
during the quarter. Year-to-date, 114 new drug stores have been opened or
acquired, 30 of which were relocations, and nine drug stores have been closed.
The Company has also added two home health care stores to its network thus far
in 2008. As a result of this activity, drug store selling space has increased
by 12.6% compared to a year ago. At the end of the third quarter there were
1,198 stores in the Company's retail network, comprised of 1,132 drug stores
and 66 Shoppers Home Health Care® stores.

Cash Flows from Financing Activities

Cash flows from financing activities were $48 million in the third
quarter of 2008, as cash inflows of $96 million were partially offset by cash
outflows of $48 million. Cash inflows were comprised of a $95 million increase
in the amount commercial paper issued and outstanding under the Company's
commercial paper program 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 during the quarter were comprised of a $1 million
decrease in the amount of bank indebtedness and $47 million for the payment of
dividends.
In the third quarter of 2008, the net result of the Company's operating,
investing and financing activities was a decrease in cash of $31 million.
Year-to-date, cash flows from financing activities were $148 million and
the net result of the Company's operating, investing and financing activities
was an increase in cash of $22 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. At present,
the Company does not foresee any major difficulty in obtaining financing given
its current credit ratings and past experiences in the capital markets.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Implemented in 2008

Capital Disclosures

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

Financial Instruments

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

Inventories

The CICA issued a new accounting standard concerning Inventories
("Section 3031"), in June 2007, which is based on the International Accounting
Standards Board's International Accounting Standard 2 and replaced CICA
Handbook Section 3030, "Inventories". The new standard provides guidance on
the determination of the cost of inventory and the subsequent recognition of
inventory as an expense, as well as requiring additional associated
disclosures. The new standard also allows for the reversal of any write-downs
previously recognized. The new standard is effective for interim and annual
financial statements for fiscal years beginning on or after January 1, 2008.
The Company applied the new accounting standard retrospectively at the
beginning of its current fiscal year, with restatement of prior periods.
The results for the 16 and 40 week periods ended October 6, 2007 reflect
an increase in cost of goods sold and other operating expenses and a decrease
in operating income of $1.2 million and $0.8 million, respectively, and a
decrease in net earnings of $0.9 million and $0.9 million, respectively, with
basic and diluted net earnings per share remaining unchanged. The impact for
year ended December 29, 2007 is an increase in cost of goods sold and other
operating expenses and a decrease in operating income of $3.7 million and a
decrease in net earnings of $3.2 million, resulting in a decrease of $0.01 in
basic and diluted net earnings per share.
The implementation of the new standard has resulted in a reduction to
2008 and 2007 opening retained earnings of $21.3 million and $18.2 million,
respectively. The impact on balances as at December 29, 2007 and October 6,
2007 was a decrease in inventory of $31.9 million and $29.0 million,
respectively, an increase in future income tax asset of $9.9 million and
$9.5 million, respectively, and a decrease in income taxes payable of
$725 thousand and $512 thousand, respectively.

<<
Determining Whether a Contract is Routinely Denominated as a Single
Currency
>>

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

Transition to International Financial Reporting Standards

In January 2006, the Accounting Standards Board (the "AcSB") announced
its decision to require all publicly accountable enterprises to report under
International Financial Reporting Standards ("IFRS") for years beginning on or
after January 1, 2011. As a result, financial reporting by Canadian publicly
accountable enterprises will change significantly from current Canadian GAAP
to IFRS. These changes are part of a world-wide shift to IFRS, intended to
facilitate global capital flows and bring greater clarity and consistency to
financial reporting in the global marketplace.
On February 13, 2008, the AcSB confirmed that publicly accountable
enterprises will be required to use IFRS, as issued by the International
Accounting Standards Board, unless modifications or additions to the
requirements of IFRS are issued by the AcSB. IFRS must be adopted for interim
and annual financial statements related to fiscal years beginning on or after
January 1, 2011, with restatement of comparative periods.
The AcSB issued an Omnibus Exposure Draft of IFRS in April 2008 for
public comment. The deadline for comments was July 31, 2008. The Omnibus
Exposure Draft contains the text of the standards proposed to be adopted and
the AcSB's guiding principles for the adoption of IFRS.
The Company is currently assessing the future impact of these new
standards on its consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

Associate Loans

The Company has provided guarantees to various Canadian chartered banks
that support Associate loans. At the end of the third quarter of 2008, the
Company's maximum obligation in respect of such guarantees was $425 million
compared to $425 million at the end of the second quarter and $415 million at
the end of the prior year. At October 4, 2008, an aggregate amount of
$387 million in available lines of credit had been allocated to the Associates
by the various banks compared to $376 million at the end of the second quarter
and $356 million at the end of the prior year. As at October 4, 2008,
Associates had drawn an aggregate amount of $285 million against these
available lines of credit compared to $262 million at the end of the second
quarter and $228 million at the end of the prior year. Any amounts drawn by
the Associates are included in bank indebtedness on the Company's consolidated
balance sheets. As recourse in the event that any payments are made under the
guarantees, the Company holds a first ranking security interest on all assets
of Associate-owned stores, subject to certain prior ranking statutory claims.
As the Company is involved in allocating the available lines of credit to its
Associates, it estimates that the net proceeds from secured assets would
exceed the amount of any payments required in respect of the guarantees.

SELECTED QUARTERLY INFORMATION

Reporting Cycle

The annual reporting cycle of the Company is divided into four quarters
of 12 weeks each, except for the third quarter which is 16 weeks in duration.
The fiscal year of the Company consists of a 52 or 53 week period ending on
the Saturday closest to December 31. When a fiscal year consists of 53 weeks,
the fourth quarter is 13 weeks in duration.

Summary of Quarterly Results

The following table provides a summary of certain selected consolidated
financial information for the Company for each of the eight most recently
completed fiscal quarters. This information has been prepared in accordance
with Canadian generally accepted accounting principles.

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

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

Net earnings $ 162,511 $ 141,672 $ 128,317 $ 112,154

Per common share

- Basic net
earnings $ 0.75 $ 0.65 $ 0.59 $ 0.52
- Diluted net
earnings $ 0.75 $ 0.65 $ 0.59 $ 0.52

First Quarter Fourth Quarter
-------------------------- --------------------------
($000s, except 2008 2007 2007 2006
per share
data - unaudited) (12 Weeks) (12 Weeks) (12 Weeks) (12 Weeks)
-------------------------------------------------------------------------

Sales $ 2,023,799 $ 1,838,795 $ 2,168,822 $ 2,018,067

Net earnings $ 101,333 $ 85,284 $ 151,331 $ 132,500

Per common share

- Basic net
earnings $ 0.47 $ 0.40 $ 0.70 $ 0.62
- Diluted net
earnings $ 0.47 $ 0.39 $ 0.70 $ 0.61
>>

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

RISKS AND RISK MANAGEMENT - FINANCIAL INSTRUMENTS

The following discussion on Risks and Risk Management provides certain of
the required disclosures under CICA Handbook Section 3862, "Financial
Instruments - Disclosures" related to the nature and extent of risks arising
from financial instruments, as permitted by the standard. Therefore, this
section forms an integral part of the unaudited interim consolidated financial
statements for the 16 and 40 week periods ended October 4, 2008.
The Company is exposed to a number of risks associated with financial
instruments that have the potential to affect its operating and financial
performance. The Company's primary financial instrument risk exposures are
interest rate risk and liquidity risk. The Company's exposures to foreign
currency risk, credit risk and other price risk are not considered to be
material. The Company may use derivative financial instruments to manage
certain of these risks. The Company does not use derivative financial
instruments for trading or speculative purposes.

Exposure to Interest Rate Fluctuations

The Company, including its Associate-owned store network, is exposed to
fluctuations in interest rates by virtue of its borrowings under its bank
credit facilities, commercial paper program and financing programs available
to its Associates. Increases or decreases in interest rates will positively or
negatively impact the financial performance of the Company.
The Company uses interest rate derivatives to manage this exposure and
monitors market conditions and the impact of interest rate fluctuations on its
fixed and floating rate debt instruments on an ongoing basis. The Company has
interest rate derivative agreements converting an aggregate notional principal
amount of $250 million of floating rate commercial paper debt into fixed rate
debt. The fixed rates payable by the Company under these agreements range from
4.03% to 4.18%. These agreements mature as follows: $150 million in December
2008, $50 million in December 2009 and $50 million in December 2010 with reset
terms from one to three months.
Furthermore, the Company may be exposed to losses should any counterparty
to its derivative agreements fail to fulfil its obligations. The Company has
sought to minimize counterparty risk by transacting with counterparties that
are large financial institutions. There is no net exposure as at October 4,
2008, as the interest rate derivative agreements are in a liability position.
At October 6, 2007, the maximum exposure was equal to the carrying value of
the interest rate derivative agreements of $2.6 million.
As at October 4, 2008 the Company had $380 million of unhedged floating
rate debt. During the 16 weeks ended October 4, 2008, the Company's average
outstanding unhedged floating rate debt was $468 million. Had interest rates
been higher or lower by 50 basis points during the period, net earnings would
have decreased or increased, respectively, by approximately $0.5 million as a
result of the Company's exposure to interest rate fluctuations on its unhedged
floating rate debt.

Foreign Currency Exchange Risk

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

Credit Risk

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

Liquidity Risk

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

Current liabilities and long-term liabilities

The contractual maturities of the Company's current and long-term
liabilities as at October 4, 2008 are as follows:

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

-------------------------------------------------------------------------
Bank indebtedness 259,394 - - - 259,394
-------------------------------------------------------------------------
Commercial paper 343,847 - - - 343,847
-------------------------------------------------------------------------
Accounts payable 859,005 21,935 3,243 142 884,325
-------------------------------------------------------------------------
Current portion of
long-term debt 299,986 - - - 299,986
-------------------------------------------------------------------------
Long-term debt - - - 447,069 447,069
-------------------------------------------------------------------------
Other long-term
liabilities 49,743 1,018 8,210 14,911 73,882
-------------------------------------------------------------------------

Total 1,811,975 22,953 11,453 462,122 2,308,503
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
There is no difference between the carrying value of bank indebtedness
and the amount the Company is required to pay.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

NON-GAAP FINANCIAL MEASURES

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

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

16 Weeks Ended 40 Weeks Ended
-------------------------------------------------------
October 4, October 6, October 4, October 6,
2008 2007 2008 2007
-------------------------------------------------------------------------

Sales $ 2,793,005 $ 2,542,671 $ 6,926,112 $ 6,309,560
Operating expenses
Cost of goods
sold and other
operating
expenses
(Note 2) 2,473,584 2,260,187 6,153,649 5,631,656
Amortization 63,799 54,942 154,894 130,752
-------------------------------------------------------------------------

Operating income 255,622 227,542 617,569 547,152

Interest expense
(Note 4) 20,100 15,920 48,012 38,688
-------------------------------------------------------------------------

Earnings before
income taxes 235,522 211,622 569,557 508,464

Income taxes
(Note 2)
Current 84,662 93,369 189,350 177,548
Future (11,651) (23,419) (11,954) (8,194)
-------------------------------------------------------------------------
73,011 69,950 177,396 169,354
-------------------------------------------------------------------------
Net earnings $ 162,511 $ 141,672 $ 392,161 $ 339,110
-------------------------------------------------------------------------

Net earnings per
common share:

Basic $ 0.75 $ 0.65 $ 1.81 $ 1.57
Diluted $ 0.75 $ 0.65 $ 1.80 $ 1.56

Weighted average
common shares
outstanding
- Basic
(millions) 217.1 216.4 216.9 215.9
- Diluted
(millions) 217.5 217.3 217.5 217.2
Actual common
shares outstanding
(millions) 217.1 216.6 217.1 216.6

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

40 Weeks Ended
---------------------------
October 4, October 6,
2008 2007
-------------------------------------------------------------------------

Retained earnings, beginning of period as
reported $ 1,580,888 $ 1,225,682
Impact of the adoption of new accounting
standard, Handbook Section 3031,
Inventories (Note 2) (21,337) (18,150)
-------------------------------------------------------------------------
Retained earnings, beginning of period as
restated 1,559,551 1,207,532
Net earnings 392,161 339,110
Dividends (139,970) (103,711)
Premium on share capital purchased for
cancellation (30) (24)
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,811,712 1,442,907
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

16 Weeks Ended 40 Weeks Ended
-------------------------------------------------------
October 4, October 6, October 4, October 6,
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings $ 162,511 $ 141,672 $ 392,161 $ 339,110
Other
comprehensive
(loss) income,
net of tax
Change in
unrealized
gain/loss on
interest rate
derivatives
(net of tax of
$375 and $971
(2007 - $431
and $792),
respectively) (761) (875) (1,972) 1,500
Change in
unrealized
gain/loss on
equity forward
derivatives
(net of tax of
$296 and $74
(2007 - $82
and $42),
respectively) (602) 163 (151) 85
Amount of
previously
unrealized
gain/loss on
equity forward
derivatives
recognized in
earnings during
the period (net
of tax of $3
and $2 (2007 -
$nil and $59),
respectively) 7 2 (4) (113)
-------------------------------------------------------------------------
Other comprehensive
(loss) income (1,356) (710) (2,127) 1,472
-------------------------------------------------------------------------
Comprehensive
income $ 161,155 $ 140,962 $ 390,034 $ 340,582
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Accumulated other
comprehensive
income, beginning
of period $ 247 $ 406
Other
comprehensive
(loss) income (2,127) 1,472
-------------------------------------------------------------------------
Accumulated other
comprehensive
(loss) income,
end of period $ (1,880) $ 1,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------

SHOPPERS DRUG MART CORPORATION
Consolidated Balance Sheets
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
October 4, October 6, December 29,
2008 2007 2007
-------------------------------------------------------------------------

Assets

Current
Cash $ 49,817 $ 17,477 $ 27,588
Accounts receivable 399,254 325,034 372,306
Inventory (Note 2) 1,590,062 1,402,477 1,545,599
Income taxes recoverable 18,064 - -
Future income taxes (Note 2) 82,211 67,619 69,952
Prepaid expenses and deposits 94,926 131,735 134,692
-------------------------------------------------------------------------
2,234,334 1,944,342 2,150,137

Property and equipment 1,289,443 1,030,783 1,126,513
Deferred costs 38,497 28,423 32,966
Goodwill 2,400,898 2,229,945 2,245,441
Other intangible assets 84,457 55,726 57,930
Other assets 20,480 11,243 8,990
-------------------------------------------------------------------------
Total assets $ 6,068,109 $ 5,300,462 $ 5,621,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current
Bank indebtedness $ 259,394 $ 246,909 $ 225,152
Commercial paper (Note 7) 343,847 537,201 543,847
Accounts payable and accrued
liabilities 913,392 761,285 990,545
Income taxes payable (Note 2) - 106,260 65,100
Dividends payable 46,677 34,656 34,686
Current portion of long-term
debt 299,986 - 298,990
-------------------------------------------------------------------------
1,863,296 1,686,311 2,158,320

Long-term debt (Note 7) 447,069 298,872 -
Other long-term liabilities 289,098 229,020 244,657
Future income taxes 34,006 26,704 30,171
-------------------------------------------------------------------------
2,633,469 2,240,907 2,433,148
-------------------------------------------------------------------------

Associate interest 102,614 102,588 113,119

Shareholders' equity

Share capital 1,511,412 1,502,145 1,506,020
Contributed surplus 10,782 10,037 9,892

Accumulated other comprehensive
(loss) income (1,880) 1,878 247
Retained earnings (Note 2) 1,811,712 1,442,907 1,559,551
-------------------------------------------------------------------------
1,809,832 1,444,785 1,559,798
-------------------------------------------------------------------------
3,332,026 2,956,967 3,075,710
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 6,068,109 $ 5,300,462 $ 5,621,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

16 Weeks Ended 40 Weeks Ended
------------------------------------------------------
October 4, October 6, October 4, October 6,
2008 2007 2008 2007
-------------------------------------------------------------------------

Operating
activities
Net earnings
(Note 2) $ 162,511 $ 141,672 $ 392,161 $ 339,110
Items not
affecting cash
Amortization 68,137 56,750 164,809 136,486
Future income
taxes (Note 2) (11,651) (23,419) (11,954) (8,194)
Loss on disposal
of property and
equipment 1,203 2,420 3,183 4,372
Stock-based
compensation 516 1,049 1,312 2,963
-------------------------------------------------------------------------
220,716 178,472 549,511 474,737

Net change in
non-cash working
capital balances
(Notes 2 and 3) (67,168) (27,448) (244,596) (147,691)
Increase in other
long-term
liabilities 18,667 19,944 35,951 32,237
Store opening costs (7,402) (7,307) (17,714) (14,249)
-------------------------------------------------------------------------
Cash flows from
operating activities 164,813 163,661 323,152 345,034
-------------------------------------------------------------------------

Investing activities
Purchase of
property
and equipment (161,298) (137,541) (317,128) (248,826)
Proceeds from
disposition of
property and
equipment 10,422 6,705 18,594 6,794
Business
acquisition
-HealthAccess
and Information
Healthcare
Marketing Corp.
(Note 3) (88,498) - (88,498) -
Other business
acquisitions
(Note 3) (21,745) (110,268) (109,207) (121,074)
Deposits 20,639 (66,683) 59,718 (74,815)
Other assets (2,555) (7) (12,250) (1,046)
-------------------------------------------------------------------------
Cash flows used in
investing activities (243,035) (307,794) (448,771) (438,967)
-------------------------------------------------------------------------

Financing activities
Bank indebtedness,
net (1,047) 20,498 34,242 112,422
Commercial paper,
net (Note 7) 95,000 64,324 (199,350) 34,199
Issuance of
long-term debt
(Note 7) - - 450,000 -
Financing costs
incurred - (20) (3,500) (20)
Associate interest (271) (4,164) (10,505) (14,061)
Proceeds from
shares issued for
stock options
exercised 601 3,628 4,756 10,591
Repayment of share
purchase loans 6 29 219 295
Repurchase of share
capital (35) - (35) (29)
Dividends paid (46,667) (34,588) (127,979) (94,852)
-------------------------------------------------------------------------
Cash flows from
financing activities 47,587 49,707 147,848 48,545
-------------------------------------------------------------------------
(Decrease) increase
in cash (30,635) (94,426) 22,229 (45,388)
Cash, beginning
of period 80,452 111,903 27,588 62,865
-------------------------------------------------------------------------
Cash, end of
period $ 49,817 $ 17,477 $ 49,817 $ 17,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash
flow information
Interest paid $ 8,405 $ 10,295 $ 37,669 $ 32,721
Income taxes paid $ 104,129 $ 56,797 $ 271,464 $ 165,087

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

1. BASIS OF PRESENTATION

The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and follow the same accounting policies and methods
of application with those used in the preparation of the audited annual
consolidated financial statements for the 52 week period ended
December 29, 2007, except as described in Note 2, Changes in Accounting
Policies. These financial statements do not contain all disclosures
required by Canadian GAAP for annual financial statements and,
accordingly, should be read in conjunction with the most recently
prepared annual consolidated financial statements and the accompanying
notes included in the Company's 2007 Annual Report.

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

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

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

2. CHANGE IN ACCOUNTING POLICIES

Adoption of New Accounting Standards

Capital disclosures

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

Capital Management

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

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

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

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

October 4, October 6, December 29,
2008 2007 2007
-------------------------------------------------------------------------

Cash $ (49,817) $ (17,477) $ (27,588)
Bank indebtedness 259,394 246,909 225,152
Commercial paper 343,847 537,201 543,847
Current portion of long-term
debt 299,986 - 298,990
Long-term debt 447,069 298,872 -
----------------------------------------

Net debt 1,300,479 1,065,505 1,040,401

Shareholders' equity 3,332,026 2,956,967 3,075,710
----------------------------------------

Total capitalization $ 4,632,505 $ 4,022,472 $ 4,116,111
----------------------------------------
----------------------------------------

Net debt:Shareholders' equity 0.39:1 0.36:1 0.34:1
Net debt:Total capitalization 0.28:1 0.26:1 0.25:1
EBITDA:Cash interest
expense(1)(2) 17.23:1 18.93:1 18.37:1

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

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

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

The following table provides a summary of the Company's credit ratings at
October 4, 2008:

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

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

There were no changes to any of the Company's credit ratings during the
16 and 40 weeks ended October 4, 2008.

Financial instruments

The Company adopted two new accounting standards concerning financial
instruments: CICA Handbook Section 3862 "Financial Instruments -
Disclosures" ("Section 3862") and CICA Handbook Section 3863 "Financial
Instruments - Presentation" ("Section 3863"). These standards were issued
in December 2006 and replaced Section 3861, "Financial Instruments -
Disclosure and Presentation". The new disclosure standard increased the
emphasis on the risk associated with financial instruments and how those
risks are managed. The new presentation standard carried forward the
former presentation requirements under the replaced Section 3861. The
standards are effective for interim and annual financial statements for
fiscal years beginning on or after October 1, 2007. The Company applied
the new accounting standards at the beginning of its current fiscal year
and its implementation did not have an impact on the Company's results of
operations or financial position; the resulting disclosures from
implementation are presented below and in the Company's Management's
Discussion and Analysis for the 16 and 40 week periods ended October 4,
2008.

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

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

Financial
Asset / Liability Category Measurement

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

Derivatives Classification Measurement

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

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

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

Transaction costs

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

Derivative financial instruments and hedge accounting

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

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

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

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

Interest rate derivatives

In December 2005, the Company entered into interest rate derivative
agreements converting an aggregate notional principal amount of $250,000
of floating rate commercial paper debt issued by the Trust into fixed
rate debt. The commercial paper issued by the Trust has been replaced
with commercial paper issued directly by the Company. The fixed rates
payable by the Company under the derivative agreements range from 4.03%
to 4.18%. These agreements mature as follows: $150,000 in December 2008,
$50,000 in December 2009 and $50,000 in December 2010 with reset terms
from one to three months.

Based on market values of the interest rate derivative agreements at
October 4, 2008, the Company has recognized a liability of $2,516, of
which $200 is presented in accounts payable and accrued liabilities and
$2,316 is presented in other long-term liabilities. Based on market
values of the interest rate derivative agreements at October 6, 2007, the
Company recognized an asset of $2,630 in other assets. Market values were
determined based on information received from the Company's
counterparties to these agreements.

Equity forward derivatives

Based on market values of the equity forward agreements at October 4,
2008, the Company has recognized a net liability of $670, of which $152
is presented in accounts receivable and $822 is presented in other
long-term liabilities. Based on market values of the equity forward
agreements at October 6, 2007, the Company recognized an asset of $1,051
in other assets. Market values were determined based on information
received from the Company's counterparties to these agreements.

During the 16 weeks ended October 4, 2008, net losses of $7 (2007 - $2)
were reclassified from accumulated other comprehensive (loss) income to
earnings. During the 40 weeks ended October 4, 2008, net gains of $4
(2007 - $113) were reclassified from accumulated other comprehensive
(loss) income to earnings.

Fair value of financial instruments

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

The fair values of long-term receivables, long-term liabilities and
long-term debt approximate their carrying values given the current market
rates associated with these instruments.

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

Financial risk management objectives and policies

In the normal course of business, the Company is exposed to financial
risks that have the potential to negatively impact its financial
performance. The Company may use derivative financial instruments to
manage certain of these risks. The Company does not use derivative
financial instruments for trading or speculative purposes. These risks
are discussed in more detail under the section entitled "Risks and Risk
Management - Financial Instruments" on pages 15 - 16 of the Company's
Management Discussion and Analysis for the 16 and 40 weeks ended
October 4, 2008.

Inventories

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

The results for the 16 and 40 weeks ended October 6, 2007 reflect an
increase in cost of goods sold and other operating expenses and a
decrease in operating income of $1,176 and $799, respectively, and a
decrease in net earnings of $902 and $859, respectively, with basic and
diluted net earnings per share remaining unchanged. The impact for year
ended December 29, 2007 is an increase in cost of goods sold and other
operating expenses and a decrease in operating income of $3,742 and a
decrease in net earnings of $3,187, resulting in a decrease of $0.01 in
basic and diluted net earnings per share.

The implementation of the new standard has resulted in a reduction to
2008 and 2007 opening retained earnings of $21,337 and $18,150,
respectively. The impact on balances as at December 29, 2007 and
October 6, 2007 was a decrease in inventory of $31,925 and $28,984,
respectively, an increase in future income tax asset of $9,863 and
$9,463, respectively, and a decrease in income taxes payable of $725 and
$512, respectively.

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

The cost of inventory recognized as an expense and included in cost of
goods sold and other operating expenses for the 16 and 40 weeks ended
October 4, 2008 was $1,758,232 and $4,386,055 (2007 - $1,622,654 and
$4,045,713), respectively. During the period, there were no significant
write-downs of inventory as a result of net realizable value being lower
than cost and no inventory write-downs recognized in previous years were
reversed.

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

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

Future Accounting Standards

Goodwill and intangible assets

In February 2008, the CICA issued a new accounting standard concerning
Goodwill and Intangible Assets ("Section 3064"), which is based on the
IASB's International Accounting Standard 38, Intangible Assets. The new
section replaced the existing guidance on goodwill and other intangible
assets and research and development costs. The new section provides
additional guidance on measuring the cost of goodwill and intangible
assets. The standard is effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008. The
Company will apply the new accounting standards at the beginning of its
2009 fiscal year. The Company is currently assessing the impact of the
new standard on the Company's results of operations, financial position
and disclosures.

Financial statement concepts

In February 2008, the CICA issued amendments to Section 1000, "Financial
Statement Concepts" to clarify the criteria for recognition of an asset
and the timing of expense recognition. The new requirements are effective
for interim and annual financial statements relating to fiscal years
beginning on or after October 1, 2008. The Company will apply the
amendments to Section 1000 at the beginning of its 2009 fiscal year. The
implementation of the amendments to Section 1000 will not have an impact
the Company's results of operations, financial position and disclosures
because the amendments are clarifications on the application of Section
1000.

3. ACQUISITIONS

Centre d'Escomptes Racine

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

The total cost of the acquisition in cash, including costs incurred in
connection with the acquisition, was $77,530 and was allocated to the net
assets on the basis of their fair values as follows:

Net working capital $ 9,363
Property and equipment 997
Goodwill 54,273
Prescription files(1) 12,100
Future income taxes 797
-------------------------------------------------------------------------
Purchase price $ 77,530
-------------------------------------------------------------------------

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

(1) The carrying value of the Company's prescription files is included in
other intangible assets in the consolidated balance sheets.

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

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 and will operate as Shoppers Drug Mart
Specialty Health Network Inc. and will provide comprehensive patient
support services for specialty pharmaceutical needs. The assets acquired
are composed of primarily goodwill, intangible assets and leasehold
improvements at two locations. The total cost of the acquisition in cash,
including costs incurred in connection with the acquisition, was $88,498
and will be allocated between the assets acquired on the basis of their
fair values. The purchase price allocation remains preliminary pending
finalization of the valuations of the assets and business acquired.

The operations of the acquired assets and business have been included in
the Company's results of operations from the date of acquisition.

Other business acquisitions

During the 16 and 40 weeks ended October 4, 2008, the Company acquired
the assets or shares of a number of pharmacies, each of which is
individually immaterial to the Company's total acquisitions. The total
cost of acquisitions of $21,745 and $109,207 (2007 - $32,738 and
$43,544), respectively, including costs incurred in connection with the
acquisitions, is allocated primarily to goodwill and other intangible
assets based on their fair values. Certain purchase price allocations are
preliminary and may change. The operations of the acquired pharmacies
have been included in the Company's results of operations from the date
of acquisition.

4. INTEREST EXPENSE

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

16 Weeks Ended 40 Weeks Ended
-------------------------- --------------------------
October 4, October 6, October 4, October 6,
2008 2007 2008 2007
-------------------------------------------------------------------------

Interest on bank
indebtedness $ 3,467 $ 3,683 $ 8,318 $ 7,983
Interest on
commercial paper 4,846 7,854 19,880 19,408
Interest on
long-term debt 11,787 4,383 19,814 11,297
-------------------------------------------------------------------------
$ 20,100 $ 15,920 $ 48,012 $ 38,688
-------------------------------------------------------------------------
-------------------------------------------------------------------------

5. EMPLOYEE FUTURE BENEFITS

The net benefit expense included in the results for the 16 and 40 weeks
ended October 4, 2008 for benefits provided under pension plans was
$1,807 and $4,519 (2007 - $1,991 and $5,113), respectively, and for
benefits provided under other benefit plans was $31 and $77 (2007 - $31
and $77), respectively.

6. STOCK-BASED COMPENSATION

The Company uses the fair value method to account for stock options
issued after 2002 under its stock option programs. If compensation
expense under the fair value method of accounting had been recognized on
stock options issued in 2002, the stock options would have been fully
expensed by the end of the Company's fiscal 2007 year; and as a result,
there would be no impact on the Company's net earnings for the 16 and 40
weeks ended October 4, 2008 and a reduction in net earnings of $14 and
$174 for the 16 and 40 weeks ended October 6, 2007. Basic and diluted
earnings per share would have remained unchanged for the 16 and 40 weeks
ended October 4, 2008 and October 6, 2007.

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

7. DEBT REFINANCING

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

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

On May 22, 2008, the Company filed with the securities regulators in each
of the provinces of Canada, a final short form base shelf prospectus (the
"Prospectus") for the issuance of up to $1 billion of medium-term notes.
Subject to the requirements of applicable law, medium-term notes can be
issued under the Prospectus for up to 25 months from May 22, 2008, the
date of the final receipt. No incremental debt was incurred by the
Company as a result of this filing.

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

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

8. FINANCING TRUST

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

9. SUBSEQUENT EVENT

On October 17, 2008, the Company entered into a new senior unsecured
364-day bank credit facility in the amount of up to $200,000. This
facility was available for a single drawdown to provide for a partial
refinancing of the Company's $300,000 of medium-term notes maturing on
October 24, 2008. On October 23, 2008, the Company elected to drawdown
all of this facility to refinance a portion of its $300,000 of maturing
medium-term notes. The balance of funds required to complete the
refinancing of the $300,000 of maturing medium-term notes was drawn from
funds available under the Company's pre-existing $800,000 revolving term
bank credit facility maturing June 6, 2011. On October 24, 2008, the
$300,000 of medium-term notes was repaid in full, along with all accrued
and unpaid interest owing on the final semi-annual interest payment. On a
consolidated basis, after giving effect to the repayment of the maturing
medium-term notes, the net debt position of the Company remained
substantially unchanged as a result of these refinancing activities.

Earnings Coverage Exhibit to the Consolidated Financial Statements

52 Weeks Ended October 4, 2008
-------------------------------------------------------------------------
Earnings coverage on long-term debt obligations 37.73 times
-------------------------------------------------------------------------

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

%SEDAR: 00016987EF

For further information: 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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