ANNUAL REPORT PROJECTSHOPPERS DRUG MART CORPORATION

Presented toMrs. Wendy Roscoe

Professor in Financial AccountingACCO-310/2-B

Concordia UniversityJohn Molson School of Business

Prepared byAzzea Huynh 9375910, Solen Heng 9357920, Yang Karen Chen 4693558,

Hai Han Xing 9098143, Hang Li 5555930John Molson School of Business

Concordia University

December 3rd, 2009

TABLE OF CONTENTS

Page

INTRODUCTION.............................................................................................................1

Company Description .......................................................................................................2

Stock Market Analysis.......................................................................................................5

Ratio Analysis....................................................................................................................8

Common size analysis and trend analysis..........................................................................19

Analysis of particular Assets accounts..............................................................................22

CONCLUSION AND RECOMMENDATION................................................................28

APPENDIX A – Shoppers Drug Mart flow chart.............................................................31

APPENDIX B – Distribution of selected merchandise group sales..................................32

APPENDIX C – Comparative table of SDM’s competitors..............................................33

APPENDIX D – Ratio Analysis........................................................................................34

APPENDIX E – Comparison of Assets.............................................................................37

APPENDIX F – Further disclosures..................................................................................39

APPENDIX G – Horizontal and Vertical analysis............................................................40

BIBLIOGRAPHY ..........................................................................................................44

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INTRODUCTION

These past two years have been difficult for the World Economy. With the

recession having its toll on many companies and investors, but mainly households, it is

difficult to manage ones fund in order to have a positive return, or simply to break-even.

Even though the recession has not left the Canadian economy devastated, it has shaken

investor’s confidence in investing in any firm.

However, according to Statistics Canada, Canada is slowly getting out of the

recession: “Following three quarters of substantial declines, overall corporate profits and

fixed capital investment of non-financial corporations increased in the third quarter.1”

Inheriting a large sum of money in these uncertain times makes one debate what

to do with it. Despite the negative outcome of the economy, investing in a firm is still a

good option, as it is indicated previously. One of the possible good companies to invest in

is Shoppers Drug Mart. This is in fact the case of a friend that has just inherited a large

sum of money. Due to the limited knowledge in accounting, our friend is seeking advice

with respect to whether the company is a worthwhile investment.

The following report will take into consideration all the information needed in

order to understand this company. It includes a description of the company’s primary

business activities, a historical summary and details concerning competitors; a summary

about its stock market activity and a ratio analysis and comparison to industry averages

for the assets. In addition, a common size analysis and trend analysis for both the Income

Statement and Balance Sheet; an analysis of the presentation of particular asset accounts

and a discussion about the accounting policy choices made along with an assessment of

why certain policies were chosen and the impact on the Financial Statements will also be

helpful in making the final decision.

After reading this report, the potential investor should have a solid idea of the

risks and returns associated with an investment in Shoppers Drug Mart.

1 Statistics Canada – The Daily – Tuesday December 1, 2009 Financial flow accounts. http://www.statcan.gc.ca/daily-quotidien/091201/dq091201a-eng.htm

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Company Description

Shoppers Drug Mart Corporation (SDM) is a licensor of full-service retail drug

stores in Canada (in Quebec, it is licensed under the name of Pharmaprix). The company

offers front store merchandise categories like over-the-counter drugs (OTC), health and

beauty aids, cosmetics and fragrances, everyday household needs and seasonal products,

as well as prescription medication2.

The company was founded by Murray Koffler, a Toronto pharmacist in 1962.

Murray Koffler believed it was possible to build a national organization of drugstores

without sacrificing the personalized service of the local community health professional.

The company was purchased by a management group led by Kohlberg Kravis Roberts &

Company. SDM launched its initial public offering in 2001. With the belief to provide a

strong sense of pride, accountable and community spirit service, Murray Koffler’s vision

continues to bear fruit in numerous ways. The company has now over 1,119 stores across

Canada, 30 medical clinic pharmacies operating under the name Shoppers Simply

Pharmacy ™ (Pharmaprix Simplement Sante in Quebec) and two luxury beauty

destinations operating as Murale™3. SDM is well-known for its high-quality private label

products such as LifeBrand®, Quo®, Everyday Market®, Bio-Life®, Nativa®, Get™

and Easypix®. It is also known for its value-added services like the Healthwatch®

program which allows patients to have counseling on medications and disease

management. It also owns 66 Shoppers Home Health Care® stores which provide

assisted-living devices, medical equipment and home-care products for patients.

Furthermore, the company has a great loyalty card program, viewed as being one of the

largest programs in Canada: Shoppers Optimum® program4. (Please refer to Appendix

A).

The core value of the company is to fulfill the health and wellness needs of

Canadians. It has done so for the past 47 years. “The success of [the] business is built

upon the leadership of [their] people, the quality of [their] stores, the breadth of [their]

products and the service excellence of [their] pharmacies.5” The company has always put

2 Dow Jones Company Report – Shoppers Drug Mart Inc 2009 Factiva Inc. p. 23 Shoppers Drug Mart – 2008 Annual Report p.13 and Dow Jones Company Report – Shoppers Drug Mart Inc 2009 Factiva Inc. p. 34 Idem 35 Ibid 3 p.1

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the customer first and tries to accommodate them in any possible way. For example, over

400 stores open to midnight or 24 hours a day to respond to its customer’s busy lives.

This commitment to customer’s complete satisfaction is demonstrated through

SDM’s record sales of “$9.4 billion during the financial year ended December 2008, an

increase of 11.1% over 2007. The operating profit of the company was $822 million, an

increase of 12.2%. As for Net profit, it has increase 15.2% ($565 million)”6.

Over the past few years, sales of prescription and OTC medications have

exploded in Canada. In 2005, the retail sales of drugs (including vitamins and health

supplements) surpassed the $20 billion mark. (Refer to Appendix B). This has led to an

emerging phenomenon in the retail market with the appearance of more and more

pharmacy/drug stores selling not only medication but also food and general

merchandise7.

SDM’s competitors are not only Canadian based, but international as well. Katz

group Canada, a holding company of drugstore chains in Canada with over 1,800 stores

across Canada, is one of them. However, this company is private and does not trade on

the Toronto Exchange. Jean Coutu Group Inc, with 353 stores across Quebec, Ontario

and New Brunswick is another competitor. In 2007, the company has purchased ProDoc,

a company specializing in manufacturing generic drugs. Also its penetration rate for 2009

is 10.4% for its front-end retail stores8. Rite Aid, an American company, is also viewed as

a competitor. In fact, it has bought Jean Coutu USA in 2007 for $2.31 billion USD in

cash and 250 million issued shares of Rite Aid common stock9. Other competitors include

Walgreen Company and CVS Caremark Corporation all US based. By looking at the

table in Appendix C, when comparing the Canadian based companies, SDM is the

leading drug store company.

As for the future, “SDM’s goal is to continue to invest in the business, while

maximizing productivity and drive additional efficiencies while controlling cost. They

6 Dow Jones Company Report – Shoppers Drug Mart Inc 2009 Factiva Inc. p. 47 Dube, Guillaume. Statistics Canada – Competing for the Retail Drug Market http://www.statcan.gc.ca/pub/11-621-m/11-621-m2006048-eng.htm8 Jean Coutu Group – 2009 Annual Report, p3.9 Rite Aid Corporation – United States Securities and Exchange Commission report, p.28http://www.sec.gov/Archives/edgar/data/84129/000104746909004278/a2192156z10-k.htm#dc70801_item_1._business

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expect to increase their penetration rate of front store sales from 17% to 19% in the

coming year10.” They want to add new stores and capitalize on the opportunity to relocate

and or expand current stores in order to accommodate all the products and services the

company offers.

10 Shoppers Drug Mart – 2008 Annual Report p. 9

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Stock Market Analysis

Graph I – Shoppers Drug Mart (SC)11

As we see from the stock price chart, over the last 5 years, the price has a strong

upward trend from 2005 to the third quarter of 2008, with the average annual return of

16.3%. The stock price went up from $37 in January, 2005 to a new high of over $55 at

the end of June 2008. On June 18th 2008, Shoppers Drug Mart had the highest stock price

trading at $58.23 CAD.

Due to the fact that the price does no oscillate too much and there is no big volatility

on the stock volume, Shoppers Drug Mart Corporation is less active than other big capital

public companies that have similar features (big sales volume and high price volatility).

However, the situation changed after the third quarter of 2008 where the stock price

plunged from $55 to $42 within only a few days, and thereafter moved into a sideways

11 Globe Investor – Shoppers Drug Mart Corporation Website last accessed November 23rd 09.http://www.globeinvestor.com/servlet/Page/document/v5/data/stock?id=SC-T

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range. Since there is no specific news released about the decline, it is more likely caused

by the global economic recession.

Graph II – Stock Price chart for Shoppers Drug Mart12

For this year, a significant observation is that the stock price has fluctuated

substantially during the month of July. This is due to a warning by the province of

Ontario concerning a drug reform that was issued on July 10. This drug reform consists

of a major review of reimbursement plan for prescriptions, which potentially could put

pressure on margins of pharmaceutical sales. Also, this has put pressure on the stock

market of drug store companies.

12 Yahoo Canada Finance – Shoppers Drug Mart Corporation Website last accessed on November 23 2009.http://ca.finance.yahoo.com/q/bc?s=SC.TO

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The nature of the risk of Shoppers Drug Mart is considered to be low even if it is

in the pharmaceutical area. Any lawsuits related to the malfunction of a prescription drug

are directly targeted to the pharmaceutical company making the medication and not

SDM. Of course, since it does manufacture its own brand and products, it is liable to its

consumer’s well-being. Overall, the pharmaceutical industry is very profitable. Shopper

Drug Mart was a growth stock and is now becoming more of a value stock. It has an

increasing profit and EPS. However, the possible mandate to cut generic drug prices by

the Ontario Ministry of Health may put pressure on SDM’s pharmacy profits13. This is

also making investors nervous. According to Mr. Yarbrough, an analyst with Edward

Jones in St. Louis, Mo, the reform can lead “from zero impact to as much as $0.30 off the

EPS14’. In addition, the adverse changes to the economic and financial conditions in

Canada and globally and the continued financial market volatility and general uncertainty

on the timing of a recovery will create a challenging operating environment, thus limiting

sales growth and the Company’s ability to maximize gross margin dollars, operating cash

flow and profits. Despite all of this, as mentioned before, Statistics Canada has compiled

its data and it seems that Canada is slowly getting out of the recession.

Graph III – 3 year results of SDM15

13 Lam, Eric. Drug sales shot in arm for Shoppers. Financial Post, November 11 2009. http://www.windsorstar.com/business/Shoppers+Drug+profit+rises/2210536/story.html 14 Idem15 Idem

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Ratio Analysis

In order to better understand the company in which one would like to invest in, in

this case, Shoppers Drugs Mart, it is important to understand “the business, business

risks, and industry16”. Analyzing the Financial Statements can be very complicated and

time consuming. However, this process is critical. Ratio Analysis is a helpful tool since it

allows one to “assess operating and financial risks by expressing the relationship between

selected financial statement data17”. The ratios are used to identify trends over time for a

company and to compare two or more companies at one point in time. Financial

Statement ratio analysis focuses on four key aspects of a business: profitability, liquidity,

solvency and market test. Financial ratios are a very good way to analyze this company’s

financial position. However, they are useless if not compared to previous years.

Therefore, for some ratios, trend analysis will be done for SDM for the years 2005-2008.

Industry analysis is as important as trend analysis. It allows one to compare SDM to

another similar company. Because of the diversity of SDM, it is difficult to compare it to

a specific industry. Therefore, the company Jean Coutu will serve as a basis of

comparison. All the calculations of the ratios can be found in Appendix D.

Profitability tests

As we all know, every company is concerned with its profitability. Profitability

ratios are often used to determine the company’s bottom line. These ratios are important

internally (managers, employees) and externally (current and future investors).

Profitability ratios show a company’s overall efficiency and performance, the higher the

ratio, the better. Ratios that show margins represent the firm’s ability to translate sales

dollars into profits at various stages of measurement.

Gross Profit Margin

This ratio looks at Cost of Goods Sold as a percentage of sales. It looks at how

well a company controls the cost of its inventory and the manufacturing of its products.

The larger the ratio, the better it is.

Gross Profit Margin =Gross Profit / Net Sales

16 Kieso, Weygandt et al. Intermediate Accounting Volume 1, 8th Canadian version, John Wiley & Sons, 2007, p. 234. 17 Ibid p.235.

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SDM shows an increase in Gross Profit Margin from 9.27% to 9.37% in 2008, which is a

good sign. As for Jean Coutu, it is 10.28%. The fact that Jean Coutu has a slightly higher

percentage doesn’t mean that one should not invest in SDM.

Net Profit Margin

The net profit margin measures “how effective is management in generating profit

on every dollar of sales during the period18”. When net profit margin is rising, this means

more efficient management of sales and expenses. On a Shareholder point of view, it

would be good to compare this ratio with other companies in the same industry to see

how the company responds to changes in demand for the product and service.

Net Profit Margin= Net Income / Net Sales

Net Sales= Sales revenue – any returns from customers and other reductions.

For companies in the service industry, net sales = total operating revenues. For Shoppers

Drug Mart, Operating revenues= Operating Income.

The Net Profit Margin for SDM has been increasing for the past 3 years (61.81%

in 2006, 62.08% in 2007 and 64% in 2008). This means that 64 cents of every dollar is

profit. This increase shows efficient management of sales and expenses. As for Jean

Coutu, in 2008, it was (16.68%). In this case, the ratio is negative because Jean Coutu

demonstrated a net loss of 251.4 million dollars.

Cash Flow Margin

This ratio expresses the relationship between cash generated from operations and

sales. It measures the ability of the firm to translate sales into cash.

Cash Flow Margin =Cash from Operating Activities / Net Sales

For SDM, the ratio has decreased to 54.28% for 2008, while Jean Coutu has a ratio of

9.71%. In this case, the ratio favors SDM over Jean Coutu.

Quality of Income – Liberal or Conservative policy regarding revenue and expense

recognition

%= Cash from operating activities / Net Income measures how liberal or conservative

the company is in choosing various revenues and expense recognition policies. When the

ratio is above 1.0, this means the company has more conservative policies and when it is

below, it has more liberal policies.

18 Libby et al., Financial Accounting 3rd Canadian edition. P. 182

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A conservative policy implies the company does not record revenue too early or

expenses too late, while a liberal policy implies speeding up revenue recognition or

delaying expense recognition.

For SDM, from 2005 until 2007 it has used a conservative policy (the ratios were

all above 1.0). In 2008, it switched to a liberal policy (the ratio was 0.85). As for Jean

Coutu, the ratio is (0.58), a liberal policy.

The major cause of differences between net income and cash flow from

operations is due primarily to sales that have not been collected and payment to suppliers

of goods and services, which were larger amount than the amount of expenses recognized

during the year. When looking at Jean Coutu, the company incurred a loss (in Income). In

this case, it seems better to invest in SDM.

Ratios that show returns represent the firm’s ability to measure the overall

efficiency of the firm in generating returns for its shareholders.

Return on Assets and Total Asset Turnover ratio

The first one measures the efficiency with which the company is managing its

investments in assets and using them to generate profit. “The return on assets ratio

measures how much the company earned for each dollar of investment during the period.

A high ratio suggests that the company is doing a good job selecting new investments, all

other things being equal19”.

Return on Assets = Net Income / Average Total Assets

Total Asset Turnover ratio measures “the sales generated per dollar of assets. A high ratio

suggests that the company is managing its assets (resources used to generate revenues)

efficiently20”.

Total Asset Turnover ratio = Sales or Operating Revenues / Average Total A

The assets of all four years have grown over time. Shopper Drug Mart’s growth

has been steady throughout the four-year time period.

The ROA indicates how much the company earned in net income per $1 of assets.

Based on this measure, Shoppers Drug Mart has shown a steady growth in its efficient

utilization of resources over time from 0.086 to 0.09. It shows that the company has well-

19 Ibid p.12420 Ibid p.123

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managed its assets over time because of the steady increase. As for Jean Coutu, the ratio

is (0.1173) because it had a net loss. In this case, SDM’s results are more encouraging.

The asset turnover ratio reflects how much revenue was produced per $1 of assets.

Based on this measurement of efficiency, in 2008, the company produced $1.57 in

revenue per $1 of assets, slightly less than last year (1.60$). As for Jean Coutu, the ratio

is 0.70 which is over two times lower compared to SDM.

Return on Equity

This measures “how well management used the investment by shareholders

during the period21”. It shows how much the firm earned for each dollar of shareholder’s

investment. Firms with higher ROE are expected to have higher share prices than firms

with a lower ratio holding all other things equal.

ROE= Net Income / Average Shareholders’ Equity

The ROE for SDM has decreased for the past 3 years from 38.99% to 32.35%. This can

be explained by the recent downfall in the economy which may lead to a lower ratio. As

for Jean Coutu, since it had a net loss in 2008, the ratio is negative (14.36%).

Earnings per share

This ratio represents the portion of the profit allocated to each outstanding share

of common stock.

EPS= (Net Income available to common shareholders)/ WA of # of common

shares and outstanding shares)

Table I – Earnings per Share of SDM

($000s, except per share data)22

2008 2007 2006 2005

53 weeks 52 weeks 52 weeks 52 weeksSales 9,422,911 8,487,382 7,786,436 7,151,115Net earnings 565,212 493,628 422,491 364,494Per common share:-Basic net earnings $2,60 $2,28 $1,97 $1,72-Diluted net earnings

$2,60 $2,27 $1,95 $1,69

21 Ibid p. 18322 Ibid p.51

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Table II – Earnings per Share of Jean Coutu23

Basic and diluted earnings: ($0.98)

The Earnings per share of SDM are higher compared to the Jean Coutu: $2.60 vs (0.98).

Fixed Asset turnover ratio

‘‘Fixed asset turnover ratio measures how efficiently a company uses its

investment in property, plant, and equipment over time24.” ‘‘It measures the sales dollars

generated by each dollar of fixed assets used. A high rate normally suggests effective

management. An increasing rate over time signals more efficient fixed asset use.25’’

Fixed Asset turnover = Net sales (operating revenue) / Avr Net Fixed Asset

SDM’s fixed assets turnover ratio has decreased over the last three years, this is due to

the fact that the company has recently gone through a massive expansion phase where it

opened many new stores. This is why the ratio has been declining lately. As for Jean

Coutu, the ratio is 1.10.

Liquidity Tests

Liquidity is the ability of the firm to convert assets into cash. The liquidity ratios

are of particular interest to short-term creditors because the liquidity of the firm measures

its ability to pay them. In this case, the higher the ratio, the better it is.

Current Ratio

This “measures the ability of a company to pay its current obligations.26’’

Current Ratio= Current Assets / current liabilities

“A high ratio normally suggests good liquidity, but a too high ratio suggests

inefficient use of resources. An old guideline was that companies should have a current

ratio between 1 and 2. Today, many strong companies use sophisticated management

techniques to minimize funds invested in current assets, and, as a result, have current

ratios below 1.27”

23 Jean Coutu Group – 2008 Annual Report p. 3824 Libby et al., Financial Accounting 3rd Canadian edition p.46425 Idem26 Ibid p.52927 Idem

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SDM’s current ratio for 2008 indicates that the company has $1.29 to pay each

$1.00 in current liabilities. This shows the company’s liquidity position is getting better.

As for Jean Coutu, it is $1.23.

Accounts receivable turnover ratio

This ratio “shows how many times average trade receivables were recorded and

collected during the period. It is beneficial to the company to have a higher ratio because

it can invest the cash collected to earning interest income or diminish borrowings to

reduce interest expense.28”

Receivable Turnover = Sales / Average Net Trade Account Receivables

Average Net Trade Account Receivables= (Beginning Net Trade Receivable + Ending

Net Trade Accounts Receivable)/2

The average collection period measures in general, how much time it takes to

collect the amount.

Average Collection Period29 = Average Trade A/R / [Credit Sales/ 365]

Credit Sales30 = Net Sales – Cash flows from operating activities

SDM’s receivables turnover decreased from 2.32 to 2.15 in 2007 and 2008. Shoppers

Drug Mart Corporation’s sales increased form $8,478,382,000 in 2007 to $9,442,911,000

in 2008. It appears that this company loosened its credit policy as it achieved this sizeable

increase in sales. Selling products at the retail level in 2006 may have contributed to the

decrease in receivables turnover. The receivables turnover ratio reflects how many times

trade receivables were recorded and collected during the period average. The higher the

ratio, the faster the collection of receivables is. A higher ratio benefits the company

because it can invest the cash collected to earning interest income or reduce borrowings

to reduce interest expense31. As for Jean Coutu, the ratio is 9.13, which is significantly

higher.

28 Libby et al., Financial Accounting 3rd Canadian edition. P. 35929 Idem30 Shoppers Drug Mart – 2008 Annual Report p.38,4131 Ibid p40

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Inventory Turnover

“This measures how many times the average inventory was produced and sold

during the period. A higher ratio indicates that inventory moves more quickly through the

production process to the ultimate customer, reducing storage and obsolescence cost.

Because less money is tied up in inventory, the excess can be invested to earn interest

income or to reduce borrowings, which reduces interest expense32.”

Inventory Turnover = Cost of Good Sold / Average Inventory

Average Inventory= (Beginning Inventory + Ending Inventory)/2

The company has diminished its inventory turnover from 5.47 in 2005 to 5.07 in

2008. The rate is overall constant, there were not big fluctuations. However, what could

explain a lower ratio in 2008 is probably the fact that the company has more and more

lifestyle/every day use products such as soap, paper towel etc which can stay in inventory

longer than drugs which has an expiration date. As for Jean Coutu, the ratio is 9.36.

Accounts Payable turnover ratio

This measure shows investors how many times per period the company pays its

average payable amount.

Accounts Payable Turnover= Cost of goods sold / Average Accounts Payable

Total supplier purchases/ average accounts payable

The number has slightly went up, however it still is considerably in the same

range (+8.30), meaning that the company is paying off its supplier in a timely manner. As

for Jean Coutu, the ratio is 5.95.

Solvency Tests

Solvency is the ability of the company to have enough assets to cover its liability.

The lower the ratio, the better it is (except for the ability of the company to meet its long

term obligations).

Times in interest earned

‘‘The ratio measures the company’s ability to generate resources from current

operations to meet its interest obligations.33”

32 Libby et al., Financial Accounting 3rd Canadian edition. p. 42533 Ibid p.586

14

Times in interest earned = (Net income + interest Expense + income tax

expenses)/ Interest Expenses

“A high ratio is viewed more favorably than a low ratio. Basically, the ratio shows

the amount of income before interest and income tax that is generated for each dollar of

interest expense. A high ratio shows an extra margin of protection in case profitability

deteriorates. Analysts are particularly interested in a company’s ability to meet its

required interest payments because failure to do so could result in bankruptcy.34”

SDM’s profit-making activities generated $ 13.81 for each dollar of interest in

2008. This company’s income could fall substantially before the company would appear

to have trouble meeting its interest obligations with resources generated by normal

operations. As for Jean Coutu, the ratio was negative because of the large loss it incurred

this year.

Debt to Equity

Debt to equity ratio generally measures how much debt the company uses to

finance its growth and/or operations relative to equity financing supplied by its

shareholders35.

Debt to Equity= Total Liability / Total Shareholder’s Equity

By looking at the Financial highlights section before the Message to

Shareholders:

2008 0.40; 2007 0.34; 2006 0.32; 2005 0.39; 2004 0.51

The Company’s debt-to-equity ratio has dropped drastically since 2004. This means that

the company is using less and less debt to finance its operations. A lower debt-to-equity

ratio suggests that the company is not a risky investment. However, for the past 2 years

(2007 and 2008) the ratio is rising which means they could be expanding their operations.

As a matter of fact, it is the case.

34 Ibid p.58735 Libby et al., Financial Accounting 3rd Canadian edition. p. 70

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Market Tests

These tests consider the future earnings of the company. A higher ratio is what

investors are looking for. These ratios relate the current market price of a stock to the

return that might accrue to the investor.

Price Earnings ratio

This ratio shows the relation between current market price of stock and earnings

per share. In this case, the price of the share is considered to be the one given by SDM on

p3 of their report.

P/E ratio= Current mk P per share / Earnings per share

The ratio has diminished for SDM from 23.46 to 18.48. This is in fact due to the harsh

economic times. The ratio for Jean Coutu is negative; once again it is due to its net loss in

2008.

A further analysis of the company’s assets and comparing it to Jean Coutu can

help decide if SDM is a good investment. When looking at the Balance Sheet of SDM

Corporation and the ratios calculated in Appendix E, it is possible to see that the

company’s “Total Assets were $6,419,306,000 at the end of 2008 compared to

$5,621,977,000 at the end of 2007 an increase of $797 million or 14.2%36”. In fact

$234,000,000 of this boost is because of an increase in Accounts Receivable and

Inventory with an offset by a reduction in prepaid expenses and deposits account37.

The increase in Accounts Receivable and Inventory is due to the ongoing

expansion of the store network and increased sales activity. As a matter of fact, during

the 2008 fiscal year, the company has opened 142 drug stores of which 37 were

relocations and has closed 13 smaller stores38. Furthermore, throughout the year, the

company has completed 14 major drug store expansions, has added 2 home health care

stores and has launched Murale™ a retailer of prestige cosmetic products39.

As for the decline in Prepaid Expenses and Deposits, it is because the funds

deposited and held in escrow corresponding to the purchase of drug stores and land

diminished because of successful transactions. 36 Shoppers Drug Mart Corporation – 2008 Annual Report p.28, 5337 Idem38 Ibid p.1539 Idem

16

When analyzing Net Property and Equipment40, there was an increase of

$316,000,000 (28%) over the past year. This is explained by the capital investment and

store “revitalization program41”.

The increase of $222,000,000 in Total Assets due to acquisition of drugs stores,

prescription files, assets of the HealthAccess division of Calea Ltd. and 100% of its

shares in Information Healthcare Marketing Corp; which increased the net balances of

Goodwill and Other Intangible Assets42.

Accounts Receivable

The accounts receivable balance increased during 2008 to $448,476,000, so the

company recorded more net sales than it collected in cash from customers. The

percentage of accounts receivable to total assets has increased for the past 4 years. It went

up from 5.86% to 6.98%. Thus, the increase is subtracted from net earnings in the

computation of SDM’s cash flow from operations. In 2008, the sales totalled $9.423

billion. Accounts also increased during the same period, indicating that the company did

not collect this whole amount in 2008. That is why, the increase in accounts receivable is

subtracted from sales revenue in computing the cash received from operating activities43.

Inventory

The costing method used is FIFO (first in, first out). The reason FIFO is chosen is

because this is a drug store and all drugs have expiring dates, so old drugs needs to be

sold first. In order to compare the change in inventory, we have divided inventory by

total assets. The ratio for the past 4 years has not changed dramatically. It is around

27.16%.

‘‘The capital acquisitions ratio reflects the portion of purchases of property, plant,

and equipment financed from operating activities without the need for outside debt or

equity financing or the sale of other investments or fixed assets. A high ratio indicates

less need for outside financing for current and future expansion. This provides the

company with opportunities for strategic acquisition, avoids the cost of additional debt,

40 Additional information in Appendix F41 Ibid p.2942 Idem43 Libby et al., Financial Accounting 3rd Canadian edition. P. 358

17

and reduces the risks of bankruptcy that come with additional leverage44.” The value of

SDM is 1.42 which is good.

Capital Acquisitions Ratio = Cash flow from operating activities/ cash paid for

property, plant and equipment

A final ratio that may be helpful in determining why one should invest in SDM is

the financial leverage ratio. This “measures the relationship between the total assets and

the shareholder’s equity that finances the assets”:

Financial Leverage ratio= Average Total Assets / Average Shareholder’s Equity

The ratio is more or less constant (around 1.84), suggesting the company relies

less and less on debt financing, which is a good sign. Jean Coutu has a ratio of 1.22

which is lower.

When these assets are compared to Jean Coutu, one can see there was an increase

in Accounts Receivable, Inventory, Capital Assets, Goodwill and Other Assets. When

comparing the actual numbers, one can see that the % of increase for SDM for its Assets

is larger compared to Jean Coutu.

All of the ratios given above are a good indicator whether or not to invest in

SDM. As indicated, the financial results of SDM are constant compared to last year. Of

course, there was a slight decrease, but this is in fact due to the recession that is affecting

the company as well as other companies. When compared to Jean Coutu, SDM seems to

be in a better financial situation because SDM incurred a Net Earning, while Jean Coutu

suffered a loss in 2008. Thus investing in SDM, by looking and comparing its ratios to

Jean Coutu, is a better option.

On a side note, a report made by Dow Jones Company Report gives all the ratios

and are compared to the industry. The report has been included at the end of the project.

44 Ibid p.249

18

Common Size & Trend Analysis

In addition to evaluating a company’s performance based on ratios, trend and

common size analysis are two alternative methods of analyses. These techniques allow an

individual to gain some insight concerning the ongoing trends and changes within the

Financial Statements over the years. By doing so, one can grasp a clearer picture of the

financial situation of a particular company of interest and use it to aid in ones decisions

concerning resource allocation. For the purpose of this analysis, year 2007 is used as the

base year to evaluate Shoppers Drug Mart Corporation’s trends. For Income Statement,

all items are proportionately relative to revenue and for Balance Sheet, all assets and

liabilities are proportionately relative to total assets for the common size analysis.

Shoppers Drug Mart Income Analysis

Analysis of Shoppers Drug Mart’s Income Statement has indicated that there is a

growth in most areas of the Income Statement. There appears to be mild growth from

2007 to 2008. However, as we all know that in 2008, the global economy had suffered a

major setback. With such harsh economic environment, Shoppers Drug Mart’s figures are

still climbing instead of dropping drastically like most other companies. It hasn’t been

affected much by the overall economic climate. For the most part, this is good news. An

increase in sales revenue and net income of 111 and 115 percent, from 2007 respectively,

indicates an increase in prosperity. Income has also grown in size from 5.78% to 6% of

total sales revenue. All this translates into a stable or higher rate of return for investors as

well as in shareholders’ wealth. This has also allowed the company to have steady funds

to expand their company to keep up their competitiveness.

The offset to this is that cost has also increased horizontally. Cost of goods sold

and other operating expenses has grown to 111 percent since 2007. However, on the

bright side, the relative size of cost of goods sold and other operating expenses has

decreased from 88.7 percent in 2007 to 88.46 percent in 2008. The decreased size of cost

of goods sold and other operating expenses has caused an addition for operating income.

However, the proportion of interest expenses has slightly increased from 0.62% to 0.68%

in 2008 and therefore leads to a deduction of net income. However, overall, there still a

slight increase of net income in 2008. Intuitively, this makes sense because the lower a

company’s expenses are, the greater income from operations is and therefore a higher net

19

income. Now, if expenses would have increased in size rather than decreasing, income

would have suffered instead. In this case, Shoppers Drug Mart’s overall expenses has

decreased a little bit meaning they are effectively managing their costs. As a result, this

shows that the company has become more productive and efficient over the years. If

these trends continue, Shoppers Drug Mart will continue to increase profit and provide

investors a great opportunity to increase their wealth.

Shoppers Drug Mart Balance Sheet Analysis

Continuing in Shoppers Drug Mart’s Balance Sheet statement, analysis has shown

a growth in most areas of the Balance Sheet. Cash has grown from 2007 to 2008 by 33

percent. This amounted to only 1 percent change in respect of size since 2007. Accounts

receivables appear to be doing well as it has grown to 120 percent since 2007. In

addition, its size has remained 7 percent, the same as to 2007. It’s a good thing for the

company to not increase the portion of its account receivables as to total assets. Because,

in normal economic times, this is not as bad as collections can be reasonably assured for

most of the accounts. However, in bad times, like the one we are going through right

now, the likelihood of customers paying their accounts would decrease, as available

disposable income becomes a problem for more and more people. If a company has too

much account receivable, the estimate of bad debt may increase and therefore reduce our

accounts receivables. As a consequence, the company would have less cash to pay off its

debt. Therefore, a company does not necessarily want a lot of sales on credit due to the

issue of collection poses a problem. Intangible assets have increased to 169 percent as of

2008 from 2007. There is great uncertainty with the benefits that can be obtained from

intangible assets, therefore the impact of these assets are questionable and one may

wonder if having more intangible assets is necessarily a good thing. Total assets have

grown in number and size since 2007.

Now, let’s move on to the liabilities and shareholders’ equity portion. Analysis

shows growth in most items, with some having a dramatic increase over the years.

Firstly, the main object for concerns from this point on is short-term and long-term debt

has risen by 100 percent since 2007. Their proportions have risen to 3% and 10%

respectively. This adds concern to the company capability to pay off their current debt

20

and long-term debt. A company can be doing well in terms of revenue and net income,

but if they do not have the ability to pay off all their current debt, they will eventually go

bankrupt. However, since total current assets are greater than total current liabilities,

there should not be much of a problem there.

A particular point of interest to investors is the 24% percent increase in retained

earning from 2007 until 2008. This equates to a relative size of 30% to total assets or total

liabilities and shareholder’s equity. The size of Capital Stock has only 1 percent increase

from 2007. This is a good indication that Shoppers Drug Mart will not require much

financing; it is becoming profitable enough to fund its own capital expenditures. (Refer to

Appendix G for horizontal and vertical analysis calculations)

21

Analysis of the presentation of particular assets accounts

With the ratios calculated and a thorough analysis of the Financial Statements, a

final step has to be done in order to make an informed decision whether or not to invest in

SDM. This section will explain particular assets accounts, accounting policies used and

the impact of these on the Financial Statements.

As noted earlier, this year, SDM Total Assets went from $5.6 billion to $6.4

billion. This is due to an increase in its Current Assets, especially its accounts receivable

and inventory. However, there was a reduction in prepaid expenses and deposits account

(please refer to p16.)

SDM prepares its consolidated Financial Statements according to Canadian

Generally Accepted Accounting Principles. GAAP requires management to make

estimates and assumptions that affect the amounts reported (assets, liabilities, disclosures)

at the date of the Financial Statements and the reported amounts of revenues and

expenses during the period45. Therefore, this means that estimates, judgments and

assumptions based on historical data, current trends and other factors that management

believed to be important during the time they prepared the financial statement are

reported. Thus, if the actual result differs from the estimate, such difference is considered

as material. Estimates are used for inventory provisions, income and other taxes,

goodwill, other intangible assets and long-lived assets for impairment46.

Furthermore, the company “recognizes revenue at the time goods are sold, net of

returns.47”

Cash & Accounts Receivable

The company generates their cash and receivables from sale and services of

assisted-living devices, medical equipment, home care product and durable mobility

equipment to institutional and retail customers. Cash & Accounts Receivable grew $85

million during 2008. This is significantly a good improvement for SDM Drug Mart

Company.

45 Shoppers Drug Mart – 2008 Annual Report, p.5546 Idem47 Idem

22

Inventory

Shoppers Drug Mart’s inventory is valued at the lower of cost and estimated net

realizable value. The company uses FIFO (First-in, First-out) method to count their

inventory. “All direct expenditures and costs incurred in order to bring the merchandise

(inventory) to its present location and condition are considered into cost.48” Rebates and

other considerations from a vendor are considered as a reduction of cost of inventory.

When looking at the Balance Sheet, one can see Inventory increased by $198 million.

Notably, this indicates the increase and expansion in sale activities during the year. As for

the notion of shrinkage, it is estimated as a percentage of sales for the period from the

date of the last physical inventory count to the balance sheet date. This estimate is based

on past experience and recent physical count of inventory.

Property and equipment

SDM’s capital asset includes Building, Equipment & Fixture, Computer software

& Equipment, and leasehold improvement. Property and equipment are recorded at cost

including capitalized interest49. “The interest is capitalized on properties held for

development and those under development50.” The company has been amortizing their

capital asset by using the straight-line method over the estimated useful life.

Table III – Useful life of particular Assets51

Buildings 20 years

Equipment and fixtures 3 to 10 years

Computer software and equipment 2 to 10 years

Leasehold improvements Lesser of term of the lease and useful life

Shoppers Drug Mart reviews their long-lived assets for impairment annually. The

annual report of 2008 showed that Property and equipment increased by $316 million or

28%. This indicates that SDM invested mostly in Property and Equipment as part of their

capital asset. This will lead to an increase in cash flow in the future years of operation

under the Cash Flow statement. This is a good sign of growth and thus expansion of the

business.

48 Shoppers Drug Mart – 2008 Annual Report, p.5649 Idem50 Idem51 Idem

23

In 2008, the total cost of Property and Equipment was $2,243,249,000 and

Accumulated Amortization was $801,114,000 as reported in the Balance Sheet.

Amortization expense was $190,322,000. This indicates that the company has been using

up to 36% of their capital asset in the business operation.

Deferred Cost

In 2008, Deferred Cost was credited by $47,213,000. This showed a net increase

of 43% compared to the balance in 2007. These costs are associated with opening a new

store and relocating an old one. These costs are recognized, deferred and amortized into

COGS and other operating expenses on a straight-line basis over 3 years52.

Goodwill and other intangible assets

The company recorded Goodwill at the fair value of the underlying net asset,

including intangible asset at the acquisition date. Goodwill is not amortized but is tested

for impairment. If there is impairment, the excess of the carrying amount over the fair

value of the asset would be charged to earnings53.

Intangible assets (including prescription files, developed technology, customer

relationships and other) are amortized by using straight line basis over the estimated

useful lives. Similar to goodwill, if there is impairment, it is treated the same way.

Table IV – Useful life of Intangible Assets54

Prescription files 7 to 12 years

Developed technology 3 years

Customer relationships 5-25 years

Other Indefinite

Referring to the Balance Sheet, Goodwill and intangible asset increased by $222

million in 2008 compared to 2007. As well, the total amortization of capital asset and

other intangible asset was $205 millions in 2008 compared to $172 million in 2007. The

net increase is $33 million or 19.3%.

52 Idem53 Idem54 Ibid p.57

24

Changes in accounting Policy – Accounting standards implemented in 2008

Capital disclosure

The Canadian Institute of Chartered Accountants issued a accounting standard

(Section 1535) that requires require both quantitative and qualitative information to be

disclosed in order for users of the Financial Statements be able to evaluate the entity’s

objective, policies, and processes for managing the capital asset55. Shoppers Drug Mart

applied the new standard at the beginning of the fiscal year, and its implementation did

not have any impact on the company’s result of operation or financial position.

Inventory

“CICA handbook section3031”:

The CICA has also issued a new standard (Section 3031) which requires Shoppers

Drug Mart to determine the cost of inventory and subsequent recognition of inventory as

an expense, as well as requiring additional associated disclosures56. To adjust the change,

the company has to make a retrospective adjustment and restatement of prior periods.

Also, the new standard allows for the reversal of any write-down previous recognized.

This may affect the balance sheet; however, it is not a big deal since SDM has been using

the lower of cost inventory and the net realizable value of their inventory. Reconciling

the retrospective from December 29 2007 to January 03 2009, there was no significant

write-down since the net realizable value of inventory being lower than cost and no

inventory write-down recognized in previous year were reversed. However, with the

restatement, there was an increase in COGS and other operating expenses which lead to a

decrease in operating income and net earnings. This also led to a reduction of opening

retained earnings and inventory for 2007.

Future accounting standards

Goodwill and other Intangible Asset

In February 2008, the CICA issued another accounting standard concerning these

assets (Section 3064). This new standard replaces the existing guidance on these

particular assets (including research and development costs). The new standard

eliminates the practice of deferring costs that do not meet the definition and recognition

55 Ibid p.3756 Idem

25

criteria of assets. It is effective for interim and annual Financial Statements for fiscal

years beginning on or after October 1, 200857. SDM will apply this policy retrospectively

at the beginning of the 2009 fiscal year and will restate prior periods. As for intangible

assets recognized prior to 2009 that no longer meet the new requirements, they will be

removed from the Balance Sheet. Therefore, the balance of deferred costs at the end of

2008 will be charged to operating retained earnings58.

Accounting issues

Cash account

Although the cash account is fairly reported and straightforward, there are some

issues that need special attention. Shoppers Drug Mart’s Balance Sheet under Current

Asset should have applied a separate disclosure for cash account. For example, cash to

cash equivalents, short-term investments, and restricted cash59.

Accounts receivable

Accounts receivable should be disclosed differently: note receivable or loan

receivable. Plus, if they have an allowance for doubtful account, it should report below

Accounts receivable and report the full amount of the uncollectible amount60.

Inventory cost

The company should apply the Gross profit method of estimating inventory. That

way, it is easy to determine the ending inventory =Estimated COGS – Actual cost of

good available for sale61.

57 Ibid p.3858 Idem59 Kieso, Weygandt et al. Intermediate Accounting Volume 1, 8th Canadian version, John Wiley & Sons, 2007, p. 38660 Idem61 Idem p.608

26

Property and Equipment

It is difficult for users to read the notes to Financial Statements for Property and

Equipment since the company recorded all items together in one account: “Property and

Equipment” includes Building, Equipment & Fixture, Computer software & Equipment,

and leasehold improvement. The company should disclose each item separately because

each capital asset has a different useful life and their method of valuation. Furthermore,

with the company opening many new stores, the notion of cost inclusions have to be dealt

with. These cost inclusions are added to the value of a fixed asset if it is probable that

future economic benefit will be incurred and that the cost of the item can be measured

reliably.

Transition to International Financing Reporting Standards

As we all know, in January 2006 the Accounting Standards Board announced that

all publicly accountable enterprises will be required to report under IFRS for years

beginning on or after January 1, 2011. Canadian GAAP will be converged to IFRS. As

for SDM, it is assessing whether it will apply the new accounting standard at the

beginning of its 2011 fiscal year or elect to early adopt the new accounting standards at

the beginning of its 2010 fiscal year in order to minimize the amount of restatement when

the company adopts the International Financial Reporting Standard (IFRS)62.

62 Shoppers Drug Mart – 2008 Annual Report p.62

27

CONCLUSION AND RECOMMENDATIONS

After describing the company’s main activities, stock market, nature of risk and

competitors it faces, it is possible to see that SDM is a diverse company selling not only

prescription and OTC medications but also many everyday-use products. It also

manufactures its own brand product: LifeBrand® which consistently exceeds customers’

expectations. The company also introduced Nativa® its own organic food line. When

looking at its stock market performance, there were no major fluctuations despite the bad

economic situation. Of course, the stock price was affected, but not as much as many

other companies. As for the competitors, Jean Coutu Group served as a basis of

comparison. With the help of ratio analysis, one can see that SDM performed better

compared to Jean Coutu. In fact, SDM achieved sales of more than $9.4 billion with a net

earning of $565,212,000. As for Jean Coutu, it suffered a loss of $269,200,000. Overall,

the profitability ratios were in favor for SDM, as well as liquidity and solvency ratios. If

simply deciding whether or not to invest in SDM based on a ratio analysis, the answer

would be yes.

In order to reinforce the decision that SDM is a worthwhile decision, a common

size and trend analysis was helpful. Analysis of SDM Income Statement has indicated

growth in most areas.. There was an increase in sales revenue and net income of 111%

and 115%, from 2007 respectively. This indicates an increase in prosperity. Also, Income

has grown in size from 5.78% to 6% of total sales revenue. All this translates into a stable

or higher rate of return for investors and shareholders. This has also allowed the company

to have steady funds to expand their company to keep up their competitiveness. The

company’s overall expenses have decreased slightly, meaning it is effectively managing

cost. This means the company has become more productive and efficient over the years.

If these trends continue, SDM will increase profit and provide investors a great

opportunity to increase their wealth. When looking at the company’s Balance Sheet, its

Assets have increased with its Accounts Receivable remaining constant. Despite the fact

that the company’s long term liability has went up, its current assets account is bigger,

meaning that it can pay off its debt. Of course, the reason why its long term liability went

up is due to opening of many stores. There was also a 24% increase in retained earnings

28

with an increase of only 1% in size of Capital stock. This is a good sign because it means

SDM will not require much financing; it is becoming profitable enough to fund its own

capital expenditures.

As for the way particular asset accounts was disclosed, it followed Canadian

GAAP. Of course, the way Property and Equipment, Cash, Accounts Receivable were

written makes it slightly difficult to understand. Overall any changes in policy are

corrected retrospectively according to GAAP. With the convergence to IFRS in 2011, the

company is debating whether to implement it in 2010 or wait until 2011 to do so. Of

course, integrating it sooner will prevent the company to have to do major changes when

2011 arrives.

As the financial analysis was useful to determine SDM was worthwhile to invest

in, demographics can also be helpful. As we all know, our population is aging, with Baby

Boomers closely becoming senior citizens, many of them need prescription and OTC

medications. In fact, the percentage of senior citizen 65 and older will go from 13% to

18% in 2020. Of course, the effects of an aging population impact the pharmaceutical

industry63. This increases the demand of these products and puts SDM at an advantage,

being Canada’s largest and only nationwide drugstore chain with the largest market share

by sales.

Graph IV – Canada’s 2005 Population pyramid64

63 Fortin, Pierre. The Baby Boomers Tab. CBC News In depth. July 17,2006. Website last accessed on November 23rd 09.http://www.cbc.ca/news/background/canada2020/essay-fortin.html64 Nation Master – Canada’s 2005 Population pyramid. Website last accessed on November 28th 09.

29

Therefore, with all this said, investing in Shoppers Drug Mart seems worthwhile.

However, as a good investor, it is always suggested to have a diversified portfolio. In

fact, diversification is a risk management technique in finance related to hedging. It

mixes a variety of investments within a portfolio. This spreads out investments to reduce

risks because the fluctuation of a single security has less impact on a diverse portfolio

compared to one that is not. By diversifying, one minimizes the risk from any one

investment. Therefore, if a large sum of money was inherited, having part of its portfolio

in SDM’s shares would be wise.

30

Appendix AShoppers Drug Mart flow chart65

65 Wikiinvest – Shoppers Drug Mart http://www.wikinvest.com/stock/Shoppers_Drug_Mart_Corp_(TSE:SC)

31

Appendix B

Table I – Distribution of selected merchandise group sales by trade group sectors, Canada 1998 and 2005

Commodity

groups

Pharmacies and personal care stores

Food stores and general merchandise

stores

All other trade groups combined

Total, all trade groups

1998 20051998 to 2

005 1998 2005

1998 to 2005

1998 20051998 to 2

0051998 2005

1998 to 2005

$ millions %2 $ millions %2 $ millions %2 $ millions %2

Health and

personal care

products

13,524

20,420

6.15,152

9,993 9.9 412 402 -0.419,087

30,815

7.1

Drugs3 9,910

15,394

6.51,865

4,620 13.8 21 15 -4.611,797

20,030

7.9

Personal care

products4

2,766

3,970

5.33,225

5,142 6.9 246 299 2.8 6,236 9,411 6.1

Eyewear5

8481,056

3.2 61 231 20.8 145 88 -6.9 1,054 1,375 3.9

Tobacco products

and supplies

362 212 -7.33,823

5,706 5.9 1,874 2,705 5.4 6,059 8,623 5.2

All other goods and

services

3,086

3,360

1.275,811

99,305

3.9142,008

210,996

5.8220,906

313,661

5.7

Total16,973

23,992

5.184,785

115,004

4.5144,294

214,103

5.8246,052

353,099

5.3

1. In Quebec only, sales from pharmacies located in food and general merchandise stores are reported in the pharmacies trade group. 2. Compounded annual growth rate.3. Includes prescription and over-the-counter drugs, vitamins and other health supplements. 4. Includes health and beauty products (non-electric). 5. Includes prescription and non-prescription. Source: Statistics Canada, Retail Commodity Quarterly Survey.

32

Appendix C

Comparative table of SDM’s competitors66

Competitive Operating Metrics (FY2008)

Shoppers Drug Mart Corp [1]

Jean Coutu Group Inc (PJC.A) [38]

CVS Caremark Corporation [41]

Walgreen Company [42]

Rite Aid [44]

MedcoHealth Solutions [45]

Market Cap ($Billions USD)

9.36 2.31 52.97 33.44 1.38 26.36

Total Revenue ($Billions USD)

9.42 2.13 86.47 59.03 26.29 51.26

Gross Margin

11.50% 9.11% 20.91% 28.19% 26.76% 7.27%

Net Income ($Billions USD)

0.57 (1.19) 3.34 2.16 (2.91) 1.10

Net Profit Margin

6.00% (50.31%) 3.82% 3.65% (11.08%) 2.15%

Drugstores Open

1,149 353 6,300 6,443 4,901 N/A (mail-order)

Prescriptions Filled (millions)

83.0 63.3 633.0 617.0 300.0 480.2

Note: SDM and Jean Coutu Group Inc.’s financial data are given in CAD, whereas all other companies are in USD. For purposes of comparison, all data are translated to USD using the average CAD/USD exchange rate for 2008 (0.9434 CAD/USD).

66 Idem

33

Appendix DRatio Analysis

Shoppers Drug Mart Jean Coutu2008 2007 2006 2005 2008

Profitability Tests

Sales 9,422,911,00

0 8,478,382,00

0 1,507,600,00

0

Gross Profit 882,502,00

0 786,274,00

0 155,000,00

0 Gross Profit Margin 9.365492256 9.273868528 10.28124171

Net Income 565,212,00

0 490,441,00

0 422,491,00

0 364,494,00

0 (251,400,00

0)

Net Sales 882,502,00

0 790,016,00

0 683,526,00

0 599,245,00

0 1,507,600,00

0

Net Profit Margin 64.05 62.08 61.81 60.83 (16.68

)

C/F from Op. activities 478,989,00

0 565,058,00

0 569,816,00

0 450,575,00

0 146,400,00

0

Net Sales 882,502,00

0 790,016,00

0 683,526,00

0 599,245,00

0 1,507,600,00

0 Cash Flow Margin 54.28 71.52 83.36 75.19 9.71

C/F from Op. activities 478,989,00

0 565,058,00

0 569,816,00

0 450,575,00

0 146,400,00

0

Net Income 565,212,00

0 490,441,00

0 422,491,00

0 364,494,00

0 (251,400,00

0)Quality of Income 0.84745016 1.152142663 1.348705653 1.236165753 -0.582338902Policy used Liberal Conservative Conservative Conservative Conservative

Net Income 565,212,00

0 490,441,00

0 422,491,00

0 364,494,00

0 (251,400,00

0)

Average Total Assets 6,020,641,50

0 5,286,526,50

0 4,652,198,50

0 4,246,394,50

0 2,143,000,00

0

Return on Assets 0.093

9 0.092

8 0.090

8 0.085

8 (0.117

3)

Sales or Op Revenues 9,422,911,00

0 8,478,382,00

0 7,786,436,00

0 7,151,115,00

0 1,507,600,00

0

Average Total Assets 6,020,641,50

0 5,286,526,50

0 4,652,198,50

0 4,246,394,50

0 2,143,000,00

0 Total A turnover ratio 1.57 1.60 1.67 1.68 0.70

Net Income 565,212,00

0 490,441,00

0 422,491,00

0 (251,400,00

0)Avr Shareholders' equity

1,747,189,500

1,392,707,000

1,083,644,000

1,750,800,000

Return on Equity 32.35 35.21 38.99 (14.36

)

Net Sales 882,502,00

0 790,016,00

0 683,526,00

0 599,245,00

0 1,507,600,00

0

34

Avr Net Fixed Asset 1,284,324,00

0 1,017,120,50

0 828,284,00

0 683,088,50

0 1,370,500,00

0 Fixed Asset turnover 0.69 0.78 0.83 0.88 1.10

Liquidity Ratio

Current Asset 2,384,464,00

0 2,150,137,00

0 1,821,423,00

0 1,564,911,00

0 327,800,00

0

Current Liability 1,843,860,00

0 2,158,320,00

0 1,577,784,00

0 1,392,501,00

0 266,600,00

0 Current Ratio 1.29 1.00 1.15 1.12 1.23

Net Sales 882,502,00

0 790,016,00

0 1,507,600,00

0

Avr Net trade A/R 410,391,00

0 340,042,50

0 165,050,00

0 Receivable Turnover 2.15 2.32 9.13

Avr trade A/R 410,391,00

0 340,042,50

0 165,050,00

0

[Credit sales/365] 24,503,89

6 21,680,34

0 3,729,31

5 Avr collection period 16.75 15.68 44.26

COGS 8,335,038,00

0 7,520,033,00

0 6,958,361,00

0 6,430,933,00

0 1,370,000,00

0

Avr Inventory 1,644,426,00

0 1,458,861,50

0 1,294,336,50

0 1,176,137,00

0 146,350,00

0 Inventory Turnover 5.07 5.15 5.38 5.47 9.36

COGS 8,335,038,00

0 7,520,033,00

0 6,958,361,00

0 6,430,933,00

0 1,370,000,00

0

Avr A/P 1,004,525,00

0 916,911,50

0 770,511,50

0 694,507,50

0 230,400,00

0 A/P Turnover 8.30 8.20 9.03 9.26 5.95

Solvency Ratios

NI+Int Exp+ I tax exp 883,323,00

0 793,148,00

0 683,526,00

0 599,245,00

0 (242,500,00

0)

Interest exp 63,952,00

0 52,873,00

0 49,872,00

0 48,649,00

0 5,100,00

0 Times in Interest earned 13.81 15.00 13.71 12.32

(47.55)

Total Liability 465,200,00

0

Total SE 1,484,100,00

0 Debt to Equity (given) 0.40 0.34 0.24 0.28 0.31

Market tests

35

Current Mk P per share 48.05 53.26 7.42

Earnings per share $ 2.60 $ 2.27 $

(0.98)P/E ratio 18.48 23.46 -7.57

Supplemental ratio

Average Total Asset 6,020,641,50

0 5,286,526,50

0 4,652,198,50

0 4,246,394,50

0 2,143,000,00

0

Avr SE 3,267,561,50

0 2,910,500,50

0 2,555,231,00

0 2,236,283,00

0 1,750,800,00

0 Financial leverage 1.84 1.82 1.82 1.90 1.22

C/F from op activities 2,064,438,00

0 Cash paid for property …

1,454,380,000

Capital Acquisition 1.42

36

Appendix EComparison of Assets

Shoppers Drug Mart

Assets 2008% of total

Asset 2007% of total

AssetCurrent

Cash 36,567,000

0.57

27,588,000 0.49 Increase

A/R 448,476,000

6.99

372,306,000 6.62 Increase

Inventory 1,743,253,000

27.16

1,545,599,000 27.49 Decrease

Income tax receivable 8,835,000

0.14 -

Future Income taxes 83,279,000

1.30

69,952,000 1.24 Increase

Prepaid expenses and deposits

64,054,000

1.00

134,692,000 2.40 Decrease

Property and Equipment 2,384,464,000

37.15

2,150,137,000 38.25 Decrease

Deferred costs 1,442,135,000

22.47

1,126,513,000 20.04 Increase

Goodwill 47,213,000

0.74

32,966,000 0.59 Increase

Other intangible assets 2,427,239,000

37.81

2,245,441,000 39.94 Decrease

Other Assets 97,813,000

1.52

57,930,000 1.03 Increase

Total Assets 6,419,306,000

100.00

5,621,977,000 100.00

Jean Coutu Group

Assets 2008% of total

Asset 2007% of total

AssetCurrent

Cash and cash equivalents - - 40,700,000 1.74

A/R 167,500,000

8.59

162,600,000 6.96 Increase

Income tax receivable 400,000

0.02

400,000 0.02 Same

Inventory 154,700,000

7.94

138,000,000 5.91 Increase

Prepaid expenses 5,200,000

0.27

7,600,000 0.33 Decrease

Investments 1,143,200,000

58.65

1,597,800,000 68.38 Decrease

Capital Assets 329,300,000

16.89

319,400,000 13.67 Increase

Goodwill 35,300,000

1.81

20,000,000 0.86 Increase

Other Assets 2.15 Increase

37

113,700,000 5.83 50,200,000

Total Assets 1,949,300,000

100.00

2,336,700,000 100.00

2008 2007 2006 2005

A/R 448,476,000

372,306,000

307,779,000

256,504,000

Total Assets

6,419,306,000

5,621,977,000

4,929,014,000

4,375,383,000

% 6.99 6.62 6.24 5.86

Inventory 1,743,253,000

1,545,599,000

1,372,124,000

1,216,549,000

Total Assets

6,419,306,000

5,621,977,000

4,929,014,000

4,375,383,000

% 27.16 27.49 27.84 27.80

38

Appendix FFurther disclosures

Property and Equipment67

In thousands of dollars2008 Cost Accumulated

AmortizationNet Book Value

Properties held for development

$30,049 - $30,049

Properties under development

66,851 - 66,851

Land 45,946 - 45,946Buildings 138,603 27,115 111,488Equipment, fixtures, computer software and equipment

1,063,824 532,376 531,448

Leasehold improvements

897,976 241,623 656,353

$2,243,249 $801,114 $1,442,135

Deferred costs68

In thousands of dollars2008 Cost Accumulated

AmortizationNet Book Value

Store opening costs $113,683 $66,470 $47,213

Goodwill69:2008 2007

Opening balance $2,245,441 $2,122,162Goodwill acquired 181,798 123,279Ending balance $2,427,239 $2,245,441There were no write-downs of goodwill due to impairment this fiscal year (2008).

Other Intangible Assets70:In thousands of dollars2008 Cost Accumulated

AmortizationNet Book Value

Prescription files $91,599 $20,924 $70,675Developed technology 1,912 1,062 850Customer relationships

29,600 3,512 26,088

Other 200 - 200$123,311 $25,498 $97,813

67 Shoppers Drug Mart Corporation – 2008 Financial Report, p.65 68 Idem69 Idem70 Idem

39

Appendix G

Horizontal and Vertical Analysis

Horizontal 2008 2007

Sales 111% 100%Operating expenses

Cost of goods sold and other operating expenses

111% 100%

Amortization 119% 100%Operating income

112% 100%

Interest expense

121% 100%

Income before income taxes

112% 100%

Income taxesCurrent

102% 100%

Future

12% 100%

104% 100%Net income 115% 100%

Vertical

2008 2007

Sales 100% 100%Operating expenses

Cost of goods sold and other operating expenses

88.46% 88.70%

Amortization 2.18% 2.03%Operating income

9.37% 9.27%

Interest expense

0.68% 0.62%

Income before income taxes

8.69% 8.65%

Income taxesCurre 2.70% 2.95%

40

ntFuture

Net income 6.00% 5.78%

Horizontal 2008 2007

AssetsCurrent

Cash 133% 100%Accounts receivable 120% 100%Inventory 113% 100%Income taxes recoverable

100% 0%

Future income taxes 119% 100%

Prepaid expenses and deposits

48% 100%

111% 100%Property and equipment

128% 100%

Deferred costs 143% 100%Goodwill

108% 100%

Other intangible assets 169% 100%Other assets 227% 100%Total assets 114% 100%LiabilitiesCurrent

Bank indebtedness

107% 100%

Commercial paper

63% 100%

Short-term 100% 0%

41

debt

Accounts payable and accrued liabilities

103% 100%

Income taxes payable 0% 100%Dividends payable

135% 100%

Current portion of long-term debt

0% 100%

85% 100%Long term debt 100% 0%Other long-term liabilities 124% 100%Future income taxes 156% 100%

117% 100%Associate interest 105% 100%Shareholders' equityShare capital 101% 100%Contributed surplus 107% 100%

Accumulated other comprehensive income

Retained earnings

124% 100%

124% 100%112% 100%

Total liabilities and shareholders' equity

114% 100%

Vertical

2008 2007

AssetsCurrent

Cash 1% 0%Accounts receivable 7% 7%Inventory 27% 27%Income taxes recoverable

0% 0%

Future income taxes 1% 1%Prepaid expenses and 1% 2%

42

deposits37% 38%

Property and equipment

22% 20%

Deferred costs 1% 1%Goodwill

38% 40%

Other intangible assets 2% 1%Other assets 0% 0%Total assets 100% 100%LiabilitiesCurrent

Bank indebtedness

4% 4%

Commercial paper

5% 10%

Short-term debt

3% 0%

Accounts payable and accrued liabilities

16% 18%

Income taxes payable 0% 1%Dividends payable

1% 1%

Current portion of long-term debt

0% 5%

29% 38%Long term debt 10% 0%Other long-term liabilities 5% 4%Future income taxes 1% 1%

44% 43%Associate interest 2% 2%Shareholders' equityShare capital 24% 27%Contributed surplus 0% 0%

Accumulated other comprehensive income

Retained earnings

30% 28%

30% 28%54% 55%

43

Total liabilities and shareholders' equity

100% 100%

44

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