Press Releases

Shoppers Drug Mart Corporation announces third quarter earnings of $143 million - an increase of 15.1%

Nov 6, 2007

TORONTO, Nov. 6 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the third quarter ended October 6, 2007.

Third Quarter Results (16 Weeks)

Solid top line growth and a favourable sales mix continued to drive
strong growth in net earnings. Third quarter net earnings increased 15.1% to
$143 million or 66 cents per share (diluted) from $124 million or 57 cents per
share (diluted) a year ago.
Sales in the third quarter were $2.543 billion compared to $2.329 billion
in the same period last year, an increase of $214 million or 9.2%, with
continued strong sales growth experienced in all regions of the country, led
by gains in Western Canada and Québec. On a same-store basis, sales increased
5.3%.
Prescription sales increased 8.9% in the third quarter to $1.215 billion,
accounting for 47.8% of the Company's sales mix compared to 47.9% in the same
period last year. On a same-store basis, prescription sales increased 5.4%,
driven by strong growth in the number of prescriptions filled, while greater
generic utilization continued to have a deflationary impact on prescription
sales growth.
Front store sales increased 9.5% in the third quarter to $1.328 billion,
with the Company once again experiencing sales gains in all categories, led by
OTC medications and cosmetics. On a same-store basis, front store sales
increased 5.3%.
Commenting on the quarter, Jurgen Schreiber, President and CEO stated,
"We are pleased with our third quarter results. Continued growth in sales and
net earnings is a testament to the quality of our real estate program and the
strength of our differentiated product and service offering, combined with
solid execution at store-level thanks to the efforts of our Associate-owners
and their teams."

Year-to-date Results (40 Weeks)

Sales for the first three quarters of 2007 increased 9.4% to
$6.310 billion, with prescription sales up 9.3% and front store sales up 9.5%.
On a same-store basis, sales increased 5.6%, with prescription sales up 5.8%
and front store sales up 5.4%. During the first three quarters of 2007,
prescription sales accounted for 47.8% of the Company's sales mix, unchanged
from the same period last year.
Net earnings for the first three quarters of 2007 increased 17.2% to
$340 million or $1.57 per share (diluted) from $290 million or $1.34 per share
(diluted) a year ago.

Store Network Development

During the third quarter, 55 drug stores were opened or acquired, 20 of
which were relocations, and two drug stores were closed. The Company also
added two home health care stores to its network during the quarter. At
quarter-end, there were 1,096 stores in the system, comprised of 1,035 drug
stores and 61 Shoppers Home Health Care stores. Drug store selling space was
in excess of 9.2 million square feet at the end of the third quarter, an
increase of 13.0% compared to a year ago.

Dividend

The Company also announced today that its Board of Directors has declared
a dividend of 16 cents per common share, payable January 15, 2008 to
shareholders of record as of the close of business on December 31, 2007.

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, 2007. The call playback can be accessed after
5:00 p.m. (Eastern Standard Time) on Tuesday, November 6, 2007 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 3238653.

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 1,035 Shoppers Drug Mart and Pharmaprix stores
operating in prime locations in every province and two territories, the
Company is one of the most convenient retailers in Canada. The Company also
owns and operates 61 Shoppers Home Health Care stores, making it the largest
Canadian retailer of home health care products and services.

This news release, including the Management's Discussion and Analysis,
contains forward-looking statements 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. These forward-looking statements are based
on certain assumptions by management, certain of which are set out in this
news release. Inherent in these forward-looking 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 these statements depending on, among others, such
factors as changes in the regulatory environment as it relates to the sale of
prescription drugs, competition from other retailers, exposure to interest
rate fluctuations, foreign currency risks, certain property and casualty
risks, the ability to attract and retain pharmacists, risks in connection with
third party service providers, the availability of suitable store locations,
seasonality risks, changes in federal and provincial laws, rules and
regulations relating to the Company's business and environmental matters,
changes in tax regulations and accounting pronouncements, the success of the
Company's Associate-owned stores, supplier and brand reputations and the
accuracy of management's assumptions. This list is not exhaustive of the
factors that may affect any of the Company's forward-looking statements.
Investors and others should carefully consider these and other factors and not
place undue reliance on these forward-looking statements. Further information
regarding these and other 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 30,
2006 and the section entitled "Risk Factors" in the Company's Annual
Information Form for the same period. The forward-looking statements contained
in this news release represent the Company's views only as of the date of this
release. 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 statements.
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 29, 2007
>>

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 interim period consolidated financial statements of the Company
and the notes thereto for the 16 and 40 week periods ended October 6, 2007.
The Company's unaudited interim period consolidated 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 30, 2006.

FORWARD-LOOKING STATEMENTS

This discussion of the consolidated financial condition and results of
operations of the Company contains forward-looking statements 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. These
forward-looking statements are based on certain assumptions by management,
certain of which are set out herein. Inherent in these forward-looking
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 these statements depending
on, among others, such factors as changes in the regulatory environment as it
relates to the sale of prescription drugs, competition from other retailers,
exposure to interest rate fluctuations, foreign currency risks, certain
property and casualty risks, the ability to attract and retain pharmacists,
risks in connection with third party service providers, the availability of
suitable store locations, seasonality risks, changes in federal and provincial
laws, rules and regulations relating to the Company's business and
environmental matters, changes in tax regulations and accounting
pronouncements, the success of the Company's Associate-owned stores, supplier
and brand reputations and the accuracy of management's assumptions. This list
is not exhaustive of the factors that may affect any of the Company's
forward-looking statements. Investors and others should carefully consider
these and other factors and not place undue reliance on these forward-looking
statements. Further information regarding these and other 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 30, 2006 and the section entitled "Risk Factors"
in the Company's Annual Information Form for the same period. The
forward-looking 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. 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 statements.
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 6, 2007, there were 1,035 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 ("OTC") 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 Life Brand®, Quo®, Bella® and
Everyday Market® trademarks, and value-added services such as the
HealthWatch® program, which offers patient counselling on medications and
disease management, and the Shoppers Optimum™ program, one of the largest
retail loyalty card programs in Canada. In fiscal 2006, the Company recorded
consolidated sales of approximately $7.8 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 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 61 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 also 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 16 and 40 week periods ended October 6, 2007 compared to the 16 and
40 week periods ended October 7, 2006, as well as certain other metrics with
respect to investing activities for the 16 and 40 week periods ended
October 6, 2007 and financial position as at October 6, 2007.

- Third quarter sales of $2.543 billion, an increase of 9.2%.

- Year-to-date sales of $6.310 billion, an increase of 9.4%.

- Third quarter comparable store sales growth of 5.3%, comprised of
comparable prescription sales growth of 5.4% and comparable front
store sales growth of 5.3%.

- Year-to-date comparable store sales growth of 5.6%, comprised of
comparable prescription sales growth of 5.8% and comparable front
store sales growth of 5.4%.

- Third quarter EBITDA(1) of $284 million, an increase of 16.2%.

- Year-to-date EBITDA of $679 million, an increase of 16.8%.

- Third quarter EBITDA margin(2) of 11.16%, an increase of 68 basis
points.

- Year-to-date EBITDA margin of 10.76%, an increase of 69 basis
points.

- Third quarter net earnings of $143 million or $0.66 per share
(diluted), an increase of 15.1%.

- Year-to-date net earnings of $340 million or $1.57 per share
(diluted), an increase of 17.2%.

- Third quarter capital expenditures of $248 million, which includes
the acquisition of the assets of Centre d'Escomptes Racine
($77 million). This compares to $210 million in the prior year, which
included the acquisitions of MediSystem Technologies Inc.
($90 million) and Therapy Supplies & Rental Limited ($19 million).
Opened or acquired 55 new drug stores, 20 of which were relocations,
and added two home health care stores.

- Year-to-date capital expenditures of $370 million compared to
$298 million in the prior year. Opened or acquired 91 new drug
stores, 37 of which were relocations, and added three home health
care stores.

- Year-over-year increase in drug store selling space of 13.0%.

- Net debt to total capitalization ratio of 0.26:1 at October 6, 2007
compared to 0.27:1 a year ago.

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

(2) EBITDA divided by sales.

Results of Operations

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

16 Weeks Ended 40 Weeks Ended
--------------------------- ---------------------------
($000s, except October 6, October 7, October 6, October 7,
per share data) 2007 2006 2007 2006
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Sales $ 2,542,671 $ 2,329,051 $ 6,309,560 $ 5,768,369
Cost of goods
sold and other
operating
expenses 2,259,011 2,084,896 5,630,857 5,187,210
--------------------------- ---------------------------

EBITDA(1) 283,660 244,155 678,703 581,159
Amortization 54,942 44,295 130,752 106,466
--------------------------- ---------------------------

Operating income 228,718 199,860 547,951 474,693
Interest expense 15,920 14,632 38,688 38,977
--------------------------- ---------------------------

Earnings before
income taxes 212,798 185,228 509,263 435,716
Income taxes 70,224 61,348 169,294 145,725
--------------------------- ---------------------------

Net earnings $ 142,574 $ 123,880 $ 339,969 $ 289,991
--------------------------- ---------------------------
--------------------------- ---------------------------

Per common share
- Basic net
earnings $ 0.66 $ 0.58 $ 1.57 $ 1.36
- Diluted net
earnings $ 0.66 $ 0.57 $ 1.57 $ 1.34

(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 third quarter were $2.543 billion compared to $2.329 billion
in the same period last year, an increase of $214 million or 9.2%, with
continued strong sales growth experienced in all regions of the country, led
by gains in Western Canada and Québec. On a same-store basis, sales increased
5.3% during the third quarter of 2007. Year-to-date, sales increased 9.4% to
$6.310 billion. The Company's capital investment program, which has resulted
in a 13.0% increase in drug store selling space compared to a year ago,
continues to have a positive impact on sales growth. On a same-store basis,
sales increased 5.6% during the first three quarters of 2007.
Prescription sales were $1.215 billion in the third quarter compared to
$1.116 billion in the same period last year, an increase of $99 million or
8.9%. On a same-store basis, prescription sales increased 5.4% during the
third quarter of 2007, driven by strong growth in the number of prescriptions
filled, while greater generic prescription utilization continued to have a
deflationary impact on prescription sales growth. Prescription sales
represented 47.8% of the Company's sales mix during the third quarter of 2007
compared to 47.9% in the same period last year. Year-to-date, prescription
sales increased 9.3% to $3.014 billion and accounted for 47.8% of the
Company's sales mix. On a same-store basis, prescription sales increased 5.8%
during the first three quarters of 2007.
Front store sales were $1.328 billion in the third quarter compared to
$1.213 billion in the same period last year, an increase of $115 million or
9.5%, with the Company once again experiencing sales gains in all categories,
led by OTC medications and cosmetics. On a same-store basis, front store sales
increased 5.3% during the third quarter of 2007. Year-to-date, front store
sales increased 9.5% to $3.296 billion. On a same-store basis, front store
sales increased 5.4% during the first three quarters of 2007.

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 of 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 of the
Company-owned home health care business and MediSystem Technologies Inc.
Total cost of goods sold and other operating expenses were $2.259 billion
in the third quarter compared to $2.085 billion in the same period last year,
an increase of $174 million or 8.4%. Expressed as a percentage of sales, cost
of goods sold declined by 118 basis points in the third quarter of 2007 versus
the comparative prior year period, reflecting improvements in cost of goods
and an enhanced sales mix. The acquisitions of MediSystem Technologies Inc.
and Therapy Supplies & Rental Limited, both of which were acquired late in the
third quarter of the prior year, also contributed to margin improvement in the
quarter. Better margins continue to provide the Company with the operating
leverage and financial flexibility to make certain strategic investments in
order to further strengthen the business for the long-term. Examples of such
investments include a national pharmacy marketing campaign designed to promote
the new tools and services available under the Company's expanded
HealthWatch® program, increased promotional activities in the front of the
store, including initiatives to support the launch of new private label
products, and costs associated with the enhancement of certain corporate and
store-level information systems. Other operating expenses were also higher due
to the inclusion of these expenses at MediSystem Technologies Inc. and Therapy
Supplies & Rental Limited, as well as from additional costs incurred to
self-distribute more consumable products, however these costs only partially
offset the benefits of the higher gross margin rates described above.
Accordingly, other operating expenses, expressed as a percentage of sales,
increased by 50 basis points in the third quarter of 2007 when compared to the
third quarter of the prior year.
Year-to-date, total cost of goods sold and other operating expenses
increased 8.6% to $5.631 billion. Expressed as a percentage of sales, cost of
goods sold declined by 113 basis points in the first three quarters of 2007
versus the comparative prior year period, while other operating expenses
increased by 44 basis points.

Amortization

Amortization of capital assets and other intangible assets was
$55 million in the third quarter compared to $44 million in the same period
last year, an increase of $11 million or 24.0%. Expressed as a percentage of
sales, amortization increased 26 basis points in the third quarter of 2007
versus the comparative prior year period, reflecting the continued growth of
the Company's capital investment program.
Year-to-date, amortization of capital assets and other intangible assets
increased 22.8% to $131 million. Expressed as a percentage of sales,
amortization increased 22 basis points in the first three quarters of 2007
versus the comparative prior year period.

Operating Income

Operating income was $229 million in the third quarter compared to
$200 million in the same period last year, an increase of $29 million or
14.4%. As described above, sales growth, combined with a reduction in cost of
goods and an enhanced mix, partially offset by increased amortization and
investments in other growth initiatives, resulted in a higher operating margin
(operating income divided by sales). In 2007, third quarter operating margin
improved by 42 basis points to 9.00% compared to 8.58% in the third quarter of
last year. The Company's EBITDA margin (EBITDA divided by sales) was 11.16% in
the third quarter of 2007, a 68 basis point improvement over the EBITDA margin
of 10.48% posted in the third quarter of last year.
Year-to-date, operating income increased 15.4% to $547 million and
operating margin improved by 45 basis points to 8.68%. During the first three
quarters of 2007, EBITDA margin was 10.76%, a 69 basis point improvement over
the EBITDA margin of 10.07% posted during the first three quarters of 2006.

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 $16 million in the third quarter of 2007 compared to
$15 million in the same period last year, an increase of $1 million or 8.8%.
This increase versus the comparative prior year period can be attributed to an
increase in the amount of consolidated net debt outstanding, coupled with a
market-driven increase in short-term interest rates. Year-to-date, interest
expense was $39 million, essentially unchanged from the first three quarters
of the prior year. (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 of 2007 was
33.0% compared to 33.1% in the same period last year. Year-to-date, the
Company's effective income tax rate was 33.2% compared to 33.4% during the
first three quarters of the prior year.

Net Earnings

Third quarter net earnings were $143 million compared to $124 million in
the same period last year, an increase of $19 million or 15.1%. On a diluted
basis, earnings per share were $0.66 in the third quarter of 2007 compared to
$0.57 in the same period last year.
Year-to-date, net earnings increased 17.2% to $340 million. On a diluted
basis, earnings per share were $1.57 in the first three quarters of 2007
compared to $1.34 in the same period last year.

<<
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 6, December 30,
($000s) 2007 2006
-------------------------------------------------------------------------

Cash $ (17,477) $ (62,865)
Bank indebtedness 246,909 134,487
Commercial paper 537,201 503,550
Long-term debt 298,872 300,000
---------------------------

Net debt 1,065,505 875,172

Shareholders' equity 2,975,976 2,723,954

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

Total capitalization $ 4,041,481 $ 3,599,126
---------------------------
---------------------------

Net debt:Shareholders' equity 0.36:1 0.32:1
Net debt:Total capitalization 0.26:1 0.24:1
Net debt:EBITDA(1) 1.15:1 1.06:1
EBITDA:Cash interest expense(1)(2) 18.94:1 17.16:1

(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
216,600,267 common shares outstanding at October 29, 2007. As at this same
date, the Company had issued options to acquire 1,741,709 of its common shares
pursuant to its stock-based compensation plans, of which 1,181,662 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 $550 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 $300 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 Dominion Bond Rating Service. In the event that
the Company's commercial paper program is unable to maintain this rating, the
program is supported by the Company's $550 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 Dominion Bond Rating Service
to third-party investors; and (ii) by providing guarantees to various Canadian
chartered banks that support Associate loans. Due to current 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. (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 Dominion Bond Rating Service and BBB from Standard &
Poor's.
At the end of the third quarter, $54 million of the Company's
$550 million revolving credit facility was utilized, all in respect of
outstanding letters of credit and trade finance guarantees. At December 30,
2006, $51 million of this facility was utilized, all in respect of outstanding
letters of credit and trade finance guarantees. At October 6, 2007, the
Company had $40 million of commercial paper issued and outstanding under its
commercial paper program compared to $50 million at the end of the prior year.
At the end of the third quarter, Associates had obtained an aggregate amount
of $498 million of Trust financing and had drawn an aggregate amount of
$247 million in the form of Associate loans from various Canadian chartered
banks compared to $454 million and $141 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 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 $164 million in the third
quarter of 2007 compared to $172 million in the same period last year, a
decrease of $8 million or 4.9%. During the third quarter of 2007, growth in
net earnings, adjusted for non-cash items, was reduced by an investment in
non-cash working capital balances, whereas in the third quarter of 2006, the
Company's investment in non-cash working capital balances declined.
Year-to-date, the Company has generated $345 million of cash from
operating activities compared to $331 million in the first three quarters of
2006.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were $308 million in the third
quarter of 2007 compared to $172 million in the same period last year, an
increase of $136 million or 78.8%. Of these totals, investments in property
and equipment amounted to $138 million in the third quarter of this year
compared to $95 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
$67 million in deposits during the third quarter of 2007 compared to an
investment of $72 million in business acquisitions in the same period last
year. Consistent with its stated growth objectives, these investments relate
primarily to acquisitions of drug stores and prescription files, including
funds deposited and held in escrow in respect of outstanding offers, as the
Company continues to pursue attractive opportunities in the marketplace. Of
the $110 million invested in business acquisitions in the third quarter of
this year, $77 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.)
Year-to-date, cash flows used in investing activities were $439 million
compared to $262 million in the first three quarters of 2006. Of these totals,
investments in property and equipment amounted to $249 million in the first
three quarters of this year compared to $172 million in the same period last
year. Investments in business acquisitions and deposits were $121 million and
$75 million, respectively, in the first three quarters of 2007 compared to an
investment of $83 million in business acquisitions in the same period last
year.
During the third quarter of 2007, 55 new drug stores were opened or
acquired, 20 of which were relocations, and two drug stores were closed. The
Company also added two home health care stores to its network during the
quarter. Year-to-date, 91 new drug stores have been opened or acquired, 37 of
which were relocations, and six drug stores have been closed. The Company has
also added three home health care stores to its network thus far in 2007. As a
result of this activity, drug store selling space has increased by 13.0%
compared to a year ago. At the end of the third quarter there were 1,096
stores in the system, comprised of 1,035 drug stores and 61 Shoppers Home
Health Care® stores.

Cash Flows From (Used in) Financing Activities

Cash flows from financing activities were $50 million in the third
quarter of 2007, as cash inflows of $88 million were partially offset by cash
outflows of $39 million. Cash inflows were comprised of a $20 million increase
in bank indebtedness, a $64 million increase in the amount of commercial paper
issued and outstanding under the Company's commercial paper programs (a
$40 million increase in the amount of commercial paper issued and outstanding
by the Company plus $24 million of additional Trust financing obtained by
Associates), and $4 million of proceeds received from the issuance of common
shares pursuant to the Company's stock-based incentive plans. Cash outflows
were comprised of a $4 million reduction in the amount of Associate investment
and $35 million for the payment of dividends.
In the third quarter of 2007, the net result of the Company's operating,
investing and financing activities was a decrease in cash balances of
$94 million.
Year-to-date, cash flows from financing activities were $49 million and
the net result of the Company's operating, investing and financing activities
was a decrease in cash balances of $45 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. The Company
does not foresee any difficulty in obtaining additional short or long-term
financing given its current credit ratings and past experiences in the capital
markets.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Implemented in 2007

Financial Instruments

In 2006, the Canadian Institute of Chartered Accountants (the "CICA")
issued new accounting standards concerning financial instruments: Financial
Instruments - Recognition and Measurement ("Section 3855"); Hedges ("Section
3865"); and Comprehensive Income ("Section 1530"). These standards require
prospective application and are effective for the Company's 2007 fiscal year.
The Company applied the new accounting standards at the beginning of its
current fiscal year and their implementation did not have a significant impact
on the Company's results of operations or financial position.

Financial Assets and Liabilities

Section 3855 establishes standards for recognizing and measuring
financial instruments. Under the new standards, all 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. This classification drives
the basis of measurement and the accounting treatment in the financial
statements. (See note 2 to the accompanying unaudited consolidated financial
statements of the Company.)

Derivatives and Hedge Accounting

The Company has entered into various interest rate derivative agreements
converting an aggregate notional principal amount of $250 million of floating
rate short-term, asset-backed notes issued by the Trust 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. These interest
rate derivative agreements are designated as hedges in accordance with the new
standards. Accordingly, the fair value of these agreements has been included
in "other assets" on the consolidated balance sheet of the Company. Any
after-tax adjustments related to the fair values of these interest rate
derivative agreements have been included in "accumulated other comprehensive
income" on the consolidated balance sheet of the Company. (See note 2 to the
accompanying unaudited consolidated financial statements of the Company.)
In addition, the Company has entered into cash-settled equity forward
agreements to limit its exposure to future changes in the market price of
197,745 of its common shares by virtue of its obligations under its
stock-based, long-term incentive plan ("LTIP"). These agreements mature in
December 2008 and December 2009. A percentage of these equity forward
derivative agreements, related to the unearned units under the LTIP, has been
designated as a hedge in accordance with the new standards. Accordingly, upon
adoption of the new standards, the fair value of this hedge was reflected in
the opening balance of "accumulated other comprehensive income", net of tax.
During the first three quarters of 2007, the change in the fair value of
the percentage of these equity forward agreements that relates to the unearned
LTIP units has been recorded in "other comprehensive income". (See note 2 to
the accompanying unaudited consolidated financial statements of the Company).

Convertible and Other Debt Instruments with Embedded Derivatives

In March 2007, the Emerging Issues Committee of the CICA (the "EIC")
issued EIC-164, "Convertible and Other Debt Instruments with Embedded
Derivatives" ("EIC-164"). EIC-164 addresses accounting for debt instruments
with certain conversion features. EIC-164 applies retrospectively to financial
instruments accounted for in accordance with Section 3855 in interim or annual
financial statements ending on or after June 30, 2007. The implementation of
EIC-164 did not have an impact on the Company's results of operations or
financial position.

Accounting by an Investor upon Loss of Significant Influence

In April 2007, the EIC issued EIC-165, "Accounting by an Investor upon
Loss of Significant Influence" ("EIC-165"). EIC-165 addresses how an investor
that loses significant influence in an investee should account for the amount
the investor has in accumulated other comprehensive income for its
proportionate share of the investee's equity adjustments for other
comprehensive income. EIC-165 applies retrospectively to financial statements
for interim and annual periods ending after June 30, 2007. The implementation
of EIC-165 did not have an impact on the Company's results of operations or
financial position.

Accounting Policy Choice for Transaction Costs

In June 2007, the EIC issued EIC-166, "Accounting Policy Choice for
Transaction Costs" ("EIC-166"). EIC-166 addresses whether transaction costs
related to financial assets and liabilities that are not classified as held
for trading can be recognized in net income for certain of these financial
assets and liabilities and added to the carrying amount for other financial
assets and liabilities. EIC-166 applies retrospectively to financial
statements issued for interim and annual reports ending on or after
September 30, 2007. The implementation of EIC-166 did not have an impact on
the Company's results of operations or financial position.

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 2007, the
Company's maximum obligation in respect of such guarantees was $415 million
compared to $370 million at the end of the second quarter and end of the prior
year. At October 6, 2007, an aggregate amount of $347 million in available
lines of credit had been allocated to the Associates by the various banks
compared to $332 million at the end of the second quarter and $323 million at
the end of the prior year. As at October 6, 2007, Associates had drawn an
aggregate amount of $247 million against these available lines of credit
compared to $232 million at the end of the second quarter and $141 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,
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 third quarter of 2007, the total amount of
loans outstanding from the Trust to the Company's Associates was $498 million
compared to $473 million at the end of the second quarter and $454 million at
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 $51 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

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

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

Net earnings $ 142,574 $ 123,880 $ 112,264 $ 94,407

Per common share
- Basic net
earnings $ 0.66 $ 0.58 $ 0.52 $ 0.44
- Diluted net
earnings $ 0.66 $ 0.57 $ 0.52 $ 0.44

First Quarter Fourth Quarter
--------------------------- ---------------------------
2007 2006 2006 2005

(12 Weeks) (12 Weeks) (12 Weeks) (12 Weeks)
-------------------------------------------------------------------------

Sales $ 1,838,795 $ 1,671,119 $ 2,018,067 $ 1,833,327

Net earnings $ 85,131 $ 71,704 $ 132,500 $ 115,125

Per common share
- Basic net
earnings $ 0.40 $ 0.34 $ 0.62 $ 0.54
- Diluted net
earnings $ 0.39 $ 0.33 $ 0.61 $ 0.53
>>

The selected quarterly information has been prepared in accordance with
Canadian generally accepted accounting principles.
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.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

There were no changes in internal controls 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 controls 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 6, October 7, October 6, October 7,
2007 2006 2007 2006
-------------------------------------------------------------------------

Sales $ 2,542,671 $ 2,329,051 $ 6,309,560 $ 5,768,369
Operating expenses
Cost of goods
sold and other
operating
expenses 2,259,011 2,084,896 5,630,857 5,187,210
Amortization 54,942 44,295 130,752 106,466
-------------------------------------------------------------------------

Operating income 228,718 199,860 547,951 474,693

Interest expense
(Note 4) 15,920 14,632 38,688 38,977
-------------------------------------------------------------------------

Earnings before
income taxes 212,798 185,228 509,263 435,716

Income taxes
Current 93,409 84,013 177,447 155,230
Future (23,185) (22,665) (8,153) (9,505)
-------------------------------------------------------------------------
70,224 61,348 169,294 145,725
-------------------------------------------------------------------------
Net earnings $ 142,574 $ 123,880 $ 339,969 $ 289,991
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net earnings per
common share:

Basic $ 0.66 $ 0.58 $ 1.57 $ 1.36
Diluted $ 0.66 $ 0.57 $ 1.57 $ 1.34

Weighted average
common shares
outstanding
- Basic
(millions) 216.4 214.0 215.9 213.6
- Diluted
(millions) 217.3 216.6 217.2 216.6
Actual common
shares outstanding
(millions) 216.6 214.9 216.6 214.9

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

40 Weeks Ended
-------------------------
October 6, October 7,
2007 2006
-------------------------------------------------------------------------

Retained earnings, beginning of period $ 1,225,616 $ 941,672
Impact of the adoption of new accounting
standards, Handbook Sections 3855, Financial
Instruments - Recognition and Measurement;
3865, Hedges; and 1530, Comprehensive
Income (Note 2) 66 -
Net earnings 339,969 289,991
Dividends (103,711) (77,157)
Premium on repurchase of shares (24) (35,595)
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,461,916 $ 1,118,911
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

16 Weeks Ended 40 Weeks Ended
-------------------------------------------------------
October 6, October 7, October 6, October 7,
2007 2006 2007 2006
-------------------------------------------------------------------------

Net earnings $ 142,574 $ - $ 339,969 $ -
Other comprehensive
income, net of tax
Change in un-
realized gain on
interest rate
derivative (net
of tax of $431
and $792,
respectively) (875) - 1,500 -
Change in un-
realized gain on
equity forward
derivatives (net
of tax of $82
and $42,
respectively) 163 - 85 -
Amount of
previously un-
realized gain on
equity forward
derivatives
recognized in
earnings during
the period (net
of tax of $nil
and $59,
respectively) 2 - (113) -
-------------------------------------------------------------------------
Other comprehensive
income (loss) (710) - 1,472 -
-------------------------------------------------------------------------
Comprehensive
income $ 141,864 $ - $ 341,441 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Accumulated other
comprehensive
income, upon
adoption of new
accounting
standards (Note 2) $ 406 $ -
Other comprehensive
income (net of tax
of $775) 1,472 -
-------------------------------------------------------------------------
Accumulated other
comprehensive
income, end of
period $ 1,878 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

October 6, October 7, December 30,
2007 2006 2006
-------------------------------------------------------------------------

Assets

Current
Cash $ 17,477 $ 18,368 $ 62,865
Accounts receivable 325,034 285,830 307,779
Inventory 1,431,461 1,259,856 1,372,124
Future income taxes 58,156 42,946 46,407
Prepaid expenses and deposits
(Note 3) 131,735 42,349 32,248
-------------------------------------------------------------------------
1,963,863 1,649,349 1,821,423

Property and equipment 1,030,783 830,436 907,728
Deferred costs 28,423 21,111 25,936
Goodwill 2,229,945 2,112,952 2,122,162
Other intangible assets 55,726 44,793 45,249
Other assets 11,243 10,243 6,516
-------------------------------------------------------------------------
Total assets $ 5,319,983 $ 4,668,884 $ 4,929,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current
Bank indebtedness $ 246,909 $ 171,291 $ 134,487
Commercial paper 537,201 518,750 503,550
Accounts payable and accrued
liabilities 761,285 702,674 843,278
Income taxes payable 106,772 32,371 70,672
Dividends payable 34,656 25,783 25,797
Current portion of long-term
debt - 300 -
-------------------------------------------------------------------------
1,686,823 1,451,169 1,577,784

Long-term debt 298,872 307,738 300,000
Other long-term liabilities 229,020 169,440 188,938
Future income taxes 26,704 17,930 21,689
-------------------------------------------------------------------------
2,241,419 1,946,277 2,088,411
-------------------------------------------------------------------------

Associate interest 102,588 107,275 116,649

Shareholders' equity

Share capital 1,502,145 1,490,298 1,491,264
Contributed surplus 10,037 6,123 7,074
Accumulated other comprehensive
income 1,878 - -
Retained earnings 1,461,916 1,118,911 1,225,616
-------------------------------------------------------------------------
2,975,976 2,615,332 2,723,954
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 5,319,983 $ 4,668,884 $ 4,929,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

16 Weeks Ended 40 Weeks Ended
-------------------------------------------------------
October 6, October 7, October 6, October 7,
2007 2006 2007 2006
-------------------------------------------------------------------------

Operating
activities
Net earnings $ 142,574 $ 123,880 $ 339,969 $ 289,991
Items not
affecting cash
Amortization 56,750 46,125 136,486 112,804
Future income
taxes (23,185) (22,665) (8,153) (9,505)
Loss on disposal
of property and
equipment 2,420 1,793 4,372 3,617
Stock-based
compensation 1,049 1,129 2,963 2,541
-------------------------------------------------------------------------
179,608 150,262 475,637 399,448
Net change in
non-cash working
capital balances (28,584) 13,071 (148,591) (81,297)
Increase in
long-term
liabilities 19,944 12,963 32,237 21,730
Store opening
costs (7,307) (4,269) (14,249) (9,052)
-------------------------------------------------------------------------
Cash flows from
operating
activities 163,661 172,027 345,034 330,829
-------------------------------------------------------------------------

Investing
activities
Purchase of
property and
equipment (137,541) (95,094) (248,826) (172,222)
Business
acquisitions
(Note 3) (110,268) (72,139) (121,074) (83,145)
Deposits (Note 3) (66,683) - (74,815) -
Proceeds from
disposition of
property and
equipment 6,705 129 6,794 287
Other assets (7) (5,047) (1,046) (7,297)
-------------------------------------------------------------------------
Cash flows used in
investing
activities (307,794) (172,151) (438,967) (262,377)
-------------------------------------------------------------------------

Financing
activities
Bank indebtedness,
net 20,498 296 112,422 7,444
Commercial paper,
net 64,324 64,450 34,199 48,900
Repayment of long-
term debt - - - (25,000)
Revolving term
debt, net - 2,199 - 6,013
Deferred financing
costs (20) (49) (20) (452)
Associate interest (4,164) (8,456) (14,061) (9,226)
Proceeds from
shares issued for
stock options
exercised 3,628 5,232 10,591 10,099
Repayment of share
purchase loans 29 145 295 2,120
Repurchase of
share capital - (41,789) (29) (41,789)
Dividends paid (34,588) (25,689) (94,852) (72,717)
-------------------------------------------------------------------------
Cash flows from
(used in) financing
activities 49,707 (3,661) 48,545 (74,608)
-------------------------------------------------------------------------
Decrease in cash (94,426) (3,785) (45,388) (6,156)
Cash, beginning
of period 111,903 22,153 62,865 24,524
-------------------------------------------------------------------------
Cash, end of
period $ 17,477 $ 18,368 $ 17,477 $ 18,368
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash
flow information
Interest paid $ 10,295 $ 14,503 $ 32,721 $ 32,964
Income taxes paid $ 56,797 $ 48,815 $ 165,087 $ 164,277

SHOPPERS DRUG MART CORPORATION
Exhibit to the Consolidated Financial Statements
(unaudited)
-------------------------------------------------------------------------

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 30, 2006, except as described in Note 2, Change in Accounting
Policy. 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 2006 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 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.

Comparative Amounts

Certain comparative amounts have been reclassified to conform with the
current period's financial statement presentation.

2. CHANGE IN ACCOUNTING POLICIES - Adoption of New Accounting Standards

Financial Instruments

In 2006, the Canadian Institute of Chartered Accountants ("CICA") issued
new accounting standards concerning financial instruments: Financial
Instruments - Recognition and Measurement ("Section 3855"); Financial
Instruments - Disclosure and Presentation ("Section 3861"), Hedges
("Section 3865"); and Comprehensive Income ("Section 1530"). The
standards require prospective application and were effective for the
Company's first quarter of fiscal 2007. The Company applied the new
accounting standards at the beginning of its current fiscal year.

Financial Assets and Liabilities

Section 3855 establishes standards for recognizing and measuring
financial instruments. Under the new standards, all 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 Company's financial assets and financial liabilities are classified
and measured as follows:

Asset/Liability Category Measurement

Cash Held for trading Fair value
Accounts receivable Loans and receivables Amortized cost
Long-term receivables 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 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.
In addition, the Company uses cash-settled equity forward contracts 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 Company's interest rate derivatives have been designated as cash flow
hedges and reported at fair value, in accordance with the new standards,
as a component of other assets. A percentage of the equity forward
derivatives, related to unearned units under the LTIP, has been
designated as a hedge. The fair value of the percentage of the equity
derivatives designated as a hedge has been reflected in the opening
balance of accumulated other comprehensive income, net of tax.

The following table summarizes the impact on the Company's opening
balance sheet for fiscal 2007 as a result of the adjustments relating to
interest rate and equity forward derivatives:

Long-term
incentive
plan and December 31,
December 30, Interest equity 2006
2006 balance, rate forward opening
as reported derivative derivative balance

Other assets $ 6,516 $ 338 $ 610 $ 7,464

Other long-term
liabilities $ 188,938 $ - $ 234 $ 189,172

Future income taxes
(within liabilities) $ 21,689 $ 115 $ 128 $ 21,932

Retained earnings $ 1,225,616 $ - $ 66 $ 1,225,682

Accumulated other
comprehensive
income $ - $ 223 $ 183 $ 406
-------------------------------------------------------------------------

In addition to the above adjustments, the Company has adopted the policy
of adding transaction costs to financial assets and liabilities
classified as other than "held for trading", as a result, the Company's
deferred financing costs were reclassified to the debt balances to which
they relate. As at December 31, 2006, the commercial paper balance was
reduced by $707 of deferred financing costs and the long-term debt
balance was reduced by $1,518 of deferred financing costs. As at
October 6, 2007, the commercial paper balance was reduced by $549 of
deferred financing costs and the long-term debt balance was reduced by
$1,127 of deferred financing costs.

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

As a result of the implementation of these standards, the Consolidated
Financial Statements include a Consolidated Statement of Comprehensive
Income, with the cumulative amount of other comprehensive income
presented as a new category of shareholders' equity in the Consolidated
Balance Sheets.

Based on market values at October 6, 2007, the carrying amounts of the
interest rate derivative and the equity forward contracts are $2,630 and
$1,051, respectively.

3. ACQUISITIONS

Centre D'Escomptes Racine

On September 25, 2007, the Company purchased the assets of the seven
stores of Centre D'Escomptes Racine, a pharmacy chain in Quebec. The
total cost of the acquisition, including costs incurred in connection
with the acquisition, was $77,077 and will be allocated between
inventory, other assets, goodwill and intangibles. The purchase price
allocation remains preliminary pending finalization of the valuations of
the assets acquired.

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

Funds Held in Escrow

Included in the balance of prepaid expenses and deposits at October 6,
2007, the Company had amounts held in escrow of $74,815 with respect to
other drug store acquisition activity.

4. INTEREST EXPENSE

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

16 Weeks Ended 40 Weeks Ended
-------------------------------------------------------
October 6, October 7, October 6, October 7,
2007 2006 2007 2006
-------------------------------------------------------------------------

Interest on bank
indebtedness $ 3,683 $ 2,400 $ 7,983 $ 6,151
Interest on
commercial paper 7,792 7,078 19,250 18,702
Interest on long-
term debt 4,227 4,926 10,906 12,677
Amortization of
deferred financing
costs 218 228 549 1,447
-------------------------------------------------------------------------
$ 15,920 $ 14,632 $ 38,688 $ 38,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------

5. EMPLOYEE FUTURE BENEFITS

The net benefit expense included in the results for the 16 and 40 week
periods ended October 6, 2007 for benefits provided under pension plans
was $1,991 and $5,113 (2006 - $2,032 and $5,081), respectively, and for
benefits provided under other benefit plans was $31 and $77 (2006 - $41
and $103), 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 Company's net earnings for the 16 and
40 week periods ended October 6, 2007 would have been reduced by $14 and
$174 (2006 - $129 and $496), respectively. For the 16 and 40 week periods
ended October 6, 2007 and October 7, 2006, basic earnings per share and
diluted earnings per share would have been unchanged.

For a description of the Company's stock option programs, see Note 11 to
the consolidated financial statements in the Company's 2006 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 $51,000, as a form of
credit enhancement which, in turn, enables the Trust to provide
favourable financing terms to the Company's Associates.

As at October 6, 2007, $497,750 (2006 - $423,750) of the consolidated
commercial paper balance is commercial paper issued by the Trust.

Earnings Coverage Exhibit to the Consolidated Financial Statements

52 Weeks Ended October 6, 2007
-------------------------------------------------------------------------
Earnings coverage on long-term debt obligations 54.26 times
-------------------------------------------------------------------------

The earnings coverage ratio on long-term debt (including any current
portion) is equal to net 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: (416) 493-1220 ext. 5500, corporateaffairs@shoppersdrugmart.ca; Investor Relations: (416) 493-1220 ext. 5678, investorrelations@shoppersdrugmart.ca


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