SHOPPERS DRUG MART CORPORATION 2009 ANNUAL REPORT. Partners in growth

Transcription

1 SHOPPERS DRUG MART CORPORATION 2009 ANNUAL REPORT Partners in growth

2 drug stores 1,219 across Canada See back cover for details Our business Shoppers Drug Mart/Pharmaprix is Canada s leading retail drug store chain, with more than 1,219 convenient locations from coast to coast. Last year, we helped 85% of Canadians fulfill their health, beauty and convenience needs with more than 360 million patient and customer transactions. Over the course of our 48 years in business, we have gained the trust of Canadians who recognize Shoppers Drug Mart/Pharmaprix for our professional service, knowledge and friendly advice. Together with our Associateowners and their store teams, we are helping our patients and customers enhance their wellbeing and improve their quality of life. Contents flap Corporate profile/ Our brands 1 Financial highlights 2 Pharmacy leadership 3 Partnerships 4 Opportunities 5 Efficiencies 6 Front store differentiation 7 Beauty 8 Private label 9 Convenience & value health + beauty + convenience Growing with The foundation: favourable demographic and industry trends Growth potential of Canada s population is expected to be over the age 28% of 60 by the year 2026* 32.6 average number of prescriptions per year for patients over the age of 60** As a large proportion of Canada s population continues to age, we anticipate a greater demand for pharmacy services and health, wellness and beauty products. * Statistics Canada ** IMS Health, Canada, Compuscript 10 Message to shareholders 12 Message from the Chair 13 Management s discussion and analysis 52 Financials 84 Corporate social responsibility & sustainability 92 Corporate directory ibc Shareholder information

3 A S H O P P E R S D R U G M A R T C O M P A N Y T M Corporate profile Shoppers Drug Mart Corporation is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Québec). Founded in 1962 by Toronto pharmacist Murray Koffler, the Company has grown to a network of more than 1,170 Shoppers Drug Mart/Pharmaprix stores across Canada. These conveniently located stores are owned and operated by the Company s licensed Associate-owners who have helped build a brand that is synonymous with exceptional service, value and trust. The Company also licenses or owns more than 49 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and six luxury beauty destinations operating as Murale. With fiscal 2009 sales of approximately $10 billion, the Company is the leader in Canada s retail drug store marketplace and is the number one provider of pharmacy products and services. Shoppers Drug Mart has successfully leveraged its leadership position in pharmacy and its convenient store locations to capture a significant share of the market in front store merchandise, including over-the-counter medications, health and beauty aids, cosmetics and fragrances, seasonal products and everyday household essentials. The Company also offers a broad range of high-quality private label products marketed under such trademarks as Life Brand, Quo, Everyday Market, Bio-Life, Baléa, Nativa and Easypix, among others, and value-added services such as the HealthWATCH program, which offers patient counselling and advice on medications, disease management and health and wellness, and the Shoppers Optimum program, one of the largest retail loyalty card programs in Canada. As well, the Company owns and operates 66 Shoppers Home Health Care stores, which are engaged in the sale and service of assisted-living devices, medical equipment, home-care products and durable mobility equipment to institutional and retail customers. In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services, and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities in Ontario and Alberta. A solid platform for growth Our growing network of retail formats, offering specialty services and a portfolio of private label brands, is supported by our Associate-owners and their store teams, comprised of more than 46,000 employees, who are dedicated to providing Canadians with the best in health, beauty and convenience. Retail formats Specialty services Corporate brands

4 Financial highlights (1) (2) Summary Earnings Data ($000s) Sales $ 9,985,600 $ 9,422,911 $ 8,478,382 $ 7,786,436 $ 7,151,115 Cost of goods sold and other operating expenses 8,841,170 8,350,367 7,520,033 6,958,361 6,430,933 Amortization 248, , , , ,937 Operating income 895, , , , ,245 Interest expense 58,215 63,952 52,873 49,872 48,649 Income taxes 252, , , , ,102 Net earnings $ 584,908 $ 554,145 $ 490,441 $ 422,491 $ 364,494 Summary Operating Data Sales ($000s) 9,985,600 9,422,911 8,478,382 7,786,436 7,151,115 Sales growth 6.0% 11.1% 8.9% 8.9% 8.9% Same-store sales growth 4.8% (3) 4.8% (4) 5.2% 6.5% 5.8% Sales mix: Pharmacy 48.3% 47.6% 47.0% 46.9% 46.7% Front store 51.7% 52.4% 53.0% 53.1% 53.3% EBITDA ($000s) (5) 1,144,430 1,072, , , ,182 EBITDA growth 6.7% 11.9% 15.7% 15.0% 12.7% EBITDA margin (6) 11.5% 11.4% 11.3% 10.6% 10.1% Capital expenditures ($000s): Property and equipment 461, , , , ,973 Business acquisitions 97, , , ,885 24,540 Intangible assets 33,989 48,650 Total 592, , , , ,513 Summary Balance Sheet Data ($000s) Total assets 6,852,454 6,364,223 5,621,977 4,929,014 4,375,383 Net debt 1,432,425 1,389,315 1,040, , ,829 Long-term debt 946, , , ,000 Shareholders equity 3,826,110 3,420,529 3,075,710 2,723,954 2,386,508 Key ratios: Net debt:shareholders equity 0.37:1 0.41:1 0.34:1 0.32:1 0.39:1 Net debt:total capitalization 0.27:1 0.29:1 0.25:1 0.24:1 0.28:1 Share Data ($) (7) Price: High Low Close Net earnings: Basic Diluted Dividends declared (1) Fiscal 2008 consists of 53 weeks. All other fiscal years consist of 52 weeks. (2) Reflects the impact of the retrospective application of the new accounting standard concerning Goodwill and Other Intangible Assets - CICA Handbook Section Prior years have not been restated. (3) Based on a comparable 52 week period excluding tobacco products. (4) Based on a comparable 53 week period excluding tobacco products. (5) EBITDA (earnings before interest, taxes, depreciation and amortization). (6) EBITDA as a percentage of sales. (7) Share price information is presented on a calendar year basis. Sales ($ millions) 9,986 9,423 8,478 7,786 7,151 EBITDA ($ millions) ,144 1, Diluted Earnings Per Share ($) Retail Selling Space (millions ft. 2 ) Growth % *Fiscal 2008 consists of 53 weeks. All other fiscal years consist of 52 weeks. Growth % Growth % Growth %

5 Investing in a sustainable, national footprint We continue to seek opportunities to strengthen and grow our store portfolio through the construction of new stores, and the relocation and expansion of existing older stores within our network. In 2009, Shoppers Drug Mart/Pharmaprix opened or acquired 114 drug stores, 40 of which were relocations. In addition to this activity, we also completed 22 major drug store expansions. Given our strong balance sheet and financial position, we believe we are well-positioned to capitalize on future consolidation opportunities within the industry and are prepared to continue investing in our retail network. Canadians Opportunities for new formats and services To meet the evolving needs of our patients and customers, we have developed new formats, including Shoppers Simply Pharmacy and Murale, our stand-alone, luxury beauty destinations. At the end of 2009, there were 49 Shoppers Simply Pharmacy stores in medical buildings or clinics, providing patients with additional points of access to our network. We are also enhancing our ability to serve the diverse health needs of Canadians through the growth of our adjacent businesses, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem Technologies Inc., and through our 66 Shoppers Home Health Care stores. Continued growth of Shoppers Drug Mart and increase in retail Pharmaprix stores are now in square footage in % excess of 10,000 square feet 9.9% Shoppers Drug Mart continues to make significant investments in the store network with the goal of increasing the number and average size of our full-service drug stores, allowing us to offer a wider range of products and services. SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

6 pharmacy leadership Shoppers Drug Mart/Pharmaprix pharmacists are trusted and recognized members of our patients health care teams. We are committed to the continuous improvement of patient care, and in an effort to provide our patients with more meaningful services, we have embarked on a number of partnerships within the health care field. approval rating of community pharmacists 73% when it comes to professional honesty and ethics, second only to physicians* 4,800 6,100 Associate-owners and pharmacists Pharmacy technicians * Nanos Research poll SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

7 Partnering with patients, health care teams, organizations and institutions partnerships pharmacy Enhancing patient care With over two million Canadians living with diabetes, and expectations that the number will continue to grow, diabetes management continues to be an important concern for our patients. Shoppers Drug Mart/Pharmaprix has a comprehensive offering of diabetes-related information and tools under the HealthWATCH Diabetes Management Program, including 52 commonly asked questions and answers, developed in conjunction with the Canadian Diabetes Association. Additionally, we are enabling more Shoppers Drug Mart/Pharmaprix pharmacists to become Certified Diabetes Educators through a mentorship program with the Leadership Sinai Centre for Diabetes at Mount Sinai Hospital in Toronto, Ontario. Engaging in community-based health care teams We are working in partnership with Capital Health Nova Scotia on Community Cardiovascular Hearts in Motion, a community-based prevention and management program aimed at decreasing heart and stroke risk factors through behaviour change, including healthy eating, exercise, medication adherence and risk factor management. This three-month program includes a pharmacist intervention protocol requiring a Shoppers Drug Mart pharmacist to participate in the medication recommendation process. With the involvement of our pharmacists, the patient prescription adherence improved from 17% to 64%. The success of Hearts in Motion in the community has led to measurable improvements in the vascular health of participating patients and has clearly identified the importance of a patient s pharmacist in managing heart disease. Reaching out through specialty pharmacy Specialty pharmacy is one of the fastest growing sectors within pharmacy. Shoppers Drug Mart Specialty Health Network Inc. is engaged in the provision of specialty pharmacy services, supporting patients with complex drug therapies for acute and chronic conditions, and is helping grow this aspect of the business in collaboration with physicians and our retail locations. Our pharmacists can now work in conjunction with Shoppers Drug Mart Specialty Health Network to help patients with reimbursement solutions for the specialty prescription drugs required to treat their conditions, which can often be expensive. More recently, we have begun a physician outreach program from our Shoppers Drug Mart/Pharmaprix locations designed to ease the administrative burden for doctors wishing to prescribe specialty pharmaceuticals to their patients. 180 Shoppers Drug Mart/ Pharmaprix Certified Diabetes Educators T A K I N G T H E L E A D B E I N G P A R T O F T H E S O L U T I O N In April 2009, the Company acquired Plasmid Biocommunications Inc., a Toronto-based company specializing in drug reimbursement. Together, using Plasmid s platforms, and and leveraging Shoppers Drug Mart Specialty Health Network Inc. s expertise, we have created the DrugCoverage Reimbursement Hub, a tool which provides our pharmacists with access to reimbursement assistance and resources, program information and clinical support services. The engagement of a pharmacist in the Hearts in Motion program s core team resulted in significant improvement in compliance and adherence to medication recommendations and prescriptions. These encouraging results have prompted us to further explore the pharmacist s role in communitybased prevention and health management programs for improved patient outcomes. Dr. Nicholas Giacomantonio, Cardiologist & Medical Director of Community Cardiovascular Hearts in Motion SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

8 pharmacy opportunities Working with patients, government and third-party payers Alleviating pressure on the health care system As governments across the country struggle with the increasing burden on the health care system due to an aging population and rising costs, community pharmacists have a greater role to play in Canada s health care system. Currently, over four million Canadians are without a family doctor and look to community pharmacies to fill the void as primary providers of health care services, knowledge and advice. Shoppers Drug Mart/Pharmaprix pharmacies are a critical part of the health system infrastructure, helping to reduce health care costs and free up time for family physicians. While we support the expanded role of the pharmacist, our goal is to ensure that our Associate-owners and their pharmacy teams are properly reimbursed for the additional services they provide. An expanded scope of practice This past year, many strides were made to further expand the pharmacist s scope of practice. In Ontario, Bill 179 received Royal Assent in December 2009, giving pharmacists the ability to prescribe specific drugs and provide certain injections. Also, early in 2010, pharmacists prescribing powers were further expanded in Nova Scotia to ensure that patients can get the medicine they need if they are unable to get to their family doctor. These changes recognize that pharmacists are experts in medication management therapy and that their scope of practice should not just be limited to dispensing prescriptions. In the provinces where permitted, including British Columbia and Alberta, we have moved quickly to increase the number of pharmacists who can provide immunizations. Patients like the convenience of coming into their pharmacy to get their vaccinations, reducing the number of patients who visit their doctor or local health clinics for this service. In Ontario, Shoppers Drug Mart pharmacists are active participants in the MedsCheck program, which compensates pharmacists for the advice and guidance they provide to patients regarding their medications. Similar programs are being reviewed in other provinces, including Alberta, where 12 Shoppers Drug Mart stores are involved in the Pharmacy Practice Models Initiative, designed to explore how communitybased pharmacists can be reimbursed for the provision of medication management services. Better serving patients and payers Shoppers Drug Mart/Pharmaprix is working with private payers in an effort to help them reduce their health care costs. Over the past few years we have partnered with the Canadian Auto Workers (CAW) to deliver wellness programming to members, and, more recently, have worked with Rogers Communications on their web-based employee health initiative. In conjunction with the CAW, we host fitness challenges, prepare health risk assessments and provide ongoing education on topics, including cardiovascular disease and diabetes, to active employees and retirees alike. These programs are designed to help patients better manage their health and reduce lost time due to illness, ultimately helping employers reduce costs. T A K I N G T H E L E A D B E I N G P A R T O F T H E S O L U T I O N When the H1N1 pandemic emerged, community pharmacists acted as front-line resources for patient concerns, questions and, in some provinces, vaccinations. It is estimated that pharmacists received over 230,000 patient visits, calls and inquiries related to H1N1 each day during the height of the second wave last fall. In British Columbia alone, more than 6,200 H1N1 vaccinations were administered by over 130 Shoppers Drug Mart pharmacists. The ability for BC pharmacists to administer injections made a big difference in the fight against the H1N1 pandemic. Pharmacists are the most accessible of all health care workers and provided a quick and convenient option for patients looking for H1N1 and seasonal flu vaccinations. Marnie Mitchell, BC Pharmacy Association (BCPhA) CEO 4 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

9 Driving productivity and efficiency in pharmacy efficiencies pharmacy Improving productivity in pharmacy Building on the success of Project Infinity, our front store initiative designed to enhance productivity and improve customer satisfaction, we embarked upon Pharmacy Infinity in Currently being piloted in three stores, the initial phase is focused on workflow in the dispensary, clarifying the roles and responsibilities of each pharmacy team member, labour scheduling and inventory management. The pilot has been received very positively by pharmacy teams who have witnessed how small improvements to processes and better communication can impact the dispensary s overall performance. With more efficient processes in place, pharmacists have more time to deliver professional services to patients. In 2011, we plan to implement the technology phase of Project Infinity to enhance our operating system, further improve inventory management and optimize claims management and adjudication processes. Optimizing workflow in the dispensary As prescription volumes increase with the aging population, our pharmacies need to become more efficient in mainstream tasks, such as dispensing medications. Our pharmacy technicians play a large role in managing workflow and alleviating some of the requirements of the pharmacist in filling prescriptions. We continue to evolve our pharmacy technician training to empower and enable our technicians to complete many of the tasks traditionally performed by the pharmacist. In addition to our bronze, silver, gold and platinum technician certification training programs, this past year we implemented a new tier, Platinum Plus. Pharmacy automation In 2008, we tested automated prescription dispensing systems in a number of our stores. The results of the test were encouraging and, as a result, this past year we installed more than 50 ScriptPro automated dispensing units in high-volume pharmacies and expect that number to reach 150 by the end of These units, containing up to 200 of the most commonly filled prescription drugs, give the pharmacy team more time to engage in counselling and other value-added services. Automation of pharmacy order fulfillment in our Mississauga distribution centre has also generated efficiencies for our business, facilitating faster, more accurate and more efficient execution of store orders. Given its proven effectiveness, we also plan to automate the pharmacy component of the Calgary and Cornwall distribution centres. 63% of Shoppers Drug Mart/ Pharmaprix pharmacy technicians have attained bronze level certification or higher. T A K I N G T H E L E A D B E I N G P A R T O F T H E S O L U T I O N Participating in the Platinum Plus component of the Pharmacy Technician training program provided my colleagues and me an opportunity to learn from other technicians experiences and how to incorporate their best practices into our own workflow. It was great to meet other technicians in our area and to contrast and compare our approach to servicing our patients. Marianne Curtis, Shoppers Drug Mart Pharmacy Technician, Fredericton, New Brunswick The simple modifications to our workflow and the clarification of key roles and responsibilities in the pharmacy have enabled us to fill prescriptions faster and in a more systematic, dependable fashion, which frees up more time for the pharmacy team to spend with patients addressing their total health management. Fabio De Rango, Associate-owner, Oakville, Ontario SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

10 front store differentiation We are anticipating the health, beauty and convenience needs of Canadians by evolving our front store merchandise assortment. In 2009, we continued to gain market share in our core categories due, in part, to our focus on providing our customers with innovative and differentiated products and services. 18.5% private label and exclusive brand penetration rate in 2009 Over 1,700 new private label and exclusive brand SKUs introduced in SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

11 Strong growth in beauty beauty front store A leading beauty destination With approachable, trusted beauty advisors and a wealth of cosmetics, skin care and fragrance brands in an easy to shop and welcoming environment, Shoppers Drug Mart/Pharmaprix is a haven for beauty lovers. In 2009, we continued to increase our presence and market share in beauty, including mass and prestige cosmetics, fragrance and dermatological skin care. This growth was, in part, fuelled by the continued expansion of our BeautyBOUTIQUES. In 2009, we opened 48 additional BeautyBOUTIQUES, bringing the total to 228 across the Shoppers Drug Mart/Pharmaprix store network. Differentiated by our beauty brands Our success in beauty can also be attributed to the introduction of new brands to our cosmetics offering, and our commitment to innovation within our proprietary and exclusive lines. We now house over 117 beauty brands, having added 15 new cosmetics and fragrance lines to our stores in Among these new brands is Bourjois Paris, an exclusive cosmetics line hailing from France, now available in 58 stores. Quo, our own cosmetics line, boasts the leading brush sales in Canada, selling over 800,000 brushes annually. In 2009, we strengthened our leadership position in cosmetics tools and accessories by introducing Quo Professional Brushes, which have already become a staple in the makeup bags of many Canadian women. New formats Murale We are giving more Canadians access to global beauty brands and an elevated level of service and expertise with the continued roll-out of Murale, our innovative, stand-alone beauty format. This past year, we expanded our reach with the opening of four additional Murale locations: Toronto, Vancouver and two in Calgary. Murale features one of the finest assortments of beauty products, as well as a broad selection of dermatological skin care products catering to the growing number of consumers who are looking to prevent signs of aging and maintain a healthy, youthful appearance. T A K I N G T H E L E A D C R E A T I N G G R O W T H What truly sets us apart is the friendly, unbiased and professional service that our beauty advisors provide every day. We are committed to their continued development and offer online learning opportunities to enhance their customer service skills, as well as support their knowledge of the products we carry. In the evolution of its beauty offering, Shoppers Drug Mart/ Pharmaprix has created a channel that provides Canadians with an accessible, comfortable, non-biased and convenient environment in which to shop. We are so pleased to be a part of this customer experience and look forward to continued growth and expansion with Shoppers Drug Mart/Pharmaprix. Michael McLaughlin, President and CEO, Quadrant Cosmetics Corp. SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

12 front store private label Focused on innovation and value Providing a quality private label alternative Our private label program is a key point of differentiation in our merchandising strategy. Consumer acceptance and purchasing of private label brands has increased, driven by tougher economic times and more innovation within proprietary product offerings. This past year, we introduced over 1,700 new private label and exclusive products and now have more than 6,600 core items available in store. As a result of new product introductions, changes in consumer behaviour and increased emphasis on our program offerings, our corporate and exclusive brand penetration rose to 18.5% of front store sales in Developing new brands Our most substantial private label launch in 2009 was the introduction of Baléa, a comprehensive range of health and beauty lifestyle products. Baléa provides customers with over 130 quality items, including everything from lip balm to shampoo, all at affordable prices. We will continue to grow Baléa in 2010 with the addition of a men s grooming range and new face care products. Within the socks and hosiery category, we introduced two new proprietary brands, Soxsense and Allude, and we revitalized our hair care tools and accessories section this past year with the launches of Stylize and Jolie. Future opportunities for growth In 2010, we will utilize private label products to optimize our offering within two key front store categories: food and baby. Research indicates that following the birth of a child, a family increases their household spend by 20%. In order to secure an even greater share of mom s shopping trips and maximize her transactions within our stores, we plan to improve our product assortment and enhance our value proposition in the baby aisle. In food, we have expanded our Food Essentials offering to more than 630 stores and see greater potential for convenient food options within our new large format stores. T A K I N G T H E L E A D C R E A T I N G V A L U E Shoppers Drug Mart/Pharmaprix was recently recognized with the Store Brand Leadership Award for the Canadian Retail Segment from Private Label Magazine for our multitiered assortment of corporate and exclusive brands. I enjoy shopping at Shoppers Drug Mart. Not only is it near my home, it is easy to shop for the things I need, from healthy food items to vitamins to cosmetics. As a family we re pretty health conscious and we love the Nativa brand of food and snacks. Beverly Day, Customer, Kamloops, BC 8 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

13 A unique offering of products and services convenience & value front store More stores, more hours One of the key pillars of our value proposition is convenience. Our stores are strategically located in cities, towns and neighbourhoods all across Canada, providing our customers and patients with easy access to the health, wellness and household products they want and need for their families. And with over 420 Shoppers Drug Mart/Pharmaprix stores open to midnight or 24 hours a day, we are there for our customers and patients when they need us. We also offer many convenient services in-store with more than 615 Canada Post outlets across the network, and digital photo services available in more than 685 stores. Expanding loyalty with Shoppers Optimum The Shoppers Optimum loyalty card program has over 9.9 million active cardholders and continues to be one of the largest and most successful retail loyalty card programs in Canada. In 2009, we undertook several initiatives to further strengthen this program and expand its reach. The Very Important Baby program, launched earlier in the year, provides over 170,000 members, including parents and grandparents, with rewards, relevant information and special offers. The Shoppers Optimum Plus program, which was launched in 2008 and offers additional rewards, incentives and exclusive offers to our most valued customers, experienced continued growth this past year. Delivering value to our customers We understand that our customers are looking for greater value when making their purchasing decisions. Our in-store merchandising assortment encompasses a wide range of price points from which customers can choose, depending on their lifestyle and budget. In addition to our diversified product assortment, Shoppers Drug Mart/Pharmaprix provides Canadians with greater savings on essential, everyday items through our weekly promotional flyer. A unique component of our value proposition are the promotional events we provide through our Shoppers Optimum program. These popular promotions, whether a 20 times the points event or a bonus redemption offer, give our customers even greater value for their dollar. T A K I N G T H E L E A D C R E A T I N G V A L U E To give Canadians a faster way to accumulate Shoppers Optimum points, we introduced the Shoppers Optimum MasterCard, a co-branded credit card, allowing customers to earn even more points on products and services they purchase in our stores and wherever they shop. Rewards for a very important baby and you. I never used to shop at Shoppers Drug Mart but a friend told me that the Shoppers Optimum points add up quickly for free products. She was absolutely right and now I am hooked! I love the VIB program and the fact that I get more points back when I redeem because I am an Optimum Plus customer. I can t wait for my Shoppers Optimum MasterCard to arrive so I can earn even more points. Petnoy Rajapakse, Customer, New Dundee, ON SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

14 Message to shareholders Partners in growth Shoppers Drug Mart/Pharmaprix has a proven track record of delivering growth and 2009 was no different. Working in partnership with employees in our corporate and regional offices, and our Associateowners and their store teams, we continued to grow our business by executing on our key strategic priorities and initiatives. In 2009, we achieved sales of approximately $10.0 billion, an increase of 6.0% over the prior year, with our pharmacy and front store businesses each contributing to our strong sales performance. In the front store, same-store sales, excluding tobacco products, grew by 4.0%, exceeding our expectations for the year. Our efforts to differentiate our product offering, expand the store network and provide our customers with convenient products and services resulted in sales and market share gains in all core categories. Pharmacy same-store sales increased 5.7%, propelled by strong growth in the number of prescriptions filled. Through the addition of new dispensaries, the acquisition of smaller pharmacies and the growth in the overall market due to an aging demographic, our market share within pharmacy continues to grow and now stands at 20.4%. In 2009, we continued to expand our offering within our adjacent health care businesses, focusing on long-term care, home health care and specialty pharmacy. Top-line growth, improved purchasing synergies and productivity and efficiency gains, partially offset by higher operating costs and increased amortization tied to our strategic growth and store network expansion initiatives, resulted in a year-over-year increase in operating income and net earnings. For the year, net earnings increased 5.6% to $585 million, or $2.69 a share. Growing our footprint Shoppers Drug Mart/Pharmaprix is one of the most impressive Canadian retail stories in terms of store network expansion. Over the past five years, we have increased our total retail selling space, at a compound annual growth rate of 10.7%, to in excess of 11.9 million square feet. In 2009, we opened or acquired 114 drug stores, 40 of which were relocations, and completed 22 major drug store expansions. We also opened four Murale stores during the year. Looking ahead, we will continue to invest in the expansion and optimization of the store network. In 2010, we plan to allocate $560 million to capital expenditures, approximately 70% of which will be invested in the store network. This investment should result in an increase in selling space of between 8% and 9% through the addition of 105 to 115 new drug stores, approximately 45 of which will be relocations and 10 of which will be Shoppers Simply Pharmacy formats, and through the completion of between 25 and 30 drug store expansions. Creating value and differentiation Two key behavioural trends are influencing customer purchasing decisions in these challenging economic times. First, consumers are much more value-conscious and tend to purchase products more often on promotion. Understanding this demand for value, we have invested aggressively in our marketing, promotion and advertising vehicles to drive sales and traffic in our stores and plan to continue doing so in the coming year. An important part of our overall value proposition, and a unique promotional tool, is the Shoppers Optimum loyalty card program. In 2009, an additional 600,000 Canadians joined the program, bringing the total number of active cardholders to over 9.9 million. These numbers demonstrate the value of the program and the desire on the part of consumers to get more for their money. The continued growth of the Shoppers Optimum program bodes well for future sales growth and share gains, as members of the program frequent our stores more often and have an average basket size which is 60% greater than non-cardholders. Second, in recessionary times, consumers are more inclined to purchase private label products. Our strategy is to provide consumers with a multi-tier offering of quality private label and 10 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

15 exclusive brands from which to choose, depending on their preference and budget. We believe that one private label name cannot be applied to all categories and, therefore, have created distinct private label lines tailored to specific categories. In essence, we have created a house of brands, with exciting new product finds for our customers every time they visit our stores. With increasing numbers of customers purchasing private label products and further innovation within this area, we continue to experience positive growth in our private label and exclusive brand penetration rate, which now stands at 18.5% of front store sales, up from 16.9% a year ago. Our long-term goal is to grow our private label and exclusive brands penetration rate to 25%, resulting in better value for our customers, increased loyalty and opportunities for enhanced margins and profitability. Generating efficiencies With the reality of increased financial pressure on community pharmacy and continued economic strains on consumers, a strategic approach to managing costs within all areas of the business is required. With this in mind, we have implemented two key initiatives to increase productivity and efficiency within our operations. Project Infinity, first launched in 2008, is a front store initiative designed to improve operational efficiency, reduce costs and strengthen the capabilities of store leadership and engagement of staff. At the close of 2009, 68% of stores had received Project Infinity certification. The differences between a certified and a non-certified store are striking. In-stock position improves dramatically, positively impacting sales, inventory management and backroom efficiency, and store employees are more engaged in their roles. These changes resulted in an improvement of ten percentage points in customer service index scores at Infinity-certified stores. With these results in hand, we have a continued commitment to certification, with the goal of having 90% of Shoppers Drug Mart/Pharmaprix stores certified by the end of We are now transferring the learnings from Project Infinity to the dispensary. In 2009, we began to pilot the first phase of Pharmacy Infinity in three stores. This initiative is focused on standardizing our approach to regular functions within the pharmacy and designing solutions to make day-to-day operations easier and more efficient. It is our hope that these changes, coupled with future investments in technology, will streamline processes in the dispensary, allowing pharmacists to spend more time delivering professional services to patients, while enhancing returns in this key area of our business. Growing our capacity to serve our patients Two-thirds of drug store shoppers take at least one prescription medication per day, with half of them requiring three or more per day*. With an aging population, that number will continue to grow in the coming years and we expect that community pharmacy will have an even larger role to play in helping to reduce overall health care costs in a more integrated health care system. Throughout our 48 years of operation, we have continuously evolved our pharmacy service offering to meet the needs of our patients and, as a result, our pharmacists are recognized as an important, reliable and trusted member of their patients health care team. The pharmacist s knowledge and expertise extends beyond just dispensing medications, and we are encouraged that an expanded role and scope of practice for the profession has been recognized in many provinces of the country. At Shoppers Drug Mart/Pharmaprix we support and embrace these changes. At the heart of Shoppers Drug Mart/Pharmaprix is the practice of community pharmacy. Our Associate-owners and their pharmacy teams are passionate about providing the best patient care in the communities they serve. They are committed to continuous learning and development, evolving their knowledge and skills and responding to the health and wellness needs of their patients. With over 4,800 Associate-owners and pharmacists and 6,100 pharmacy technicians in stores across Canada, we are well-positioned to assist governments and other payers in their efforts to control escalating health care costs. By working in sync with other health care professionals, including doctors, nurses, therapists and caregivers, we believe we can further enhance the community-based approach to health and wellness, ultimately resulting in better patient care. This collaboration with other professions will allow us to better assist our patients in the management of diseases, monitoring of medications, and identification and prevention of health risk factors. The end result should be less strain on the health care system and an overall reduction in costs. In 2010, we will continue to work with our partners to ensure the sustainability of community pharmacy and the long-term viability of this vital health care resource. Future growth Although the Canadian economy has shown signs of recovery, consumer confidence has not yet returned to the levels of a few years ago and it is our belief that the consumer will continue to act with caution throughout However, given the strength of our brand and the dedication and commitment of our employees, Associate-owners and their teams at store level, we continue to see opportunities to grow our business by investing in our store network, enhancing our service offerings and optimizing our merchandising initiatives, while at the same time driving costs out of our operations. We will also focus on the further integration of our front store and pharmacy businesses, providing even more comprehensive health, beauty and convenience solutions for our customers and patients. Our Associate-owners and their store teams continue to be our most valuable resource. I want to thank them for their dedication this past year and also express my thanks to those employees in our corporate and regional offices. I believe that we have a winning formula at Shoppers Drug Mart/Pharmaprix and that together, with our partners, we will continue to grow in Jürgen Schreiber, President and Chief Executive Officer *Profiles Consumer Report, 2009 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

16 Message from the Chair Dear Fellow Shareholders: On behalf of the Board of Directors, I am pleased to report that despite the continued pressures of a challenging economic environment, Shoppers Drug Mart/Pharmaprix recorded another year of growth in sales and profitability. This strong performance clearly demonstrates that the Company s strategic direction, coupled with key investments in store development, pharmacy, merchandising, adjacent businesses and employee development, provides a solid platform from which to grow the business and, ultimately, enhance shareholder value. In 2009, Shoppers Drug Mart/Pharmaprix grew its total selling square footage by 9.9% and generated net earnings growth of 5.6%. Growth of any nature is remarkable in an economic downturn and I want to congratulate the Shoppers Drug Mart/ Pharmaprix team on this achievement. Your Company continues to expand and optimize its retail footprint, investments made possible by the maintenance of a strong balance sheet and an overall solid financial position. The Board is confident in the Company s operating, investing and financing policies and disciplines, and believes that the Company is well-positioned to address the challenges in the marketplace and capitalize on opportunities for future growth. The Board is focused on total shareholder returns and, in that regard, I am pleased to report that we recently declared a dividend payment of 22.5 cents per common share, representing an increase in the Company s quarterly dividend payments of approximately 5%, resulting in an annualized dividend of 90 cents per common share. This increase is in line with our rate of growth in net earnings and maintains our dividend payout ratio at a sector-leading 33%. We continue to strengthen the composition of the Board, ensuring that we have the necessary competencies, experience and knowledge to make important and effective decisions on behalf of our shareholders. As part of its mandate, the Nominating and Governance Committee is responsible for Board evaluation and, in 2009, did so with the assistance of an external consultant. The evaluation process also included a peer evaluation of each Director, including the Chair of the Board and each Committee Chair. The results of these and other methods of evaluation are used to determine whether the Board and its Committees are functioning effectively and to assess the appropriateness of the current mix of Directors. In keeping with this mandate, the size of the Board was increased from 10 to 11 members in 2009; joining the Board in May was James Hankinson, and in July, Sarah Raiss. Both bring a wealth of complementary knowledge and experience to the Board and have already provided meaningful input and guidance to the governance process. I invite you to read more about each Board member s background and our corporate governance practices in the Management Proxy Circular, which is available at As a Board, we are taking an active role in the oversight of the Company s strategic direction and key initiatives. In conjunction with our regular meetings, the Board takes the opportunity to meet with key members of the Senior Management Team in order to better understand the successes, opportunities, challenges and risks to the business units within the Company. We are committed to providing shareholders with transparent, timely and complete reporting on the performance of the Company. We are well informed of the potential changes and challenges to the retail pharmacy industry and, more importantly, the Audit Committee is actively engaged in evaluating and overseeing the risks associated with these changes and other risks facing the business. Our Human Resources and Compensation Committee was also very active this past year, working closely with senior management to ensure that the Company s total rewards programs allow Shoppers Drug Mart/Pharmaprix to attract, retain and develop the best employee talent in the market. We believe that well-balanced compensation programs must motivate and reward participants to deliver meaningful shortterm operating and financial results, while at the same time focus their attention on long-term strategic priorities and value creation so as to promote alignment of participants interests with the interests of the Company s shareholders. With the Canadian economy showing signs of recovery, your Board believes that Shoppers Drug Mart/Pharmaprix is wellpositioned to continue to grow and gain share in a growing market. In closing, I would like to thank Jürgen Schreiber, the Company s management and employees, as well as our network of Associate-owners and their teams at store level, for their efforts and contributions to our success in The dedication and commitment of these individuals, who work tirelessly, day in and day out, to satisfy the needs of our customers and patients, ensures that we will continue to build upon our position as Canada s leading retailer in health, beauty and convenience. David Williams, Chair of the Board of Directors 12 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

17 Financial Section 13 Management s Discussion and Analysis 52 Management s Report 52 Auditors Report 53 Consolidated Financial Statements 57 Notes to the Consolidated Financial Statements Other Information 84 Corporate Social Responsibility & Sustainability 92 Corporate Directory IBC Shareholder Information annual management s discussion and analysis As at March 11, 2010 The following is a discussion of the consolidated financial condition and results of operations of Shoppers Drug Mart Corporation (the Company ) for the periods indicated and of certain factors that the Company believes may affect its prospective financial condition, cash flows and results of operations. This discussion and analysis should be read in conjunction with the consolidated audited financial statements of the Company and the notes thereto for the 52 week period ended January 2, 2010 (the consolidated financial statements ). The fiscal year of the Company consists of a 52 or 53 week period ending on the Saturday closest to December 31. SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

18 Management s Discussion and Analysis Forward-looking Information and Statements This document contains forward-looking information and statements which constitute forward-looking information under Canadian securities law and which may be material regarding, among other things, the Company s beliefs, plans, objectives, strategies, estimates, intentions and expectations. Forward-looking information and statements are typically identified by words such as anticipate, believe, expect, estimate, forecast, goal, intend, plan, will, may, should, could and similar expressions. Specific forward-looking information in this document includes, but is not limited to, statements with respect to the Company s future operating and financial results, including sales expectations as set out under Results of Operations Fiscal 2009 Sales and Selected Annual Information Sales, its capital expenditure plans as set out under Strategies and Outlook and Liquidity and Capital Resources Cash Flows Used in Investing Activities, its future dividend policy as set out under Capitalization and Financial Position Dividend Policy and the ability to execute on its future operating, investing and financial strategies as set out under Strategies and Outlook. The forward-looking information and statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking information and statements contained herein. Inherent in the forward-looking information and statements are known and unknown risks, uncertainties and other factors beyond the Company s ability to control or predict, which give rise to the possibility that the Company s predictions, forecasts, expectations or conclusions will not prove to be accurate, that its assumptions may not be correct and that the Company s plans, objectives and statements will not be achieved. Actual results or developments may differ materially from those contemplated by the forward-looking information and statements. The material risk factors that could cause actual results to differ materially from the forward-looking information and statements contained herein include, without limitation: the risk of adverse changes to laws and regulations relating to prescription drugs and their sale, including pharmacy reimbursement programs and the availability of manufacturer allowances, or changes to such laws and regulations that increase compliance costs; the risk of adverse changes in economic and financial conditions in Canada and globally; the risk of increased competition from other retailers; the risk of an inability of the Company to manage growth and maintain its profitability; the risk of exposure to fluctuations in interest rates; the risk of material adverse changes in foreign currency exchange rates; the risk of an inability to attract and retain pharmacists and key employees; the risk of an inability of the Company s information technology systems to support the requirements of the Company s business; the risk of changes to the estimated contributions of the Company in respect of its pension plans or post-employment benefit plans which may adversely impact the Company s financial performance; the risk of changes to the relationships of the Company with third-party service providers; the risk that the Company will not be able to lease or obtain suitable store locations on economically favourable terms; the risk of adverse changes to the Company s results of operations due to seasonal fluctuations; risks associated with alternative arrangements for sourcing generic drug products, including intellectual property and product liability risks; the risk that new, or changes to current, federal and provincial laws, rules and regulations, including environmental and privacy laws, rules and regulations, may adversely impact the Company s business and operations; the risk that violations of law, breaches of Company policies or unethical behaviour may adversely impact the Company s financial performance; property and casualty risks; the risk of injuries at the workplace or health issues; the risk that changes in tax law, or changes in the way that tax law is expected to be interpreted, may adversely impact the Company s business and operations; the risk that new, or changes to existing, accounting pronouncements may adversely impact the Company; the risks associated with the performance of the Associate-owned store network; and the risk of damage to the reputation of brands promoted by the Company, or to the reputation of any supplier or manufacturer of these brands. 14 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009

19 This is not an exhaustive list of the factors that may affect any of the Company s forward-looking information and statements. Investors and others should carefully consider these and other factors and not place undue reliance on the forward-looking information and statements. Further information regarding these and other risk factors is included in the Company s public filings with provincial securities regulatory authorities. The forward-looking information and statements contained in this document represent the Company s views only as of the date hereof. Forward-looking information and statements contained in this document about prospective results of operations, financial position or cash flows that are based upon assumptions about future economic conditions and courses of action are presented for the purpose of assisting the Company s shareholders in understanding management s current views regarding those future outcomes and may not be appropriate for other purposes. While the Company anticipates that subsequent events and developments may cause the Company s views to change, the Company does not undertake to update any forward-looking information and statements, except to the extent required by applicable securities laws. Additional information about the Company, including the Annual Information Form, can be found at Overview The Company is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Québec). As at January 2, 2010, there were 1,170 Shoppers Drug Mart/Pharmaprix retail drug stores owned and operated by the Company s licensees ( Associates ). An Associate is a pharmacist-owner of a corporation that is licensed to operate a retail drug store at a specific location using the Company s trademarks. The Company s licensed stores are located in prime locations in each province and two territories, making Shoppers Drug Mart/Pharmaprix stores among the most convenient retail outlets in Canada. The Company also licenses or owns 49 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and six luxury beauty destinations operating as Murale. The Company has successfully leveraged its leadership position in pharmacy and its convenient store locations to capture a significant share of the market in front store merchandise. Front store merchandise categories include over-the-counter medications ( OTC medications ), health and beauty aids ( HBA ), cosmetics and fragrances (including prestige brands), everyday household needs and seasonal products. The Company also offers a broad range of high-quality private label products marketed under the trademarks Life Brand, Quo, Balea, Everyday Market, Bio-Life, Nativa and Easypix, among others, and value-added services such as the HealthWATCH program, which offers patient counselling and advice on medications, disease management and health and wellness, and the Shoppers Optimum program, one of the largest retail loyalty card programs in Canada. In fiscal 2009, the Company recorded consolidated sales of approximately $10.0 billion. Under the licensing arrangements with Associates, the Company provides the capital and financial support to enable Associates to operate Shoppers Drug Mart, Pharmaprix, Shoppers Simply Pharmacy and Pharmaprix Simplement Santé stores without any initial investment. The Company also provides a package of services to facilitate the growth and profitability of each Associate s business. These services include the use of trademarks, operational support, marketing and advertising, purchasing and distribution, information technology and accounting. In return for being provided these and other services, Associates pay fees to the Company. Fixtures, leasehold improvements and equipment are purchased by the Company and leased to Associates over periods ranging from two to 15 years, with title retained by the Company. The Company also provides its Associates with assistance in meeting their working capital and long-term financing requirements through the provision of loans and loan guarantees. Under the licensing arrangements, the Company receives a substantial share of Associate store profits. The Company s share of Associate store profits is reflective of its investment in, and commitment to, the operations of the Associates stores. SHOPPERS DRUG MART CORPORATION ANNUAL REPORT

20 Management s Discussion and Analysis (continued) The Company operates in Québec primarily under the Pharmaprix and Pharmaprix Simplement Santé trade names. Under Québec law, profits generated from the prescription area or dispensary may only be earned by a pharmacist or a corporation controlled by a pharmacist. As a result of these restrictions, the licence agreement used for Québec Associates differs from the Associate agreement used in other provinces. Pharmaprix and Pharmaprix Simplement Santé stores and their Associates benefit from the same infrastructure and support provided to all other Shoppers Drug Mart and Shoppers Simply Pharmacy stores and Associates. The Company has determined that the individual Associate-owned stores that comprise its store network are deemed to be variable interest entities and that the Company is the primary beneficiary in accordance with the Canadian Institute of Chartered Accountants Accounting Guideline 15, Consolidation of Variable Interest Entities ( AcG-15 ). As such, the Associate-owned stores are subject to consolidation by the Company. However, as the Associate-owned stores remain separate legal entities from the Company, consolidation of these stores has no impact on the underlying risks facing the Company. (See note 1 to the consolidated financial statements of the Company.) The Company also owns and operates 66 Shoppers Home Health Care stores. These retail stores are engaged in the sale and service of assisted-living devices, medical equipment, home-care products and durable mobility equipment to institutional and retail customers. In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services, and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities in Ontario and Alberta. Strategies and Outlook The Company s business strategies are designed to drive sales growth, maximize gross margin dollars and operating cash flow, leverage cost reduction opportunities and build customer loyalty. The Company believes that proper execution of its strategies will strengthen its position as the licensor of Canada s leading drug store group, thereby generating increased revenue and profitability, which, in turn, should enhance long-term shareholder value. In the opinion of the Company, the demographic shift and aging population Canada is experiencing will continue to fuel strong growth in the pharmacy, health and beauty markets. The Company believes that it remains well positioned to capitalize on this projected growth given its strong brand recognition, the strength of its Associate-owned store network, its innovative product and service offerings in pharmacy, health and beauty, its convenient store locations and its investments in adjacent health and beauty businesses. The dedication of the Company s Associate-owners, combined with its ability to recruit, develop and retain talented pharmacists and technicians, have been, and continue to be, primary contributors in the Company establishing itself as a leader in the practice of community pharmacy and health. Going forward, the Company intends to build upon this leadership position by continuing to deliver innovative pharmacy products, services and programs that aim to improve patient health outcomes, build loyalty with patients and third-party payers, increase market share and enhance profitability. Additionally, the continued rollout of the Shoppers Simply Pharmacy and Pharmaprix Simplement Santé stores is expected to enhance convenience for patients by providing them with additional points of access to the Company s national network, while enabling the Company to capture prescriptions at the point of origin, thus providing an additional platform for growth. Given the expertise and talent of its beauty advisors, the Company has established itself as one of Canada s premier beauty destinations. Through the expansion of its BeautyBOUTIQUES within Shoppers Drug Mart and Pharmaprix stores, the addition of exclusive skin care, cosmetics and fragrance brands, and a continued focus on training and development of its beauty staff, the Company believes it will increase customer satisfaction and loyalty, and build market share. The Company also believes that Murale, its innovative, stand-alone luxury beauty concept showcasing the powerful combination of health and beauty and offering customers access to exclusive prestige brands and an elevated level of service, will strengthen its already well-established presence in the category. 16 SHOPPERS DRUG MART CORPORATION ANNUAL REPORT 2009