Press Releases

Shoppers Drug Mart Corporation announces strong second quarter results - net earnings increase 18.9 percent

Jul 18, 2007

TORONTO, July 18 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the second quarter ended June 16, 2007.

Second Quarter Results (12 Weeks)
Solid top line growth and an enhanced sales mix continued to drive strong
growth in net earnings. Second quarter net earnings increased 18.9% to
$112 million or 52 cents per share (diluted) from $94 million or 44 cents per
share (diluted) a year ago.
Sales in the second quarter were $1.928 billion compared to
$1.768 billion in the same period last year, an increase of $160 million or
9.0%, with continued strong sales growth experienced in all regions of the
country. On a same-store basis, sales increased 5.3%.
Prescription sales increased 8.8% in the second quarter to $905 million,
accounting for 46.9% of the Company's sales mix compared to 47.1% in the same
period last year. On a same-store basis, prescription sales increased 5.4%.
Comparable store prescription sales growth was driven by strong growth in the
number of prescriptions filled, despite increased generic prescription
utilization that had a deflationary impact of approximately 400 basis points
on sales growth in the category. While deflationary to sales, this shift
results in a more desirable and profitable sales mix in the dispensary.
Front store sales increased 9.3% in the second quarter to $1.023 billion,
with the Company once again experiencing sales gains in all categories. 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 second quarter results and our performance throughout
the first half of 2007. Strong growth in sales and profitability continues to
provide us with the operating leverage and financial flexibility required to
execute upon our operating, investing and financing strategies for the
remainder of 2007 and beyond."

First Half Results (24 Weeks)
First half sales increased 9.5% to $3.767 billion, with both prescription
sales and front store sales up 9.5%. On a same-store basis, first half sales
increased 5.8%, with prescription sales up 6.1% and front store sales up 5.5%.
During the first half of 2007, prescription sales accounted for 47.8% of the
Company's sales mix, unchanged from the same period last year.
First half net earnings increased 18.8% to $197 million or 91 cents per
share (diluted) from $166 million or 77 cents per share (diluted) a year ago.

Store Network Development
The successful implementation of the Company's capital investment and
expansion program continues unabated. During the second quarter, 23 drug
stores were opened or acquired, 10 of which were relocations, and two drug
stores were closed. At quarter-end, there were 1,061 stores in the system,
comprised of 1,002 drug stores and 59 Shoppers Home Health Care stores. Drug
store selling space was in excess of 8.8 million square feet at the end of the
second quarter, an increase of 11.4% 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 October 15, 2007 to
shareholders of record as of the close of business on September 28, 2007.

Other Information
The Company will hold an analyst call at 3:30 p.m. (Eastern Daylight
Time) today to discuss its second quarter results. The call may be accessed by
dialing 416-641-6114 from within the Toronto area, or 1-866-696-5895 outside
of Toronto. The call will also be simulcast on the Company's website for all
interested parties. The webcast can be accessed via the Investor Relations
section of the Shoppers Drug Mart website at www.shoppersdrugmart.ca. The
conference call will be archived in the Investor Relations section of the
Shoppers Drug Mart website until the Company's next analyst call. A playback
of the call will also be available by telephone until 11:59 p.m. (Eastern
Daylight Time) on August 1, 2007. The call playback can be accessed after
5:00 p.m. (Eastern Daylight Time) on Wednesday, July 18, 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 3224686.
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 1,000 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 59 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 July 9, 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 12 and 24 week periods ended June 16, 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 June 16,
2007, there were 1,002 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 Life Brand® and Quo® 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 6
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 59 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 12 and 24 week periods ended June 16, 2007 compared to the 12 and
24 week periods ended June 17, 2006, as well as certain other metrics with
respect to investing activities for the 12 and 24 week periods ended June 16,
2007 and financial position as at June 16, 2007.

- Second quarter sales of $1.928 billion, an increase of 9.0%.

- First half sales of $3.767 billion, an increase of 9.5%.

- Second 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%.

- First half comparable store sales growth of 5.8%, comprised of
comparable prescription sales growth of 6.1% and comparable front
store sales growth of 5.5%.

- Second quarter EBITDA(1) of $219 million, an increase of 17.1%.

- First half EBITDA of $395 million, an increase of 17.2%.

- Second quarter EBITDA margin(2) of 11.33%, an increase of 78 basis
points.

- First half EBITDA margin of 10.49%, an increase of 69 basis
points.

- Second quarter net earnings of $112 million or $0.52 per share
(diluted), an increase of 18.9%.

- First half net earnings of $197 million or $0.91 per share
(diluted), an increase of 18.8%.

- Second quarter capital expenditures of $78 million compared to
$48 million in the prior year. Opened or acquired 23 new drug stores,
10 of which were relocations.

- First half capital expenditures of $122 million compared to
$88 million in the prior year. Opened or acquired 36 new drug
stores, 17 of which were relocations, and added one home health
care store.

- Year-over-year increase in drug store selling space of 11.4%.

- Net debt to total capitalization ratio of 0.24:1 at June 16, 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.

12 Weeks Ended 24 Weeks Ended
--------------------------- ---------------------------
($000s, except June 16, June 17, June 16, June 17,
per share data) 2007 2006 2007 2006
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

Sales $ 1,928,094 $ 1,768,199 $ 3,766,889 $ 3,439,318
Cost of goods
sold and other
operating
expenses 1,709,561 1,581,652 3,371,846 3,102,314
--------------------------- ---------------------------

EBITDA(1) 218,533 186,547 395,043 337,004
Amortization 38,575 31,258 75,810 62,171
--------------------------- ---------------------------

Operating income 179,958 155,289 319,233 274,833
Interest expense 11,394 12,465 22,768 24,345
--------------------------- ---------------------------

Earnings before
income taxes 168,564 142,824 296,465 250,488
Income taxes 56,300 48,417 99,070 84,377
--------------------------- ---------------------------

Net earnings $ 112,264 $ 94,407 $ 197,395 $ 166,111
--------------------------- ---------------------------
--------------------------- ---------------------------

Per common share
- Basic net
earnings $ 0.52 $ 0.44 $ 0.92 $ 0.78
- Diluted net
earnings $ 0.52 $ 0.44 $ 0.91 $ 0.77

(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 second quarter were $1.928 billion compared to
$1.768 billion in the same period last year, an increase of $160 million or
9.0%, with continued strong sales growth experienced in all regions of the
country. On a same-store basis, sales increased 5.3% during the second quarter
of 2007. Year-to-date, sales increased 9.5% to $3.767 billion. The Company's
capital investment program, which has resulted in an 11.4% increase in drug
store selling space compared to a year ago, combined with an improved product
and service offering and innovative marketing techniques, have driven sales
and market share gains in the Company's core categories. On a same-store
basis, sales increased 5.8% during the first half of 2007.
Prescription sales were $905 million in the second quarter compared to
$832 million in the same period last year, an increase of $73 million or 8.8%.
On a same-store basis, prescription sales increased 5.4% during the second
quarter of 2007. Comparable store prescription sales growth was driven by
strong growth in the number of prescriptions filled, despite increased generic
prescription utilization that had a deflationary impact of approximately 400
basis points on sales growth in the category. While deflationary to sales,
this shift results in a more desirable and profitable sales mix in the
dispensary. Prescription sales represented 46.9% of the Company's sales mix
during the second quarter of 2007 compared to 47.1% in the same period last
year. Year-to-date, prescription sales increased 9.5% to $1.799 billion and
accounted for 47.8% of the Company's sales mix. On a same- store basis,
prescription sales increased 6.1% during the first half of 2007. Front store
sales were $1.023 billion in the second quarter compared to $936 million in
the same period last year, an increase of $87 million or 9.3%. On a same-store
basis, front store sales increased 5.3% during the second quarter of 2007.
Year-to-date, front store sales increased 9.5% to $1.968 billion. On a
same-store basis, front store sales increased 5.5% during the first half 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 $1.710 billion
in the second quarter compared to $1.582 billion in the same period last year,
an increase of $128 million or 8.1%. Expressed as a percentage of sales, cost
of goods sold declined by 161 basis points in the second 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 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, 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, although 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 83 basis points in the second quarter of 2007 when
compared to the second quarter of the prior year.
Year-to-date, total cost of goods and other operating expenses increased
8.7% to $3.372 billion. Expressed as a percentage of sales, cost of goods sold
declined by 110 basis points in the first half of 2007 versus the comparative
prior year period, while other operating expenses increased by 41 basis
points.

Amortization
Amortization of capital assets and other intangible assets was
$39 million in the second quarter compared to $31 million in the same period
last year, an increase of $8 million or 23.4%. Expressed as a percentage of
sales, amortization increased 23 basis points in the second 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 21.9% to $76 million. Expressed as a percentage of sales,
amortization increased 21 basis points in the first half of 2007 versus the
comparative prior year period.

Operating Income
Operating income was $180 million in the second quarter compared to
$155 million in the same period last year, an increase of $25 million or
15.9%. 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, second quarter operating margin
improved by 55 basis points to 9.33% compared to 8.78% in the second quarter
of last year. The Company's EBITDA margin (EBITDA divided by sales) was 11.33%
in the second quarter of 2007, a 78 basis point improvement over the EBITDA
margin of 10.55% posted in the second quarter of last year.
Year-to-date, operating income increased 16.2% to $319 million and
operating margin improved by 48 basis points to 8.47%. During the first half
of 2007, EBITDA margin was 10.49%, a 69 basis point improvement over the
EBITDA margin of 9.80% posted during the first half 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 $11 million in the second quarter of 2007 compared
to $12 million in the same period last year, a decrease of $1 million or 8.6%.
This decrease versus the comparative prior year period can be largely
attributed to a reduction in the amount of consolidated net debt outstanding
and lower amortization of deferred financing costs, partially offset by a
market-driven increase in short-term interest rates. Year-to-date, interest
expense decreased 6.5% to $23 million. (See note 3 to the accompanying
unaudited consolidated financial statements of the Company.)

Income Taxes
The Company's effective income tax rate in the second quarter of 2007 was
33.4% compared to 33.9% in the same period last year. This decrease in the
effective income tax rate can be primarily attributed to a reduction in
statutory rates in certain jurisdictions, combined with adjustments to the
Company's internal capital structure.
Year-to-date, the Company's effective income tax rate was 33.4% compared
to 33.7% during the first half of the prior year.

Net Earnings
Second quarter net earnings were $112 million compared to $94 million in
the same period last year, an increase of $18 million or 18.9%. On a diluted
basis, earnings per share were $0.52 in the second quarter of 2007 compared to
$0.44 in the same period last year.
Year-to-date, net earnings increased 18.8% to $197 million. On a diluted
basis, earnings per share were $0.91 in the first half of 2007 compared to
$0.77 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.

<<
June 16, December 30,
($000s) 2007 2006
-------------------------------------------------------------------------

Cash $ (111,903) $ (62,865)
Bank indebtedness 226,411 134,487
Commercial paper 472,815 503,550
Long-term debt 298,716 300,000
---------------------------

Net debt 886,039 875,172

Shareholders' equity 2,864,062 2,723,954

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

Total capitalization $ 3,750,101 $ 3,599,126
---------------------------
---------------------------

Net debt:Shareholders' equity 0.31:1 0.32:1
Net debt:Total capitalization 0.24:1 0.24:1
Net debt:EBITDA(1) 1.00:1 1.06:1
EBITDA:Cash interest expense(1)(2) 18.63:1 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
216,205,122 common shares outstanding at July 9, 2007. As at this same date,
the Company had issued options to acquire 2,140,035 of its common shares
pursuant to its stock-based compensation plans, of which 1,450,877 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. (See notes 1 and 6 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 second quarter, $57 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 June 16, 2007, the Company
had no 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 second quarter, Associates had obtained an aggregate amount of
$473 million of Trust financing and had drawn an aggregate amount of
$232 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 second 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 $184 million in the second
quarter of 2007 compared to $154 million in the same period last year. This
increase is largely attributable to growth in net earnings, combined with an
increase in the amount of cash generated from non-cash working capital
balances versus the comparative prior year period.
Year-to-date, the Company has generated $181 million of cash from
operating activities compared to $159 million in the first half of 2006.

Cash Flows Used in Investing Activities
Cash flows used in investing activities were $87 million in the second
quarter of 2007 compared to $50 million in the same period last year, an
increase of $37 million or 72.7%. Of these totals, investments in property and
equipment amounted to $71 million in the second quarter of this year compared
to $40 million in the same period last year, reflecting the continued strength
and success of the Company's store network growth and revitalization program.
The Company also invested $7 million in business acquisitions and $9 million
in other assets during the second quarter of 2007 compared to $8 million and
$2 million, respectively, in the same period last year. Consistent with its
stated growth objectives, these investments relate primarily to acquisitions
of drug store prescription files, as the Company continues to pursue
attractive opportunities in the marketplace.
Year-to-date, cash flows used in investing activities were $131 million
compared to $90 million in the first half of 2006. Of these totals,
investments in property and equipment amounted to $111 million in the first
half of this year compared to $77 million in the same period last year.
Investments in business acquisitions and other assets were $11 million and
$9 million, respectively, in the first half of 2007 compared to $11 million
and $2 million, respectively, in the same period last year.
During the second quarter of 2007, 23 new drug stores were opened or
acquired, 10 of which were relocations, and two drug stores were closed. Year-
to-date, 36 new drug stores have been opened or acquired, 17 of which were
relocations, and four drug stores have been closed. As a result of this
activity, drug store selling space has increased by 11.4% versus a year ago.
The Company has also added one new home health care store to its network
during the first half of 2007. At the end of the second quarter there were
1,061 stores in the system, comprised of 1,002 drug stores and 59 Shoppers
Home Health Care® stores.

Cash Flows Used in Financing Activities
Cash flows used in financing activities were $25 million in the second
quarter of 2007, as cash outflows of $52 million were partially offset by a
$24 million increase in bank indebtedness 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 $12 million decrease in the
amount of commercial paper issued and outstanding under the Company's
commercial paper programs (a $25 million decrease in the amount of commercial
paper issued and outstanding by the Company, partially offset by $13 million
of additional Trust financing obtained by Associates), a $5 million reduction
in the amount of Associate investment and $34 million for the payment of
dividends.
In the second quarter of 2007, the net result of the Company's operating,
investing and financing activities was an increase in cash of $72 million.
Year-to-date, cash flows used in financing activities were $1 million and
the net result of the Company's operating, investing and financing activities
was an increase in cash of $49 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 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. It is this classification that 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
200,876 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 half 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 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.

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 second quarter of 2007, the
Company's maximum obligation in respect of such guarantees was $370 million,
unchanged from the end of the first quarter and prior year. At June 16, 2007,
an aggregate amount of $332 million in available lines of credit had been
allocated to the Associates by the various banks compared to $326 million at
the end of the first quarter and $323 million at the end of the prior year. As
at June 16, 2007, Associates had drawn and aggregate amount of $232 million
against these available lines of credit compared to $190 million at the end of
the first 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 second quarter of 2007, the total amount of
loans outstanding from the Trust to the Company's Associates was $473 million
compared to $461 million at the end of the first 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 $48 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 6 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

<<

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

Sales $ 1,928,094 $ 1,768,199 $ 1,838,795 $ 1,671,119

Net earnings $ 112,264 $ 94,407 $ 85,131 $ 71,704

Per common share
- Basic net earnings $ 0.52 $ 0.44 $ 0.40 $ 0.34
- Diluted net
earnings $ 0.52 $ 0.44 $ 0.39 $ 0.33

Fourth Quarter Third Quarter
------------------------- -------------------------
2006 2005 2006 2005
(12 Weeks) (12 Weeks) (16 Weeks) (16 Weeks)
-------------------------------------------------------------------------

Sales $ 2,018,067 $ 1,833,327 $ 2,329,051 $ 2,138,085

Net earnings $ 132,500 $ 115,125 $ 123,880 $ 107,672

Per common share
- Basic net earnings $ 0.62 $ 0.54 $ 0.58 $ 0.51
- Diluted net
earnings $ 0.61 $ 0.53 $ 0.57 $ 0.50
>>

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

12 Weeks Ended 24 Weeks Ended
------------------------- -------------------------
June 16, June 17, June 16, June 17,
2007 2006 2007 2006
-------------------------------------------------------------------------

Sales $ 1,928,094 $ 1,768,199 $ 3,766,889 $ 3,439,318
Operating expenses
Cost of goods sold
and other operating
expenses 1,709,561 1,581,652 3,371,846 3,102,314
Amortization 38,575 31,258 75,810 62,171
-------------------------------------------------------------------------

Operating income 179,958 155,289 319,233 274,833

Interest expense
(Note 3) 11,394 12,465 22,768 24,345
-------------------------------------------------------------------------

Earnings before income
taxes 168,564 142,824 296,465 250,488

Income taxes
Current 48,959 34,952 84,038 71,217
Future 7,341 13,465 15,032 13,160
-------------------------------------------------------------------------
56,300 48,417 99,070 84,377
-------------------------------------------------------------------------
Net earnings $ 112,264 $ 94,407 $ 197,395 $ 166,111
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net earnings per
common share:

Basic $ 0.52 $ 0.44 $ 0.92 $ 0.78
Diluted $ 0.52 $ 0.44 $ 0.91 $ 0.77

Weighted average
common shares
outstanding
- Basic (millions) 216.0 213.8 215.5 213.3
- Diluted (millions) 217.2 216.6 217.1 216.6
Actual common shares
outstanding (millions) 216.2 214.1 216.2 214.1

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

24 Weeks Ended
-------------------------
June 16, June 17,
2007 2006
-------------------------------------------------------------------------
Retained earnings, beginning of period
as reported $ 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 197,395 166,111
Dividends (69,055) (51,373)
Premium on repurchase of shares (24) -
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,353,998 $ 1,056,410
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

12 Weeks Ended 24 Weeks Ended
------------------------- -------------------------
June 16, June 17, June 16, June 17,
2007 2006 2007 2006
-------------------------------------------------------------------------
Net earnings $ 112,264 $ - $ 197,395 $ -
Other comprehensive
income, net of tax
Change in unrealized
gain on interest
rate derivative
(net of tax of
$1,130 and $1,223
respectively) 2,193 - 2,375 -
Change in unrealized
gain on equity
forward derivative
(net of tax of $13
and $40,
respectively) (25) - (78) -
Amount of previously
unrealized gain on
equity forward
derivative recognized
in earnings during
the period (net of
tax of $10 and $59,
respectively) (19) - (115) -
-------------------------------------------------------------------------
Other comprehensive
income 2,149 - 2,182 -
-------------------------------------------------------------------------
Comprehensive income $ 114,413 $ - $ 199,577 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Accumulated other
comprehensive
income, upon
adoption of
New Accounting
Standards (Note 2) $ 406 $ -
Other comprehensive
income (net of tax
of $1,124) 2,182 -
-------------------------------------------------------------------------
Accumulated other
comprehensive
income, end of
period $ 2,588 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

June 16, June 17, December 30,
2007 2006 2006
-------------------------------------------------------------------------

Assets

Current
Cash $ 111,903 $ 22,153 $ 62,865
Accounts receivable 295,367 246,541 307,779
Inventory 1,343,538 1,178,195 1,372,124
Future income taxes 29,264 26,106 46,407
Income tax recoverable - 4,105 -
Prepaid expenses 49,189 42,514 32,248
-------------------------------------------------------------------------
1,829,261 1,519,614 1,821,423

Property and equipment 950,367 767,831 907,728
Deferred costs 25,106 20,416 25,936
Goodwill 2,130,865 2,029,249 2,122,162
Other intangible assets 44,977 17,991 45,249
Other assets 19,930 5,196 6,516
-------------------------------------------------------------------------
Total assets $ 5,000,506 $ 4,360,297 $ 4,929,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current
Bank indebtedness $ 226,411 $ 170,651 $ 134,487
Commercial paper 472,815 454,300 503,550
Accounts payable and
accrued liabilities 714,242 612,721 843,278
Income taxes payable 55,644 - 70,672
Dividends payable 34,588 25,688 25,797
-------------------------------------------------------------------------
1,503,700 1,263,360 1,577,784

Long-term debt 298,716 303,814 300,000
Other long-term liabilities 206,029 152,340 188,938
Future income taxes 21,247 15,552 21,689
-------------------------------------------------------------------------
2,029,692 1,735,066 2,088,411
-------------------------------------------------------------------------

Associate interest 106,752 115,731 116,649

Shareholders' equity

Share capital 1,498,488 1,448,096 1,491,264
Contributed surplus 8,988 4,994 7,074
Accumulated other comprehensive
income 2,588 - -
Retained earnings 1,353,998 1,056,410 1,225,616
-------------------------------------------------------------------------
2,864,062 2,509,500 2,723,954
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 5,000,506 $ 4,360,297 $ 4,929,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

12 Weeks Ended 24 Weeks Ended
------------------------- -------------------------
June 16, June 17, June 16, June 17,
2007 2006 2007 2006
-------------------------------------------------------------------------
Operating activities
Net earnings $ 112,264 $ 94,407 $ 197,395 $ 166,111
Items not affecting
cash
Amortization 40,493 33,422 79,736 66,679
Future income taxes 7,341 13,465 15,032 13,160
Loss on disposal
of property and
equipment 1,083 1,038 1,952 1,824
Stock-based
compensation 907 782 1,914 1,412
-------------------------------------------------------------------------
162,088 143,114 296,029 249,186
Net change in non-
cash working
capital balances 19,718 9,085 (120,007) (94,368)
Increase in long-
term liabilities 6,519 4,173 12,293 8,767
Store opening costs (4,688) (2,651) (6,942) (4,783)
-------------------------------------------------------------------------
Cash flows from
operating activities 183,637 153,721 181,373 158,802
-------------------------------------------------------------------------

Investing activities
Purchase of property
and equipment (71,027) (39,551) (111,285) (77,128)
Business acquisitions (7,011) (8,174) (10,806) (11,006)
Proceeds from
disposition of
property and
equipment 41 73 89 158
Other assets (8,549) (2,450) (9,171) (2,250)
-------------------------------------------------------------------------
Cash flows used in
investing activities (86,546) (50,102) (131,173) (90,226)
-------------------------------------------------------------------------

Financing activities
Bank indebtedness, net 23,557 19,008 91,924 7,148
Commercial paper, net (12,425) (69,600) (30,125) (15,550)
Repayment of long-
term debt - (25,000) - (25,000)
Revolving term debt,
net - (2,214) - 3,814
Deferred financing
costs - (403) - (403)
Associate interest (5,246) (853) (9,897) (770)
Proceeds from shares
issued for stock
options exercised 3,633 160 6,963 4,867
Repayment of share
purchase loans 11 127 266 1,975
Repurchase of shares (29) - (29) -
Dividends paid (34,467) (25,685) (60,264) (47,028)
-------------------------------------------------------------------------
Cash flows used in
financing activities (24,966) (104,460) (1,162) (70,947)
-------------------------------------------------------------------------
Increase (decrease)
in cash 72,125 (841) 49,038 (2,371)
Cash, beginning of
period 39,778 22,994 62,865 24,524
-------------------------------------------------------------------------
Cash, end of period $ 111,903 $ 22,153 $ 111,903 $ 22,153
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental cash
flow information
Interest paid $ 15,153 $ 12,848 $ 22,426 $ 18,461
Income taxes paid $ 56,653 $ 79,518 $ 108,290 $ 115,463

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

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, 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 June 16,
2007, the commercial paper balance was reduced by $610 of deferred
financing costs and the long-term debt balance was reduced by $1,284 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 June 16, 2007 the carrying amounts of the
interest rate derivative and the equity forward contracts are $3,937 and
$306 respectively.

3. INTEREST EXPENSE

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

12 Weeks Ended 24 Weeks Ended
------------------------- -------------------------
June 16, June 17, June 16, June 17,
2007 2006 2007 2006
-------------------------------------------------------------------------

Interest on bank
indebtedness $ 2,347 $ 1,991 $ 4,300 $ 3,751
Interest on
commercial paper 5,673 6,030 11,458 11,624
Interest on long-
term debt 3,211 3,802 6,679 7,751
Amortization of
deferred financing
costs 163 642 331 1,219
-------------------------------------------------------------------------
$ 11,394 $ 12,465 $ 22,768 $ 24,345
-------------------------------------------------------------------------
-------------------------------------------------------------------------

4. EMPLOYEE FUTURE BENEFITS EXPENSE

The net benefit expense included in the results for the 12 and 24 week
periods ended June 16, 2007 for benefits provided under pension plans was
$1,561 and $3,122 (2006 - $1,561 and $3,048), respectively, and for
benefits provided under other benefit plans was $23 and $46 (2006 - $31
and $62), respectively.

5. 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 12 and
24 week periods ended June 16, 2007 would have been reduced by $77 and
$160 (2006 - $180 and $367), respectively. For the 12 week period and
24 week periods ended June 16, 2007 and June 17, 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.

6. FINANCING TRUST

The Company has arranged for a standby letter of credit from a syndicate
of banks for the benefit of the independent trust ("Trust") that is equal
to approximately 10% of the aggregate principal amount of the loans, or
$48,000, as a form of credit enhancement which, in turn, enables the
Trust to provide favourable financing terms to the Company's Associates.

As at June 16, 2007, $473,425 (2006 - $423,300) of the consolidated
commercial paper balance is commercial paper issued by the Trust.

Earnings Coverage Exhibit to the Consolidated Financial Statements

52 Weeks Ended June 16, 2007
-------------------------------------------------------------------------
Earnings coverage on long-term debt obligations 49.70 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. No. 5678, investorrelations@shoppersdrugmart.ca


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