Press Releases

Shoppers Drug Mart Corporation announces strong first quarter with sales up 10.1% and earnings up 18.8%

Apr 29, 2008

TORONTO, April 29 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the first quarter ended March 22, 2008.
First Quarter Results (12 Weeks)
First quarter sales increased 10.1% to $2.024 billion, with the Company
continuing to experience strong sales growth in all regions of the country. On
a same-store basis, sales increased 6.0% during the quarter.
Prescription sales increased 8.8% in the first quarter to $972 million,
accounting for 48.0% of the Company's sales mix compared to 48.6% in the same
period last year. On a same-store basis, prescription sales increased 5.0%,
with increased generic prescription utilization continuing to have a
deflationary impact on sales growth in the category.
Front store sales increased 11.3% in the first quarter to $1.052 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, front store sales increased
7.0%, or 7.4% excluding tobacco, with sales growth benefiting from an earlier
Easter this year compared to last year.
First quarter net earnings increased 18.8% to $101 million or 47 cents
per share (diluted) from $85 million or 39 cents per share (diluted) a year
ago. Once again, solid top line growth, an enhanced sales mix and an ongoing
commitment to cost reduction, productivity and efficiency, partially offset by
higher operating costs and increased amortization in new and relocated stores,
resulted in growth in operating income and net earnings. Net earnings growth
was also aided by a reduction in the Company's effective income tax rate,
driven by a lower statutory rate, partially offset by increased interest
expense.
Commenting on the quarter, Jurgen Schreiber, President and CEO stated,
"We are pleased with our first quarter results. Fiscal 2008 is off to a very
good start. Together with our Associate-owners and their teams, we remain
confident in our outlook for the rest of the year and are excited about the
many programs and initiatives that lie ahead."

Store Network Development

During the first quarter, 51 drug stores were opened or acquired, eight
of which were relocations, and five 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 1,160 stores in the system, comprised of
1,095 drug stores and 65 Shoppers Home Health Care stores. Drug store selling
space was approximately 9.9 million square feet at the end of the first
quarter, an increase of 16.4% 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 July 15, 2008 to
shareholders of record as of the close of business on June 30, 2008.

Other Information

The Company will hold an analyst call at 3:00 p.m. (Eastern Daylight
Time) today to discuss its first quarter results. The call may be accessed by
dialing 416-641-6114 from within the Toronto area, or 1-866-696-5895 outside
of Toronto. The call will also be simulcast on the Company's website for all
interested parties. The webcast can be accessed via the Investor Relations
section of the Shoppers Drug Mart website at www.shoppersdrugmart.ca. The
conference call will be archived in the Investor Relations section of the
Shoppers Drug Mart website until the Company's next analyst call. A playback
of the call will also be available by telephone until 11:59 p.m. (Eastern
Daylight Time) on May 13, 2008. The call playback can be accessed after
5:00 p.m. (Eastern Daylight Time) on Tuesday, April 29, 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 3255180.

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 1,095 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 owns and
operates 65 Shoppers Home Health Care stores, making it the largest Canadian
retailer of home health care products and services. In addition to its retail
store network, the Company owns MediSystem Technologies Inc., a provider of
pharmaceutical products and services to long-term care facilities in Ontario
and Alberta.

Forward-looking Information and Statements

This news release, including the Management's Discussion and Analysis,
contains forward-looking information and statements which constitute "forward-
looking information" (under Canadian securities law), and which may be
material, regarding, among other things, the Company's beliefs, plans,
objectives, estimates, intentions and expectations, including as they relate
to its operating and financial results, capital expenditures, dividend policy
and the ability to execute on its operating, investing and financing
strategies. The forward-looking information and statements contained herein
are based on certain assumptions by management, certain of which are set out
in this news release. Inherent in the forward-looking information and
statements are known and unknown risks, uncertainties and other factors beyond
the Company's ability to control or predict. Actual results or developments
may differ materially from those contemplated by the forward-looking
information and statements. The material risk factors that could cause actual
results to differ materially from the forward-looking information and
statements contained herein include, without limitation: the risk of adverse
changes to laws and regulations relating to prescription drugs and their sale,
including pharmacy reimbursement and the availability of manufacturer
allowances, or changes to such laws and regulations that increase compliance
costs; the risk of adverse changes to existing pharmacy reimbursement programs
and the availability of manufacturer allowance funding; the risk of increased
competition from other retailers; the risk of exposure to fluctuations in
interest rates; the risk of material adverse changes in foreign currency
exchange rates; the risk of an inability to attract and retain pharmacists;
the risk of changes to the relationships of the Company with third-party
service providers; the risk that the Company will not be able to lease or
obtain suitable store locations on economically favourable terms; the risk
that new, or changes to current, federal and provincial laws, rules and
regulations, including environmental laws, rules and regulations, may
adversely impact the Company's business and operations; the risk that changes
in tax law, or changes in the way that tax law is expected to be interpreted,
may adversely impact the Company's business and operations; the risk that new,
or changes to existing, accounting pronouncements may adversely impact the
Company; and the risk of damage to the reputation of brands promoted by the
Company, or to the reputation of any supplier or manufacturer of these brands.

This is not an exhaustive list of the factors that may affect any of the
Company's forward-looking information and statements. Investors and others
should carefully consider these and other risk factors and not place undue
reliance on the forward-looking information and statements. Further
information regarding these and other risk factors is included in the
Company's public filings with provincial securities regulatory authorities
including, without limitation, the section entitled "Risks and Risk
Management" in the Company's Management's Discussion and Analysis for the 52
week period ended December 29, 2007 and in the section entitled "Risk Factors"
in the Company's Annual Information Form for the same period. The forward-
looking information and statements contained in this news release represent
the Company's views only as of the date of this release. Forward-looking
information and statements contained in this news release about prospective
results of operations, financial position or cash flows that are based upon
assumptions about future economic conditions and courses of action are
presented for the purpose of assisting the Company's shareholders in
understanding management's current views regarding those future outcomes, and
may not be appropriate for other purposes. While the Company anticipates that
subsequent events and developments may cause the Company's views to change,
the Company does not undertake to update any forward-looking information and
statements, except to the extent required by applicable securities laws.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.

<<
SHOPPERS DRUG MART CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

As at April 22, 2008
>>

The following is a discussion of the consolidated financial condition and
results of operations of Shoppers Drug Mart Corporation (the "Company") for
the periods indicated and of certain factors that the Company believes may
affect its prospective financial condition, cash flows and results of
operations. This discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements of the Company and the notes
thereto for the 12 week period ended March 22, 2008. The Company's unaudited
interim period financial statements and the notes thereto have been prepared
in accordance with Canadian generally accepted accounting principles ("GAAP")
and are reported in Canadian dollars. These financial statements do not
contain all disclosures required by Canadian GAAP for annual financial
statements and, accordingly, should be read in conjunction with the most
recently prepared annual consolidated financial statements for the 52 week
period ended December 29, 2007.

FORWARD-LOOKING INFORMATION AND STATEMENTS

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

OVERVIEW

The Company is the licensor of full-service retail drug stores operating
under the name Shoppers Drug Mart® (Pharmaprix® in Québec). As at
March 22, 2008, there were 1,095 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 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 and disease management, 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. In addition, the Company also provides
a standby letter of credit to an independent trust (the "Trust") which
provides additional financing to Associates to facilitate their purchase of
inventory and to fund their working capital requirements. (See notes 1 and 7
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® trade name. 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® stores and their Associates benefit from the same infrastructure
and support provided to all other Shoppers Drug Mart® stores and Associates.
The Company has determined that the individual Associate-owned stores
that comprise its store network are deemed to be variable interest entities
and that the Company is the primary beneficiary in accordance with the
Canadian Institute of Chartered Accountants Accounting Guideline 15,
"Consolidation of Variable Interest Entities" ("AcG-15"). As such, the
Associate-owned stores are subject to consolidation by the Company. However,
as the Associate-owned stores remain separate legal entities from the Company,
consolidation of these stores has no impact on the underlying risks facing the
Company. (See note 1 to the accompanying unaudited consolidated financial
statements of the Company.)
The Company also owns and operates 65 Shoppers Home Health Care®
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 MediSystem
Technologies Inc., a provider of pharmaceutical products and services to long-
term care facilities in Ontario and Alberta.

OVERALL FINANCIAL PERFORMANCE

Key Operating, Investing and Financial Metrics

The following provides an overview of the Company's operating performance
for the 12 week period ended March 22, 2008 compared to the 12 week period
ended March 24, 2007, as well as certain other metrics with respect to
investing activities for the 12 week period ended March 22, 2008 and financial
position as at that same date.

<<
- Sales of $2.024 billion, an increase of 10.1%.

- Total comparable store sales growth of 6.0%.

- Comparable store prescription sales growth of 5.0%.

- Comparable store front store sales growth of 7.0%.

- EBITDA(1) of $206 million, an increase of 16.4%.

- EBITDA margin(2) of 10.18%, an increase of 56 basis points.

- Net earnings of $101 million, an increase of 18.8%.

- Earnings per share (diluted) of $0.47 versus $0.39 in the prior
year.

- Capital expenditure program of $147 million compared to $44 million
in the prior year.

- Opened or acquired 51 new drug stores, eight of which were
relocations, and added one home health care store.

- Maintained desired capital structure and financial position.

- Net debt to total capitalization ratio of 0.28:1 at March 22, 2008
compared to 0.26:1 a year ago.

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

Results of Operations

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

12 Weeks Ended
--------------------------
March 22, March 24,
($000s, except per share data) 2008 2007
-------------------------------------------------------------------------
(unaudited) (unaudited)

Sales $ 2,023,799 $ 1,838,795
Cost of goods sold and other operating
expenses 1,817,875 1,661,882
--------------------------

EBITDA(1) 205,924 176,913
Amortization 44,771 37,235
--------------------------

Operating income 161,153 139,678
Interest expense 13,760 11,374
--------------------------

Earnings before income taxes 147,393 128,304
Income taxes 46,060 43,020
--------------------------

Net earnings $ 101,333 $ 85,284
--------------------------
--------------------------

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

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

Sales

Sales represent the combination of sales of the retail drug stores owned
by the Associates and sales of the Company-owned home health care business and
MediSystem Technologies Inc.
Sales in the first quarter were $2.024 billion compared to $1.839 billion
in the same period last year, an increase of $185 million or 10.1%, with the
Company continuing to experience strong sales growth in all regions of the
country. The Company's capital investment program, which resulted in a 16.1%
increase in selling square footage versus a year ago, continues to have a
positive impact on sales growth. On a same-store basis, sales increased 6.0%
during the first quarter of 2008.
Prescription sales were $972 million in the first quarter compared to
$894 million in the first quarter of 2007, an increase of $78 million or 8.8%.
On a same-store basis, prescription sales increased 5.0% during the first
quarter of 2008, with increased generic prescription utilization continuing to
have a deflationary impact on sales growth in the category. Prescription sales
represented 48.0% of the Company's sales mix during the first quarter of 2008
compared to 48.6% in the same period last year.
Front store sales were $1.052 billion in the first quarter compared to
$945 million in the first quarter of 2007, an increase of $107 million or
11.3%, 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, front store sales
increased 7.0% during the first quarter of 2008, or 7.4% excluding tobacco,
with sales growth benefiting from an earlier Easter this year compared to last
year.

Cost of Goods Sold and Other Operating Expenses

Cost of goods sold is comprised of the cost of goods sold at the retail
drug stores owned by the Associates and the cost of goods sold at the Company-
owned home health care business and MediSystem Technologies Inc. Other
operating expenses include corporate selling, general and administrative
expenses, operating expenses at the retail drug stores owned by the
Associates, including Associates' earnings, and operating expenses at the
Company-owned home health care business and MediSystem Technologies Inc.
Total cost of goods sold and other operating expenses were $1.818 billion
in the first quarter compared to $1.662 billion in the same period last year,
an increase of $156 million or 9.4%. Expressed as a percentage of sales, cost
of goods sold declined by 98 basis points in the first 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 42 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.

Amortization

Amortization of capital assets and other intangible assets was
$45 million in the first quarter compared to $37 million in the same period
last year, an increase of $8 million or 20.2%. Expressed as a percentage of
sales, amortization increased 18 basis points in the first quarter of 2008
versus the comparative prior year period, reflecting the continued growth of
the Company's capital investment and store development program.

Operating Income

Operating income was $161 million in the first quarter of 2008 compared
to $140 million in the same period last year, an increase of $21 million or
15.4%. As described above, sales growth, an enhanced sales mix and an ongoing
commitment to cost reduction, productivity and efficiency, partially offset by
increased amortization in new and relocated stores, resulted in a higher
operating margin (operating income divided by sales). In 2008, first quarter
operating margin improved by 36 basis points to 7.96% compared to 7.60% in the
first quarter of last year. The Company's EBITDA margin (EBITDA divided by
sales) was 10.18% in the first quarter of 2008, a 56 basis point improvement
over the EBITDA margin of 9.62% posted in the first quarter of last year.

Interest Expense

Interest expense is comprised of interest expense arising from borrowings
at the Associate-owned stores and from debt obligations of the Company.
Interest expense was $14 million in the first quarter of 2008 compared to
$11 million in the same period last year, an increase of $3 million or 21.0%.
This increase versus the comparative prior year period can be attributed to an
increase in the amount of consolidated net debt outstanding, coupled with a
market-driven increase in short-term interest rates. (See note 4 to the
accompanying unaudited consolidated financial statements of the Company.)

Income Taxes

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

Net Earnings

First quarter net earnings were $101 million compared to $85 million in
the same period last year, an increase of $16 million or 18.8%. On a diluted
basis, earnings per share were $0.47 in the first quarter of 2008 compared to
$0.39 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.

<<
March 22, December 29,
($000s) 2008 2007
-------------------------------------------------------------------------

Cash $ (35,784) $ (27,588)
Bank indebtedness 191,082 225,152
Commercial paper 736,693 543,847
Current portion of long-term debt 299,107 298,990
--------------------------

Net debt 1,191,098 1,040,401

Shareholders' equity 3,129,116 3,075,710

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

Total capitalization $ 4,320,214 $ 4,116,111
---------------------------
---------------------------

Net debt:Shareholders' equity 0.38:1 0.34:1
Net debt:Total capitalization 0.28:1 0.25:1
Net debt:EBITDA(1) 1.21:1 1.09:1
EBITDA:Cash interest expense(1)(2) 18.10:1 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
216,872,638 common shares outstanding at April 22, 2008. As at this same date,
the Company had issued options to acquire 1,462,459 of its common shares
pursuant to its stock-based compensation plans, of which 1,020,741 were
exercisable.

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. (On April 22, 2008, the
revolving bank credit facility was amended to increase its size from
$550 million to $800 million. In conjunction with this amendment, the size of
the Company's commercial paper program was increased from $300 million to
$500 million.) 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 from the following sources: (i) an independent trust (the
"Trust") whose activities are financed through the issuance of short-term,
asset-backed notes that are rated R-1 (middle) by DBRS Limited to third-party
investors; and (ii) by providing guarantees to various Canadian chartered
banks that support Associate loans. Due to ongoing liquidity constraints in
the Canadian asset-backed commercial paper market, the aggregate amount of
Trust funding available to the Company's Associates is currently limited to
$500 million. Given these constraints, the Company intends to replace, in the
second quarter of 2008, approximately $200 million of Trust funding with funds
available under its $800 million revolving bank credit facility and/or its
$500 million dollar commercial paper program. (See notes 1 and 7 to the
accompanying unaudited consolidated financial statements of the Company.)
The Company has obtained additional long-term financing from the issuance
of $300 million of five-year medium-term notes maturing October 24, 2008,
which bear interest at a fixed rate of 4.97% per annum (the "Notes"). The
Notes were issued pursuant to a short form base shelf prospectus dated
October 10, 2003, as supplemented by a pricing supplement dated October 20,
2003, and filed by the Company with Canadian securities regulators in all of
the provinces of Canada. At the time of issuance, the Notes were assigned a
rating of A (low) from DBRS Limited and BBB from Standard & Poor's.
At the end of the first quarter, $60 million of the Company's then
existing $550 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. At March 22, 2008, the
Company had $238 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 first quarter, Associates had obtained an aggregate amount
of $499 million of Trust financing and had drawn an aggregate amount of
$218 million in loans from various Canadian chartered banks compared to
$499 million and $228 million, respectively, 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 first quarter, no amounts were outstanding on
these facilities, unchanged from the end of the prior year.

Cash Flows Used in Operating Activities

Cash flows used in operating activities were $6 million in the first
quarter of 2008 compared to $2 million in the same period last year.
Consistent with the prior year, growth in net earnings, adjusted for non-cash
items, was more than offset by an increased investment in non-cash working
capital. The increased investment in working capital balances can be largely
attributed to the timing of tax payments and trade payables.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $103 million in the first
quarter of 2008 compared to $45 million in the same period last year, an
increase of $58 million. Of these totals, investments in property and
equipment, net of proceeds from any dispositions, amounted to $63 million in
the first quarter of this year compared to $40 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 $78 million in business
acquisitions and $6 million in other assets during the first quarter of 2008
compared to $4 million and $1 million, respectively, in the same period last
year. Consistent with the Company's stated growth objectives, these
investments relate primarily to acquisitions of drug stores and prescription
files, as the Company continues to pursue attractive opportunities in the
marketplace. During the first 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 $44 million, as a number offers resulted in successful
transactions, while others expired or were withdrawn.
During the first quarter of 2008, 51 new drug stores were opened or
acquired, eight of which were relocations, and five smaller drug stores were
closed. As a result of this activity, drug store selling space has increased
by 16.4% compared to a year ago. The Company also added one home health care
store to its network during the quarter. At the end of the first quarter of
2008 there were 1,160 stores in the Company's retail network, comprised of
1,095 drug stores and 65 Shoppers Home Health Care® stores.

Cash Flows from Financing Activities

Cash flows from financing activities were $117 million in the first
quarter of 2008, as cash inflows of $194 million were partially offset by cash
outflows of $77 million. Cash inflows were comprised of a $193 million
increase in the amount of commercial paper issued and outstanding by the
Company under its 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 were comprised $34 million to
reduce bank indebtedness, an $8 million reduction in the amount of Associate
investment and $35 million for the payment of dividends.
In the first quarter of 2008, the net result of the Company's operating,
investing and financing activities was an increase in cash balances of
$8 million.
On April 22, 2008, the Company announced that it had completed an
amendment to its existing revolving 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. In conjunction with this amendment, the
Company also announced that its commercial paper program was increased from
$300 million to $500 million. The Company's commercial paper program retains
its rating of R-1 (low) by DBRS Limited. On a consolidated basis, no
incremental debt was incurred by the Company as a result of these changes.

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. The Company
does not foresee any difficulty in obtaining long-term financing given its
current credit ratings and past experiences in the capital markets.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Implemented in 2008

Capital Disclosures

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

Financial Instruments

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

Inventories

The CICA issued a new accounting standard concerning Inventories
("Section 3031"), in June 2007, which is based on the International Accounting
Standards Board's International Accounting Standard 2 and replaced CICA
Handbook Section 3030, "Inventories". The new standard provides guidance on
the determination of the cost of inventory and the subsequent recognition of
inventory as an expense, as well as requiring additional associated
disclosures. The new standard also allows for the reversal of any write-downs
previously recognized. The new standard is effective for interim and annual
financial statements for fiscal years beginning on or after January 1, 2008.
The Company applied the new accounting standard retrospectively at the
beginning of its current fiscal year, with restatement of prior periods.
The results for the 12 weeks ended March 24, 2007 reflect a decrease in
cost of goods sold and other operating expenses and an increase in operating
income of $403 thousand and an increase in net earnings of $153 thousand, with
basic and diluted net earnings per share remaining unchanged. The impact for
year ended December 29, 2007 is an increase in cost of goods sold and other
operating expenses and a decrease in operating income of $3.7 million and a
decrease in net earnings of $3.2 million, resulting in a decrease of $0.01 in
basic and diluted net earnings per share.
The implementation of the new standard has resulted in a reduction to
2008 and 2007 opening retained earnings of $21.3 million and $18.2 million,
respectively. The impact on balances as at December 29, 2007 and March 24,
2007 was a decrease in inventory of $31.9 million and $27.8 million,
respectively, an increase in future income tax asset of $9.9 million and
$9.3 million, respectively, and a decrease in income taxes payable of
$725 thousand and $490 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.

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 first quarter of 2008, the
Company's maximum obligation in respect of such guarantees was $415 million,
unchanged from the end of the prior year. At March 22, 2008, an aggregate
amount of $370 million in available lines of credit had been allocated to the
Associates by the various banks compared to $356 million at December 29, 2007,
against which an aggregate amount of $218 million was drawn compared to
$228 million at December 29, 2007. 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, excluding inventory. 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.

Associate Financing Trust

The Company has arranged for its Associates to obtain financing from the
Trust to facilitate their purchase of inventory and fund their working capital
requirements. At the end of the first quarter of 2008, the total amount of
loans outstanding from the Trust to the Company's Associates was $499 million,
unchanged from the end of the prior year. The Company has determined that the
Trust is a variable interest entity and that the Company is the primary
beneficiary. As such, the Trust is subject to consolidation by the Company and
these loans are included in commercial paper on the Company's consolidated
balance sheets. The Company has arranged for a standby letter of credit for
the benefit of the Trust from a syndicate of banks that is equal to
approximately 10% of the aggregate principal amount of the loans, or
$50 million, as a form of credit enhancement which, in turn, enables the Trust
to provide favourable financing terms to the Company's Associates. (See notes
1 and 7 to the accompanying unaudited consolidated financial statements of the
Company.)
If at any time the Trust's cost of borrowing and applicable fees are
greater than the interest rate charged to Associates on their loans, the Trust
has the right to request payment from the Company for any shortfall. In the
opinion of the Company's management, the Company is unlikely to have to make
any such payment as it is involved in setting the rate that Associates are
charged on their loans. In the event that an Associate defaults on a loan from
the Trust, the Company has the right to purchase the Associate's loan from the
Trust, at which time the Trust will assign to the Company the Associate's loan
agreement and related security documentation. The assignment of this
documentation would provide the Company with first priority security over the
Associate's inventory, subject to certain prior ranking statutory claims. The
Company expects that the net proceeds from secured assets would cover any
payments made to purchase a defaulted loan from the Trust, including any
related expenses, as it is involved in setting the amount borrowed from the
Trust by its Associates. In the event that the Company does not elect to
purchase a defaulted loan from the Trust, the Trust may draw upon the standby
letter of credit or realize on its security. If the Trust draws against the
standby letter of credit, the Company has agreed to reimburse the issuing
syndicate of banks for the amount so drawn.

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.

<<
First Quarter Fourth Quarter
($000s, except per ------------------------- -------------------------
share data 2008 2007 2007 2006
- 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

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

Sales $ 2,542,671 $ 2,329,051 $ 1,928,094 $ 1,768,199

Net earnings $ 141,672 $ 123,880 $ 112,154 $ 94,407

Per common share
- Basic net earnings $ 0.65 $ 0.58 $ 0.52 $ 0.44
- Diluted net
earnings $ 0.65 $ 0.57 $ 0.52 $ 0.44
>>

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 the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 3862, "Financial Instruments - Disclosures" related to
the nature and extent of risks arising from financial instruments, as
permitted by the standard. Therefore, this section forms an integral part of
the unaudited interim consolidated financial statements for the 12 week period
ended March 22, 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 March 22,
2008, as the interest rate derivative agreements are in a liability position.
At March 24, 2007, the maximum exposure was equal to the carrying value of the
interest rate derivative agreements of $0.6 million.
As at March 22, 2008 the Company had $678 million of unhedged floating
rate debt. During the 12 weeks ended March 22, 2008, the Company's average
outstanding unhedged floating rate debt was $750 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 $0.6 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 March 22, 2008 are as follows:

<<
Payments Payments Payments
due in the due before Payments due in
next the end of due during 2010
$000's 90 days the year 2009 to 2013 Total

Bank indebtedness 191,082 - - - 191,082
Commercial paper 736,693 - - - 736,693
Accounts payable 800,066 17,732 4,773 - 822,571
Current portion of
long-term debt - 299,107 - - 299,107
Other long-term
liabilities 49,020 1,591 11,037 3,903 65,551

Total 1,776,861 318,430 15,810 3,903 2,115,004
>>

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)
-------------------------------------------------------------------------

12 Weeks Ended
-------------------------
March 22, March 24,
2008 2007
-------------------------------------------------------------------------
Sales $ 2,023,799 $ 1,838,795
Operating expenses
Cost of goods sold and other operating
expenses (Note 2) 1,817,875 1,661,882
Amortization 44,771 37,235
-------------------------------------------------------------------------

Operating income 161,153 139,678

Interest expense (Note 4) 13,760 11,374
-------------------------------------------------------------------------

Earnings before income taxes 147,393 128,304

Income taxes (Note 2)
Current 48,663 35,204
Future (2,603) 7,816
-------------------------------------------------------------------------
46,060 43,020
-------------------------------------------------------------------------
Net earnings $ 101,333 $ 85,284
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net earnings per common share:

Basic $ 0.47 $ 0.40
Diluted $ 0.47 $ 0.39

Weighted average common shares outstanding
- Basic (millions) 216.8 215.1
- Diluted (millions) 217.4 217.0
Actual common shares outstanding (millions) 216.9 215.4

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

12 Weeks Ended
-------------------------
March 22, March 24,
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 101,333 85,284
Dividends (46,626) (34,467)
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,614,258 $ 1,258,349
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

12 Weeks Ended
-------------------------
March 22, March 24,
2008 2007
-------------------------------------------------------------------------
Net earnings $ 101,333 $ 85,284
Other comprehensive (loss) income, net of tax
Change in unrealized gain/loss on interest
rate derivatives (net of tax of $1,181
(2007 - $93)) (2,397) 182
Change in unrealized gain/loss on equity
forward derivatives (net of tax of $149
(2007 - $27)) (304) (53)
Amount of previously unrealized gain/loss on
equity forward derivatives recognized in
earnings during the period (net of tax of
$nil (2007 - $49)) - (96)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other comprehensive (loss) income (2,701) 33
-------------------------------------------------------------------------
Comprehensive income $ 98,632 $ 85,317
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Accumulated other comprehensive income,
beginning of period $ 247 $ 406
Other comprehensive (loss) income (2,701) 33
-------------------------------------------------------------------------
Accumulated other comprehensive (loss) income,
end of period $ (2,454) $ 439
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

March 22, March 24, December 29,
2008 2007 2007
-------------------------------------------------------------------------

Assets

Current
Cash $ 35,784 $ 39,778 $ 27,588
Accounts receivable 384,310 275,168 372,306
Inventory (Note 2) 1,516,991 1,357,498 1,545,599
Future income taxes (Note 2) 71,500 46,361 69,952
Prepaid expenses and deposits 91,408 33,992 134,692
-------------------------------------------------------------------------
2,099,993 1,752,797 2,150,137

Property and equipment 1,151,393 914,995 1,126,513
Deferred costs 33,690 23,256 32,966
Goodwill 2,308,695 2,125,049 2,245,441
Other intangible assets 71,459 44,932 57,930
Other assets 14,376 8,136 8,990
-------------------------------------------------------------------------
Total assets $ 5,679,606 $ 4,869,165 $ 5,621,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current
Bank indebtedness $ 191,082 $ 202,854 $ 225,152
Commercial paper 736,693 485,194 543,847
Accounts payable and accrued
liabilities 844,693 697,945 990,545
Income taxes payable (Note 2) 39,724 58,078 65,100
Dividends payable 46,626 34,467 34,686
Current portion of long-term debt 299,107 - 298,990
-------------------------------------------------------------------------
2,157,925 1,478,538 2,158,320

Long-term debt - 298,599 -
Other long-term liabilities 257,845 197,918 244,657
Future income taxes 29,607 20,394 30,171
-------------------------------------------------------------------------
2,445,377 1,995,449 2,433,148
-------------------------------------------------------------------------

Associate interest 105,113 111,998 113,119

Shareholders' equity

Share capital 1,507,257 1,494,849 1,506,020
Contributed surplus 10,055 8,081 9,892

Accumulated other comprehensive
(loss) income (2,454) 439 247
Retained earnings (Note 2) 1,614,258 1,258,349 1,559,551
-------------------------------------------------------------------------
1,611,804 1,258,788 1,559,798
-------------------------------------------------------------------------
3,129,116 2,761,718 3,075,710
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 5,679,606 $ 4,869,165 $ 5,621,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

12 Weeks Ended
-------------------------
March 22, March 24,
2008 2007
-------------------------------------------------------------------------

Operating activities
Net earnings (Note 2) $ 101,333 $ 85,284
Items not affecting cash
Amortization 47,592 39,243
Future income taxes (Note 2) (2,603) 7,816
Loss on disposal of property and equipment 857 869
Stock-based compensation 342 1,007
-------------------------------------------------------------------------
147,521 134,219
Net change in non-cash working capital
Balances (Note 2) (156,657) (140,003)
Increase in other long-term liabilities 7,625 5,774
Store opening costs (4,239) (2,254)
-------------------------------------------------------------------------
Cash flows used in operating activities (5,750) (2,264)
-------------------------------------------------------------------------

Investing activities
Purchase of property and equipment (69,189) (40,258)
Proceeds from disposition of property and
equipment 5,740 48
Business acquisitions (Note 3) (77,542) (3,795)
Deposits 43,987 -
Other assets (6,146) (622)
-------------------------------------------------------------------------
Cash flows used in investing activities (103,150) (44,627)
-------------------------------------------------------------------------

Financing activities
Bank indebtedness, net (34,070) 68,367
Commercial paper, net 192,800 (17,700)
Associate interest (8,006) (4,651)
Proceeds from shares issued for stock
options exercised 888 3,330
Repayment of share purchase loans 170 255
Dividends paid (34,686) (25,797)
-------------------------------------------------------------------------
Cash flows from financing activities 117,096 23,804
-------------------------------------------------------------------------
Increase (decrease) in cash 8,196 (23,087)
Cash, beginning of period 27,588 62,865
-------------------------------------------------------------------------
Cash, end of period $ 35,784 $ 39,778
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $ 10,370 $ 7,273
Income taxes paid $ 74,435 $ 51,637

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

1. BASIS OF PRESENTATION

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

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

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 has 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 are
financed through the issuance of short-term asset backed notes to third
party investors. The Trust is a variable interest entity and the Company
is the primary beneficiary. As such, the Trust is subject to
consolidation by the Company.

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 features, the purchase of sites for future store construction, as
well as through the acquisition of independent drug stores or their
prescription files. In addition, the Company makes capital investments in
information technology and its distribution capabilities to support an
expanding store network. The Company also provides working capital to its
Associates via loans and/or loan guarantees. The Company largely relies
on its cash flow from operations to fund its capital investment program
and dividend distributions to its shareholders. This cash flow is
supplemented, when necessary, through the borrowing of additional debt.
No changes were made to these objectives during the period.

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

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

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

March 22, March 24, December 29,
2008 2007 2007
-------------------------------------------------------------------------

Cash $ (35,784) $ (39,778) $ (27,588)
Bank indebtedness 191,082 202,854 225,152
Commercial paper 736,693 485,194 543,847
Current portion of long-term debt 299,107 - 298,990
Long-term debt - 298,599 -
---------------------------------------

Net debt 1,191,098 946,869 1,040,401

Shareholders' equity 3,129,116 2,761,718 3,075,710
---------------------------------------

Total capitalization $ 4,320,214 $ 3,708,587 $ 4,116,111
---------------------------------------
---------------------------------------

Net debt:Shareholders' equity 0.38:1 0.34:1 0.34:1
Net debt:Total capitalization 0.28:1 0.26:1 0.25:1
EBITDA:Cash interest expense(1)(2) 18.10:1 17.75:1 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
March 22, 2008:

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

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

There were no changes to any of the Company's credit ratings during the
12 weeks ended March 22, 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 Management's Discussion and
Analysis.

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

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

Financial
Asset / Liability Category Measurement

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

Derivatives Classification Measurement

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

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

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

Transaction costs

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

Derivative financial instruments and hedge accounting

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

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

The Company formally identifies, designates and documents all
relationships between hedging instruments and hedged items, as well as
its risk assessment objective and strategy for undertaking various hedge
transactions. The Company assesses, both at the hedge's inception and on
an ongoing basis, 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

Based on market values of the interest rate derivative agreements at
March 22, 2008, the Company has recognized a liability of $3,151, of
which $1,025 is presented in accounts payable and accrued liabilities and
$2,126 is presented in other long-term liabilities. Based on market
values of the interest rate derivative agreements at March 24, 2007, the
Company recognized an asset of $613 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 March 22,
2008, the Company has recognized a net liability of $767, of which $127
is presented in accounts receivable and $894 is presented in other long-
term liabilities. Based on market values of the equity forward agreements
at March 24, 2007, the Company recognized an asset of $386 in other
assets. Market values were determined based on information received from
the Company's counterparties to these agreements.

During the 12 weeks ended March 22, 2008, no amounts (2007 - net gains of
$96) were reclassified from equity to earnings.

Fair value of financial instruments

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

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

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

Financial risk management objectives and policies

In the normal course of business, the Company is exposed to financial
risks that have the potential to negatively impact its financial
performance. The Company may use derivative financial instruments to
manage certain of these risks. The Company does not use derivative
financial instruments for trading or speculative purposes. These risks
are discussed in more detail under the Risks and Risk Management -
Financial Instruments discussion on pages 12-15 of the Company's
Management Discussion and Analysis for the 12 weeks ended March 22, 2008.

Inventories

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

The results for the 12 weeks ended March 24, 2007 reflect a decrease in
cost of goods sold and other operating expenses and an increase in
operating income of $403 and an increase in net earnings of $153, 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
March 24, 2007 was a decrease in inventory of $31,925 and $27,781,
respectively, an increase in future income tax asset of $9,863 and
$9,294, respectively, and a decrease in income taxes payable of $725 and
$490, respectively.

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

The cost of inventory recognized as an expense and included in cost of
goods sold and other operating expenses for the 12 weeks ended March 22,
2008 was $1,277,596 (2007 - $1,176,813). 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.

Under the financing arrangement made by the Company between its
Associates and the Financing Trust, Associates can obtain additional
financing to fund inventory purchases and working capital requirements
from the Financing Trust. These loans obtained from the Financing Trust
are secured by a portion of the borrowing Associates' inventory. As at
March 22, 2008, $1,016,423 (2007 - $960,345) of the Associates' inventory
has been secured against the Associates' loans payable to the Trust. For
a description of the Financing Trust, see Note 7 below and Note 14 to the
consolidated financial statements in the Company's 2007 Annual Report.

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

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

Future Accounting Standards

Goodwill and intangible assets

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

Financial statement concepts

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

3. ACQUISITIONS

During the 12 week period ended March 22, 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 $77,542 (2007 - $3,795), including costs incurred in
connection with the acquisitions, is allocated primarily to goodwill and
other intangible assets based on their fair values. Certain purchase
price allocations are preliminary and may change. The operations of the
acquired pharmacies have been included in the Company's results of
operations from the date of acquisition.

4. INTEREST EXPENSE

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

12 Weeks Ended
-------------------------
March 22, March 24,
2008 2007
-------------------------------------------------------------------------

Interest on bank indebtedness $ 2,726 $ 1,953
Interest on commercial paper 7,742 5,902
Interest on long-term debt 3,292 3,519
-------------------------------------------------------------------------
$ 13,760 $ 11,374
-------------------------------------------------------------------------
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5. EMPLOYEE FUTURE BENEFITS

The net benefit expense included in the results for the 12 weeks ended
March 22, 2008 for benefits provided under pension plans was $1,356 (2007
- $1,561), and for benefits provided under other benefit plans was $23
(2007 - $23).

6. STOCK-BASED COMPENSATION

The Company uses the fair value method to account for stock options
issued after 2002 under its stock option programs. If compensation
expense under the fair value method of accounting had been recognized on
stock options issued in 2002, the stock options would have been fully
expensed by the end of the Company's fiscal 2007 year; and as a result,
there would be no impact on the Company's net earnings for the 12 week
period ended March 22, 2008 and a reduction in net earnings of $83 for
the 12 week period ended March 24, 2007. Basic and diluted earnings per
share remains unchanged for the 12 week periods ended March 22, 2008 and
March 24, 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. FINANCING TRUST

The Company has arranged for a standby letter of credit from a syndicate
of banks for the benefit of the Trust that is equal to approximately 10%
of the aggregate principal amount of the loans, or $50,000, as a form of
credit enhancement which, in turn, enables the Trust to provide
favourable financing terms to the Company's Associates.

As at March 22, 2008, $499,150 (2007 - $460,850) of the consolidated
commercial paper balance is commercial paper issued by the Trust.

8. SUBSEQUENT EVENT

On April 22, 2008, the Company announced that it had completed an
amendment to its existing revolving bank credit facility which matures in
June of 2011, increasing the size of the facility from $550,000 to
$800,000. The bank credit facility is available for general corporate
purposes, including refinancing existing indebtedness and to backstop the
Company's commercial paper program. In conjunction with this amendment,
the Company also announced that its commercial paper program was
increased from $300,000 to $500,000. The Company's commercial paper
program retains its rating of R-1 (low) by Dominion Bond Rating Service.

Earnings Coverage Exhibit to the Consolidated Financial Statements

52 Weeks Ended March 22, 2008
-------------------------------------------------------------------------
Earnings coverage on long-term debt obligations 57.85 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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