ANNUAL REPORT PROJECT

SHOPPERS DRUG MART CORPORATION

Presented to
Mrs. Wendy Roscoe
Professor in Financial Accounting
ACCO-310/2-B
Concordia University
John Molson School of Business

Prepared by
Azzea Huynh 9375910, Solen Heng 9357920, Yang Karen Chen 4693558,
Hai Han Xing 9098143, Hang Li 5555930
John Molson School of Business
Concordia University
December 3rd, 2009

ii
 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

ii
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

1
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. 2
3
Shoppers Drug Mart – 2008 Annual Report p.13 and Dow Jones Company Report – Shoppers Drug Mart
Inc 2009 Factiva Inc. p. 3
4
Idem 3
5
Ibid 3 p.1

2
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. 4
7
Dube, Guillaume. Statistics Canada – Competing for the Retail Drug Market
http://www.statcan.gc.ca/pub/11-621-m/11-621-m2006048-eng.htm
8
Jean Coutu Group – 2009 Annual Report, p3.
9
Rite Aid Corporation – United States Securities and Exchange Commission report, p.28
http://www.sec.gov/Archives/edgar/data/84129/000104746909004278/a2192156z10-
k.htm#dc70801_item_1._business

3
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

4
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

5
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

6
 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
Idem
15
Idem

7
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.

8
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

9
 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.124
20
Ibid p.123

10
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 2008 2007 2006 2005
share data)22
53 weeks 52 weeks 52 weeks 52 weeks
Sales 9,422,911 8,487,382 7,786,436 7,151,115
Net earnings 565,212 493,628 422,491 364,494
Per common share:
-Basic net earnings $2,60 $2,28 $1,97 $1,72
-Diluted net $2,60 $2,27 $1,95 $1,69
earnings

21
Ibid p. 183
22
Ibid p.51

11
 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. 38
24
Libby et al., Financial Accounting 3rd Canadian edition p.464
25
Idem
26
Ibid p.529
27
Idem

12
 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. 359
29
Idem
30
Shoppers Drug Mart – 2008 Annual Report p.38,41
31
Ibid p40

13
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. 425
33
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.587
35
Libby et al., Financial Accounting 3rd Canadian edition. p. 70

15
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, 53
37
Idem
38
Ibid p.15
39
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 F
41
Ibid p.29
42
Idem
43
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.55
46
Idem
47
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.
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.
48
Shoppers Drug Mart – 2008 Annual Report, p.56
49
Idem
50
Idem
51
Idem

23
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
Idem
53
Idem
54
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.37
56
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.38
58
Idem
59
Kieso, Weygandt et al. Intermediate Accounting Volume 1, 8th Canadian version, John Wiley & Sons,
2007, p. 386
60
Idem
61
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.html
64
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 A
Shoppers 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
Food stores and
Pharmacies and All other Total,
general merchandise
personal care stores trade groups combined all trade groups
Commo stores
dity
1998 to 2 1998 to 2 1998 to 2 1998 to 20
groups 1998 2005 1998 2005 1998 2005 1998 2005
005 005 005 05
$ millions %2 $ millions %2 $ millions %2 $ millions %2
Health
and
13,5 20,4 5,15 19,08 30,81
personal 6.1 9,993 9.9 412 402 -0.4 7.1
24 20 2 7 5
care
products
9,91 15,3 1,86 11,79 20,03
Drugs3 6.5 4,620 13.8 21 15 -4.6 7.9
0 94 5 7 0
Personal
care 2,76 3,97 3,22
5.3 5,142 6.9 246 299 2.8 6,236 9,411 6.1
products 6 0 5
4
Eyewear 1,05
848 3.2 61 231 20.8 145 88 -6.9 1,054 1,375 3.9
5 6
Tobacco
products 3,82
362 212 -7.3 5,706 5.9 1,874 2,705 5.4 6,059 8,623 5.2
and 3
supplies
All other
goods 3,08 3,36 75,8 99,30 142,0 210,9 220,9 313,6
1.2 3.9 5.8 5.7
and 6 0 11 5 08 96 06 61
services
16,9 23,9 84,7 115,0 144,2 214,1 246,0 353,0
Total 5.1 4.5 5.8 5.3
73 92 85 04 94 03 52 99
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 Shoppers Jean
CVS
Operating Drug Coutu Walgreen Rite MedcoHealth
Caremark [42]
Metrics Mart Group Inc [41] Company Aid[44] Solutions[45]
[1] [38] Corporation
(FY2008) Corp (PJC.A)
Market Cap 26.36
($Billions 9.36 2.31 52.97 33.44 1.38
USD)
Total
51.26
Revenue
9.42 2.13 86.47 59.03 26.29
($Billions
USD)
7.27%
Gross
11.50% 9.11% 20.91% 28.19% 26.76%
Margin
Net Income 1.10
($Billions 0.57 (1.19) 3.34 2.16 (2.91)
USD)
Net Profit
6.00% (50.31%) 3.82% 3.65% (11.08%) 2.15%
Margin
Drugstores N/A (mail-
1,149 353 6,300 6,443 4,901
Open order)
Prescriptions
Filled 83.0 63.3 633.0 617.0 300.0 480.2
(millions)

• 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 D
Ratio Analysis
Shoppers Drug Mart Jean Coutu
2008 2007 2006 2005 2008
Profitability Tests

9,422,911,00 8,478,382,00 1,507,600,00

Sales 0 0 0
882,502,00 786,274,00 155,000,00
Gross Profit 0 0 0
Gross Profit Margin 9.365492256 9.273868528 10.28124171

565,212,00 490,441,00 422,491,00 364,494,00 (251,400,00

Net Income 0 0 0 0 0)
882,502,00 790,016,00 683,526,00 599,245,00 1,507,600,00
Net Sales 0 0 0 0 0
(16.68
Net Profit Margin 64.05 62.08 61.81 60.83 )

478,989,00 565,058,00 569,816,00 450,575,00 146,400,00

C/F from Op. activities 0 0 0 0 0
882,502,00 790,016,00 683,526,00 599,245,00 1,507,600,00
Net Sales 0 0 0 0 0
Cash Flow Margin 54.28 71.52 83.36 75.19 9.71

478,989,00 565,058,00 569,816,00 450,575,00 146,400,00

C/F from Op. activities 0 0 0 0 0
565,212,00 490,441,00 422,491,00 364,494,00 (251,400,00
Net Income 0 0 0 0 0)
Quality of Income 0.84745016 1.152142663 1.348705653 1.236165753 -0.582338902
Policy used Liberal Conservative Conservative Conservative Conservative

565,212,00 490,441,00 422,491,00 364,494,00 (251,400,00

Net Income 0 0 0 0 0)
6,020,641,50 5,286,526,50 4,652,198,50 4,246,394,50 2,143,000,00
Average Total Assets 0 0 0 0 0
0.093 0.092 0.090 0.085 (0.117
Return on Assets 9 8 8 8 3)

9,422,911,00 8,478,382,00 7,786,436,00 7,151,115,00 1,507,600,00

Sales or Op Revenues 0 0 0 0 0
6,020,641,50 5,286,526,50 4,652,198,50 4,246,394,50 2,143,000,00
Average Total Assets 0 0 0 0 0
Total A turnover ratio 1.57 1.60 1.67 1.68 0.70

565,212,00 490,441,00 422,491,00 (251,400,00

Net Income 0 0 0 0)
Avr Shareholders' 1,747,189,50 1,392,707,00 1,083,644,00 1,750,800,00
equity 0 0 0 0
(14.36
Return on Equity 32.35 35.21 38.99 )

882,502,00 790,016,00 683,526,00 599,245,00 1,507,600,00

Net Sales 0 0 0 0 0

34
 1,284,324,00 1,017,120,50 828,284,00 683,088,50 1,370,500,00
Avr Net Fixed Asset 0 0 0 0 0
Fixed Asset turnover 0.69 0.78 0.83 0.88 1.10

Liquidity Ratio

2,384,464,00 2,150,137,00 1,821,423,00 1,564,911,00 327,800,00

Current Asset 0 0 0 0 0
1,843,860,00 2,158,320,00 1,577,784,00 1,392,501,00 266,600,00
Current Liability 0 0 0 0 0
Current Ratio 1.29 1.00 1.15 1.12 1.23

882,502,00 790,016,00 1,507,600,00

Net Sales 0 0 0
410,391,00 340,042,50 165,050,00
Avr Net trade A/R 0 0 0
Receivable Turnover 2.15 2.32 9.13

410,391,00 340,042,50 165,050,00

Avr trade A/R 0 0 0
24,503,89 21,680,34 3,729,31
[Credit sales/365] 6 0 5
Avr collection period 16.75 15.68 44.26

8,335,038,00 7,520,033,00 6,958,361,00 6,430,933,00 1,370,000,00

COGS 0 0 0 0 0
1,644,426,00 1,458,861,50 1,294,336,50 1,176,137,00 146,350,00
Avr Inventory 0 0 0 0 0
Inventory Turnover 5.07 5.15 5.38 5.47 9.36

8,335,038,00 7,520,033,00 6,958,361,00 6,430,933,00 1,370,000,00

COGS 0 0 0 0 0
1,004,525,00 916,911,50 770,511,50 694,507,50 230,400,00
Avr A/P 0 0 0 0 0
A/P Turnover 8.30 8.20 9.03 9.26 5.95

Solvency Ratios

883,323,00 793,148,00 683,526,00 599,245,00 (242,500,00

NI+Int Exp+ I tax exp 0 0 0 0 0)
63,952,00 52,873,00 49,872,00 48,649,00 5,100,00
Interest exp 0 0 0 0 0
Times in Interest (47.55
earned 13.81 15.00 13.71 12.32 )

465,200,00
Total Liability 0
1,484,100,00
Total SE 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
6,020,641,50 5,286,526,50 4,652,198,50 4,246,394,50 2,143,000,00
Average Total Asset 0 0 0 0 0
3,267,561,50 2,910,500,50 2,555,231,00 2,236,283,00 1,750,800,00
Avr SE 0 0 0 0 0
Financial leverage 1.84 1.82 1.82 1.90 1.22

2,064,438,00
C/F from op activities 0
Cash paid for property 1,454,380,00
… 0
Capital Acquisition 1.42

36
 Appendix E
Comparison of Assets
Shoppers Drug Mart
% of total % of total
Assets 2008 Asset 2007 Asset
Current
36,567,00 0.5 27,588,00
Cash 0 7 0 0.49 Increase
448,476,0 6.9 372,306,0
A/R 00 9 00 6.62 Increase
1,743,253,0 27.1 1,545,599,0
Inventory 00 6 00 27.49 Decrease
8,835,00 0.1
Income tax receivable 0 4 -
83,279,00 1.3 69,952,00
Future Income taxes 0 0 0 1.24 Increase
Prepaid expenses and 64,054,00 1.0 134,692,0
deposits 0 0 00 2.40 Decrease

2,384,464,0 37.1 2,150,137,0

Property and Equipment 00 5 00 38.25 Decrease
1,442,135,0 22.4 1,126,513,0
Deferred costs 00 7 00 20.04 Increase
Goodwil 47,213,00 0.7 32,966,00
l 0 4 0 0.59 Increase
2,427,239,0 37.8 2,245,441,0
Other intangible assets 00 1 00 39.94 Decrease
97,813,00 1.5 57,930,00
Other Assets 0 2 0 1.03 Increase

6,419,306,0 100.0 5,621,977,0

Total Assets 00 0 00 100.00

Jean Coutu Group

% of total % of total
Assets 2008 Asset 2007 Asset
Current
40,700,00
Cash and cash equivalents - - 0 1.74
167,500,0 8.5 162,600,0
A/R 00 9 00 6.96 Increase
400,00 0.0 400,00
Income tax receivable 0 2 0 0.02 Same
154,700,0 7.9 138,000,0
Inventory 00 4 00 5.91 Increase
5,200,00 0.2 7,600,00
Prepaid expenses 0 7 0 0.33 Decrease

1,143,200,0 58.6 1,597,800,0

Investments 00 5 00 68.38 Decrease
329,300,0 16.8 319,400,0
Capital Assets 00 9 00 13.67 Increase
Goodwil 35,300,00 1.8 20,000,00
l 0 1 0 0.86 Increase

37
 113,700,0 5.8 50,200,00
Other Assets 00 3 0 2.15 Increase

1,949,300,0 100.0 2,336,700,0

Total Assets 00 0 00 100.00

2008 2007 2006 2005

448,476,00 372,306,00 307,779,00 256,504,00
A/R 0 0 0 0
Total 6,419,306,00 5,621,977,00 4,929,014,00 4,375,383,00
Assets 0 0 0 0
% 6.99 6.62 6.24 5.86

1,743,253,00 1,545,599,00 1,372,124,00 1,216,549,00

Inventory 0 0 0 0
Total 6,419,306,00 5,621,977,00 4,929,014,00 4,375,383,00
Assets 0 0 0 0
% 27.16 27.49 27.84 27.80

38
 Appendix F
Further disclosures
Property and Equipment67
In thousands of dollars
2008 Cost Accumulated Net Book Value
Amortization
Properties held for $30,049 - $30,049
development
Properties under 66,851 - 66,851
development
Land 45,946 - 45,946
Buildings 138,603 27,115 111,488
Equipment, fixtures, 1,063,824 532,376 531,448
computer software
and equipment
Leasehold 897,976 241,623 656,353
improvements
$2,243,249 $801,114 $1,442,135

Deferred costs68
In thousands of dollars
2008 Cost Accumulated Net Book Value
Amortization
Store opening costs $113,683 $66,470 $47,213

Goodwill69:
2008 2007
Opening balance $2,245,441 $2,122,162
Goodwill acquired 181,798 123,279
Ending balance $2,427,239 $2,245,441
There were no write-downs of goodwill due to impairment this fiscal year (2008).

Other Intangible Assets70:

In thousands of dollars
2008 Cost Accumulated Net Book Value
Amortization
Prescription files $91,599 $20,924 $70,675
Developed technology 1,912 1,062 850
Customer 29,600 3,512 26,088
relationships
Other 200 - 200
$123,311 $25,498 $97,813

67
Shoppers Drug Mart Corporation – 2008 Financial Report, p.65
68
Idem
69
Idem
70
Idem

39
 Appendix G

Horizontal and Vertical Analysis

Horizontal 2008 2007

Sales 111% 100%

Operating expenses
Cost of goods sold
and other operating 111% 100%
expenses
Amortization 119% 100%
Operating
112% 100%
income
Interest
121% 100%
expense
Income before income
112% 100%
taxes
Income taxes
Curre
102% 100%
nt
Futur
12% 100%
e
104% 100%
Net income 115% 100%

Vertica
2008 2007
l

Sales 100% 100%

Operating expenses
Cost of goods sold
and other operating 88.46% 88.70%
expenses
Amortization 2.18% 2.03%
Operating
9.37% 9.27%
income
Interest
0.68% 0.62%
expense
Income before income
8.69% 8.65%
taxes
Income taxes
Curre 2.70% 2.95%

40
 nt
Futur
e

Net income 6.00% 5.78%

Horizontal 2008 2007

Assets
Curren
t
Cash 133% 100%
Accounts receivable 120% 100%
Inventory 113% 100%
Income taxes
100% 0%
recoverable
Future income taxes 119% 100%
Prepaid expenses and
48% 100%
deposits
111% 100%
Property and
128% 100%
equipment
Deferred costs 143% 100%
Goodwi
108% 100%
ll
Other intangible
169% 100%
assets
Other assets 227% 100%
Total assets 114% 100%
Liabilities
Curren
t
Bank
107% 100%
indebtedness
Commercial
63% 100%
paper

41
 Short-term
100% 0%
debt
Accounts payable and
103% 100%
accrued liabilities
Income taxes payable 0% 100%
Dividends
135% 100%
payable
Current portion of
0% 100%
long-term debt
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' equity
Share capital 101% 100%
Contributed surplus 107% 100%

Accumulated other
comprehensive income
Retained
124% 100%
earnings
124% 100%
112% 100%
Total liabilities and
114% 100%
shareholders' equity

Vertica
2008 2007
l

Assets
Curren
t
Cash 1% 0%
Accounts receivable 7% 7%
Inventory 27% 27%
Income taxes
0% 0%
recoverable
Future income taxes 1% 1%

42
 Prepaid expenses and
1% 2%
deposits
37% 38%
Property and
22% 20%
equipment
Deferred costs 1% 1%
Goodwi
38% 40%
ll
Other intangible
2% 1%
assets
Other assets 0% 0%
Total assets 100% 100%
Liabilities
Curren
t
Bank
4% 4%
indebtedness
Commercial
5% 10%
paper
Short-term
3% 0%
debt
Accounts payable and
16% 18%
accrued liabilities
Income taxes payable 0% 1%
Dividends
1% 1%
payable
Current portion of long-term
0% 5%
debt
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' equity
Share capital 24% 27%
Contributed surplus 0% 0%

Accumulated other
comprehensive income
Retained
30% 28%
earnings

43
 30% 28%
54% 55%
Total liabilities and
100% 100%
shareholders' equity

44
 Bibliography

Dow Jones Company Report – Shoppers Drug Mart Inc 2009 Factiva Inc.

Dube, Guillaume. Statistics Canada – Competing for the Retail Drug Market
http://www.statcan.gc.ca/pub/11-621-m/11-621-m2006048-eng.htm

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.html

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

Jean Coutu Group – 2009 Annual Report

Kieso, Weygandt et al. Intermediate Accounting Volume 1, 8th Canadian version, John
Wiley & Sons, 2007.

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

Libby et al., Financial Accounting 3rd Canadian edition.

Nation Master – Canada’s 2005 Population pyramid. Website last accessed on November
28th 09.

Rite Aid Corporation – United States Securities and Exchange Commission report, p.28
http://www.sec.gov/Archives/edgar/data/84129/000104746909004278/a2192156z10-
k.htm#dc70801_item_1._business

Shoppers Drug Mart – 2008 Annual Report

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

Wiki Invest – Shoppers Drug Mart Corporation (TSE:SC)

http://www.wikinvest.com/stock/Shoppers_Drug_Mart_Corp_(TSE:SC)

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

45