Financial Highlights/Common Share Market Information Letter to Our Shareholders Letter from the Chief Financial Officer Eleven Year Summary Quarterly Summary Management’s Discussion and Analysis Management’s Responsibility for Financial Statements Auditors’ Report Consolidated Statements of Financial Position Consolidated Statements of Earnings and Comprehensive Income / Consolidated Statements of Retained Earnings and Accumulated Other Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Directors and Officers Corporate Information 56 57 82 83 FINANCIAL HIGHLIGHTSFiscal 2009 Results for the year (in millions) Total revenues Interest expense, net Earnings before non-operating activities, unusual items and income taxes Non-operating activities Restructuring expense Unusual items – gain Income taxes Net earnings Year end position (in millions) Inventories Working capital Total assets Total long-term obligations, including principal payments on long-term obligations due within one year Shareholders’ equity Per share of capital stock Net earnings (basic reported) Net earnings (basic operating) Dividends declared Shareholders’ equity * Restated 2008* $ 5,733.

10. 0 383. 2 – (38.

8) 131. 3 290. 7 $ 968. 3 1,148.

8 3,237. 3 Comparable 2007** $ 5,844. 9 11. 5 376. 7 – (82. 2) 152. 1 306. 8 $ 879.

7 739. 8 2,974. 7 $ 5,200.

6 25. 2 355. 0 9. 3 (1. 9) 112. 9 234.

7 $ 852. 3 1,114. 7 3,404. 8 350. 7 1,657. 5 $ $ $ 2. 18 2. 23 – 15.

40 $ $ $ 364. 6 1,483. 2 2. 70 2. 43 – 13.

78 $ $ $ 372. 1 1,066. 4 2. 85 2. 25 – 9. 91 Restated 2008 represents the 52-week period ended January 31, 2009, adjusted for the new accounting standard issued under The Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3064, “Goodwill and Intangible Assets”. * Comparable 2007 represents the 52-week period ended February 2, 2008, adjusted to reflect the change in fiscal year end; the adoption of the new accounting standards for inventories, goodwill and intangible assets and the reversal of the impact of the restatement resulting from the change to the Company’s financial instruments accounting policy choice regarding recognition of embedded derivatives.

COMMON SHARE MARKET INFORMATION (Toronto Stock Exchange – Trading Symbol SCC) First Quarter 2009 2008 High Low Close Average daily trading volume $ 21. 4 $ 17. 74 $ 19. 96 56,805 $ 24. 19 $ 19. 00 $ 23. 23 41,277 Second Quarter 2009 2008 $ 24.

48 $ 18. 86 $ 20. 73 29,324 $ 25. 20 $ 19. 98 $ 20. 20 39,925 Third Quarter 2009 2008 $ 22. 41 $ 20. 05 $ 22.

15 22,488 $ 21. 99 $ 15. 22 $ 16. 80 101,950 Fourth Quarter 2009 2008 $ 26. 18 $ 22.

00 $ 24. 08 21,920 $ 20. 39 $ 16.

11 $ 20. 39 45,049 Certain information in the accompanying “Letter to Our Shareholders” and “Letter from the Chief Financial Officer” is forward-looking and is subject o important risks and uncertainties, which are described in the “Cautionary Statement Regarding Forward-looking Information” on page 9 of this Annual Report. 2009 Annual Report 1 LETTER TO OUR SHAREHOLDERS A Message from Dene Rogers, President and Chief Executive Officer “Improving the Lives of Canadians” 2009 was a challenging year marked by a deep recession.

The year began with the highest job losses since 1976 and the lowest consumer confidence index in almost three decades.Sears was prepared for the recession’s effect on sales and adjusted inventories accordingly, which were lowered by $116 million at year-end versus 2008. While same store sales were -6. 8%, margins were flat to 2008 and expenses were $215.

6 million less. Operating EBITDA declined 4. 3% to $497. 6 million, and the marginal rate to revenue of 9. 57% was 50 basis points higher than 2008. Total revenues (MM) Same store sales Gross margin rate Operating EBITDA (MM) Cash, restricted cash, investments (MM) (Year-end) Cash to debt ratio 2009 $5,200. 6 -6. 8% 38.

93% $497. 6 $1,397. 4. 0 to 1 2008 $5,733. 2 38. 97% $520. 1 $971.

5 2. 7 to 1 Oasis Cosmetics Shop The traditional cosmetics selling model is being re-invented at Sears to incorporate new product categories, such as mass-prestige, and a more fulsome beauty product assortment including hair care accessories. In fall, two pilot cosmetics shops were launched, called “Oasis”, the results of which have proven encouraging. Gift Registry In 2008, Sears initiated plans to rapidly grow the Gift Registry business and by the end of 2009, Sears had full registry services in 107 of 122 department stores.The selection of product includes traditional gift-giving brands such as Maxwell & Williams, Denby, Mikasa, Cuisinart, KitchenAid, Krups, Breville and Sears own brand, Whole Home. The advantage of the gift registry at Sears is that couples who may already possess many traditional household items such as small appliances and housewares can register for less traditional, but much needed, gift ideas such as travel, lawn mowers, cordless drills, refrigerators, and home improvements. Custom Furniture Sears now offers Canadians a very comprehensive range of customized home urnishings including more than 1,500 individual fabric and leather options and a broad range of furniture styles. Sears is unique in offering custom furniture and does not charge customers a premium for this service.

Very importantly, Sears has decreased the average order-fulfillment time for custom furniture to six weeks, making custom furniture very convenient. Customer response is encouraging, especially combined with Sears generous deferred financing terms. Major Appliances Natural Resources Canada named Sears the ENERGY STAR® Retailer of the Year for the second consecutive year.With the increased demand of Canadians for higher energy-efficient appliances, Sears increased its sales of top-tier ENERGY STAR® appliances by 85% as compared to 2008.

Sears also took steps to introduce fashion into its appliance assortment with more than 400 new style/colour choices including titanium, turquoise, champagne and ginger to satisfy the increasingly diverse individual preferences of Canadians. The above financial results are remarkable in a recession and represent the accomplishments of thousands of dedicated and hard-working Sears associates.These associates are committed to help Sears become Canada’s #1 retailer by constantly offering products and services that improve our customers’ lives. The Board of Directors and my fellow leaders sincerely appreciate the capability and dedication of our associates and their accomplishments in 2009. Following is a selection of our associates’ accomplishments: New Apparel Brand Launches During 2009, Sears reinvigorated its women’s apparel business to increase its relevance to Canadians who seek the latest fashion trends at affordable prices.In spring, “Liz & Co.

” by Liz Claiborne was launched which brought designer-inspired women’s fashions to Sears customers at wallet-friendly prices. In fall, Attitude® for women and Distinction® for men were re-launched, both attracting a younger-minded customer. Attitude was showcased at the prestigious LG Fashion Week and received media and industry accolades. In addition, Sears entered into exclusive relationships with other younger-minded brands including Mac & Jac, Press, Shirt by Shirt, Kensie and Kensiegirl. 2 2009 Annual ReportHome Services Sears continued to expand its range of home improvement services to become an end-to-end provider, a one-stop shop. For example, a customer wanting to reduce home energy expenses can obtain the full range of services and products from Sears: arrange for an energy audit, purchase and have installed high-efficiency products and improvements, use Sears deferred finance program, and Sears will prepare applicable government tax rebate forms. Sears customers then benefit from the energy savings and receive government energy rebates.Home Services are now offered in over 150 locations coast to coast including 90 full-line stores, and a growing number of Sears Home stores, Dealer stores and Sears Catalogue Agents.

Sears. ca The new sears. ca website is the most advanced retail website in Canada. The site now provides best-in-class navigation, search, checkout, speed and reliability, and grew its product offering by 76,000 skus giving it Canada’s largest online retail assortment.

The site has been enhanced to allow customers to ask questions and receive answers, either directly on the site or via the Sears YouTube channel.Live Green Sears sustainability initiatives continued to roll out in 2009 with sales of eco-products increasing 45% in 2009. Some of the newest product introductions and services were: • ENERGY STAR-rated windows, for homeowners who want to reduce home heating expenses • Water softener replacement; in a unique program, Sears pays for carbon offsets for the disposal of old water softeners • Heys “Eco Orbis” luggage made from 100% recycled plastic • A complete line of PVC-free bath products from our private brand, “Whole Home”Sears in Your Community Sears associates enjoy being involved in the various philanthropic causes the company sponsors. The Company focuses on childhood health and education needs. To meet health needs, Sears sponsors 17 children’s hospitals through funds raised via the Sears National Kids Cancer Ride.

To meet education needs, Sears sponsors the Boys and Girls Clubs of Canada, Scouts Canada and Girl Guides, and the Sears Drama Festival which attracts participation from over 300 high schools in Ontario. Sears has extended its charitable activities for 2010.The Hospital for Sick Children in Toronto opened the new Sears Cancer Clinic which will be funded by the Sears Canada Charitable Foundation. This open, bright, and interactive space provides more comfortable and functional space and facilities for children and parents from across Canada as one of the elite hospitals in North America.

In addition, the Sears Drama Festival, already established in Ontario, will be launched in British Columbia and will give gifted Canadian artists the assistance to advance their performance skills. 010 promises to be a year similar to 2009, with high unemployment, the expiration of the stimulus package and continued low consumer confidence. Despite these circumstances, Sears will continue to focus on being strategic and implement new and innovative products and services to improve the lives of our customers. In closing, I would like to again acknowledge the hard work and skills of the thousands of Sears associates who are dedicated to serving Canadians better than any other retailer and who are taking Sears to become Canada’s #1 retailer.Sincerely, Dene Rogers President and Chief Executive Officer 2009 Annual Report 3 This page has been intentionally left blank. 4 2009 Annual Report Letter from the Chief Financial Officer Sears Canada concluded fiscal 2009 in solid financial shape. Here are a few of the financially-related highlights from the year: Total revenues and same store sales declined 9. 3% and 6.

8% in 2009, respectively, and were negatively impacted by the challenging economic environment.Revenues were also negatively impacted by the unseasonably cool summer and warm winter throughout many parts of Canada causing many consumers to forgo purchases of seasonal goods such as swimwear, air-conditioners and snow blowers. Softer sales in the internet and catalogue business were caused by a 16% planned reduction of unprofitable catalogue impressions. The stronger Canadian dollar motivated consumers to cross border shop. Despite the challenging economy, Sears has remained Canada’s #1 retailer for women’s and men’s apparel and has the largest market share in major appliances and furniture.In a competitive environment of deep discounting, Sears managed to maintain margins flat to 2008 while reducing the year-ending inventory by $116. 0 million through a reduction of unproductive aged merchandise and negotiations of better terms with suppliers. This resulted in a higher balance of in-season goods from which customers were able to shop.

The Company also maintained profitability through disciplined expense management, which included controlled variable spending with revenue levels and reduced fixed expenses.Total expenses were reduced $215. 6 million. The Company improved an already-strong balance sheet by increasing cash, restricted cash and investments by $426. 1 million to $1,397. 6 million generated primarily through operating activities. Sears is well positioned to operate should the current economic conditions worsen or persist in fiscal 2010, and expects to repay the $300.

0 million of medium term notes which come due in 2010 primarily through cash generated from operations.Capital investments were closely monitored in fiscal 2009, with continued investment in key areas such as retail store initiatives, the internet business, information system infrastructure and logistics to position the Company for growth. Work continues on the transition to International Financial Reporting Standards (“IFRS”) effective in 2011. An enterprise-wide project team and executive steering committee are working to ensure a smooth transition to meet all IFRS reporting and disclosure requirements.

Allen Ravas Sr. Vice-President and Chief Financial Officer 2009 Annual Report 5 ELEVEN YEAR SUMMARY1Fiscal Year Results for the Year (in millions) Total revenues4 Depreciation and amortization Earnings before unusual items and income taxes Unusual items – expense/(gain) Earnings before income taxes Income taxes (recovery) Net earnings Dividends declared Return of capital Capital expenditures 5 Year End Position (in millions) 6 Accounts receivable 8 Inventories 9 Capital assets Total assets 7,8 Working capital Total debt Shareholders’ equity Per Share of Capital Stock Net earnings (basic reported) Dividends declared Return of capital Shareholders’ equity Financial Ratios 4,6 Return on average shareholders’ equity (%) Current ratio 8 Return on total revenues (%) Debt/equity ratio Pre-tax margin (%) Number of Selling Units Full-line department stores Sears Home stores Outlet stores Specialty type: Appliances & Mattresses / Lands’ End stores Dealer stores Floor Covering Centres Coverings stores Sears Home Services showrooms Cantrex Buying Group Members Corbeil Travel offices Catalogue selling locations 1 2009 Restated 20082 Restated 20073 2006 2005 2004 2003 10 2002 2001 2000 1999 $ 5,201 $ 5,733 $ 6,326 $ 5,933 $ 6,238 $ 6,230 $ 6,223 $ 6,536 $ 6,726 $ 6,356 $ 5,777 117 127 150 152 164 166 166 165 182 137 117 346 (2) 348 113 235 – – 52 $ 383 (39) 422 131 291 – – 96 376 (82) 458 152 306 – – 72 264 25 239 87 153 13 – 50 210 (748) 958 187 771 1,557 470 86 193 3 189 61 129 26 – 161 226 5 221 96 125 26 – 208 207 189 18 (26) 44 26 – 219 164 (5) 169 80 89 26 – 159 316 (13) 329 106 223 26 – 482 339 – 339 143 196 26 – 249 31 $ 139 $ 118 $ 136 $ 136 $ 1,620 $ 1,340 $ 1,393 $ 958 $ 1,027 $ 1,137 852 968 880 805 788 790 801 754 865 1,015 814 620 696 742 874 981 1,066 1,100 1,102 1,234 1,245 1,002 3,405 3,237 3,002 3,060 3,258 4,356 4,230 4,208 4,133 4,090 3,855 1,115 1,149 777 373 219 1,318 1,124 1,061 953 685 515 351 365 372 542 749 756 770 776 813 699 686 1,658 1,483 1,093 785 645 1,877 1,781 1,627 1,608 1,543 1,343 $ 2. 18 $ 2. 70 $ 2. 84 $ 1.

42 $ 7. 22 $ 1. 21 $ 1. 17 $ 0.

41 $ 0. 83 $ 2. 09 $ 1.

85 – – – 0. 12 14. 50 0. 24 0. 24 0. 24 0. 24 0. 24 0.

24 – – – – 4. 38 – – – – – – 15. 40 13.

78 10. 16 7. 29 6. 01 17. 67 16. 67 15. 24 15. 07 14.

49 12. 64 14. 9 1. 8 4. 5 17/83 6. 7 122 48 12 4 186 22 – 13 793 30 108 1,853 22. 6 2.

0 5. 1 20/80 7. 4 122 48 11 6 171 30 – 13 824 30 106 1,858 32. 6 1. 6 4. 8 25/75 7. 2 121 48 13 5 163 37 – 14 825 30 106 1,826 21. 3 1.

2 2. 6 41/59 4. 0 123 48 11 5 158 50 – 14 847 29 106 1,898 47.

3 1. 1 12. 4 54/46 15. 123 49 11 5 158 50 1 14 873 28 112 2,116 7. 0 1. 9 2. 1 29/71 3. 0 121 49 13 4 153 50 2 12 – – 112 2,258 7.

3 1. 9 2. 0 30/70 3. 5 122 47 14 – 144 53 – 11 – – 110 2,233 2.

7 1. 7 0. 7 32/68 0.

3 123 42 15 – 141 48 – 10 – – 110 2,220 5. 7 1. 5 1. 3 34/66 2. 5 125 37 17 – 132 38 – 6 – – 110 2,157 15. 4 1. 4 3.

5 31/69 5. 2 125 33 15 – 128 33 – 5 – – 107 2,103 15. 7 1. 3 3. 4 34/66 5. 9 110 25 12 – 110 15 – 3 – – 87 2,005 Fiscal years 1999 to 2003 have been restated to reflect a correction in accounting for lease incentives and other allowances. Historically, lease allowances were classified as a reduction to capital assets as opposed to a deferred credit.The lease allowances were historically amortized as a reduction to depreciation expense over the expected life of the asset to which it related, as opposed to a reduction to rent expense over the term of the related lease.

Restated 2008 represents the 52-week period ended January 31, 2009, adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. 6 2009 Annual Report 2 3 Restated 2007 represents the 57-week period ended February 2, 2008, restated to reflect the retrospective application of the change to the Company’s financial instruments accounting policy choice and adoption of new accounting standards for financial instruments.The Company changed its year end from the Saturday closest to December 31 to the Saturday closest to January 31. Total revenues and cost of merchandise sold have been restated to reflect guidance on recording of revenues. Revenues relating to the travel business and licensed department businesses are now recorded in revenues net of cost of sales. The restatement had no impact on net earnings. The change in policy, effective in 2000, has been applied retroactively. Capital expenditures have not been reduced by cash payments outstanding at year end resulting from normal trade terms.

The 1999 balance sheet has been restated to reflect the finalization of the accounting for the acquisition of Eatons.The 1999 to 2003 balance sheets have been restated to conform to the 2004 financial statement presentation. Fiscal years 1999 to 2006 have been restated to reflect the liability pertaining to the reduction in revenue for sales transactions for which the merchandise has yet to be delivered. Note that the Company sold its Credit and Financial Services Operations in 2005, which included the sale of $1,542 million in accounts receivable. As a result of the Company’s change in accounting policy for inventories, the inventory balances included in this table are not comparable.

See Note 1 “Summary of Accounting Policies and Estimates – Changes in Accounting Policies” of the Notes to the Consolidated Financial Statements for further details.Fiscal year comprised of a 53-week period. 4 5 6 7 8 9 10 QUARTERLY SUMMARY (in millions, except per share amounts) Total revenues Earnings before unusual items and income taxes Net earnings Net earnings per share (basic reported) Diluted earnings per share (basic reported) Net earnings per share (basic operating) Diluted earnings per share (basic operating) First Quarter Restated 2009 2008* $ 1,116. 5 $ $ $ $ $ $ 16.

8 10. 3 0. 10 0. 10 0. 16 0. 16 $ 1,254. 4 $ $ $ $ $ $ 61.

7 70. 8 0. 66 0. 66 0. 40 0. 40 Second Quarter Restated 2009 2008* $ 1,250.

0 $ $ $ $ $ $ 74. 1 49. 1 0. 45 0. 45 0. 45 0. 45 $ 1,420. 3 $ $ $ $ $ $ 91.

1 61. 5 0. 57 0.

57 0. 57 0. 7 Third Quarter Restated 2009 2008* $ 1,309. 0 $ $ $ $ $ $ 69.

4 47. 1 0. 44 0. 44 0. 44 0. 44 $ 1,442. 2 $ $ $ $ $ $ 81.

1 59. 3 0. 55 0. 55 0.

54 0. 54 Fourth Quarter Restated 2009 2008* $ 1,525. 1 $ $ $ $ $ $ 185. 4 128. 2 1.

19 1. 19 1. 18 1. 18 $ 1,616. 3 $ $ $ $ $ $ 149. 3 99.

1 0. 92 0. 92 0. 92 0. 92 * Restated 2008 represents the 52-week period ended January 31, 2009, adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. The Company’s operations are seasonal in nature.

Accordingly, merchandise and service revenues, as well as performance payments received from JPMorgan Chase Bank, N. A. Toronto Branch), also referred to in this document as credit revenues, will vary by quarter based upon consumer spending behaviour. Historically, the Company’s revenues and earnings are higher in the fourth quarter than in any other quarter due to the holiday season. The Company is able to adjust certain variable costs in response to seasonal revenue patterns; however, costs such as occupancy are fixed, causing the Company to report a disproportionate level of earnings in the fourth quarter. Other factors that affect the Company’s sales and financial performance include actions by its competitors, timing of its promotional events and changes in population and other demographics.Accordingly, the Company’s results for any one fiscal quarter are not necessarily indicative of the results to be expected for any other quarter, or the full year, and comparable stores sales for any particular future period may increase or decrease.

2009 Annual Report 7 This page has been intentionally left blank. 8 2009 Annual Report MANAGEMENT’S DISCUSSION AND ANALYSIS March 24, 2009 “Sears”, “Sears Canada” or “the Company” refers to Sears Canada Inc. and its subsidiaries, together with its proportionate share of the assets, liabilities, revenues and expenses of joint venture interests. Table of Contents 1. Company Performance a. Vision b.

Business Segments c. Core Capabilities d. Strategic Initiatives and Progress in 2009 e. Outlook f. Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA g.Consolidated Financial Results h. Fourth Quarter Results 10 10 10 10 11 15 Management’s Discussion and Analysis (“MD&A”) contains commentary from Sears management regarding strategy, operating results and financial position.

Management is responsible for its accuracy, integrity and objectivity, and develops, maintains and supports the necessary systems and controls to provide reasonable assurance as to the accuracy of the comments contained herein. This MD&A should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements for the 2009 fiscal year – the 52-week period ended January 30, 2010 (“Fiscal 2009”).The 2008 fiscal year refers to the 52-week period ended January 31, 2009 (“Restated 2008”) and has been restated for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets. ” The Company changed its fiscal year end to the Saturday closest to January 31, effective the 2007 fiscal year.

As such, the 2007 fiscal year was a transition year that comprised of a 57-week period ended February 2, 2008 (“Restated 2007”) which has been adjusted to reflect the retrospective application of the change to the Company’s financial instruments accounting policy choice and adoption of new accounting standards for financial instruments.In addition, to aid in the analysis of the Company’s results relative to Fiscal 2009 and Restated 2008, pro forma information for the 2007 fiscal year, represented as (“Comparable 2007”), has been adjusted to reflect the change in the fiscal year-end to the 52-week period ended February 2, 2008, the adoption of the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”, the adoption of the new accounting standard issued under CICA Handbook Section 3031, “Inventories” as if it had been applied retrospectively with restatements to prior periods, and the reversal of the impact of the restatement resulting from the change to the Company’s financial instruments accounting policy choice regarding the recognition of certain embedded derivatives. This MD&A is current as of March 23, 2010 unless otherwise stated.

Additional information relating to the Company, including the Company’s Annual Information Form (“AIF”) dated March 23, 2010 and the Management Proxy Circular dated March 23, 2010, are available online at the Company’s website, Sears. ca, or by contacting Sears Corporate Communications department at 416-941-4425. The 2009 Annual Report, together with the AIF and Management Proxy Circular, have been filed electronically with securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (“SEDAR”) and can be accessed on the SEDAR website at www. sedar. com. Unless otherwise indicated, all amounts are expressed in Canadian dollars. 15 17 21 2. Segment Performance a.

Merchandising Operations i. Overview ii. Strategic Initiatives iii. Results from Merchandising Operations b.Real Estate Joint Venture Operations i. Overview ii. Strategic Initiatives iii. Results from Real Estate Joint Venture Operations 24 24 24 27 28 31 31 31 31 3.

Liquidity and Financial Position 4. Capital Resources 5. Financial Instruments and Off-balance Sheet Arrangements 6. Funding Costs 7. Related Party Transactions 8. Company Initiated Purchases and Sales of Shares a. Employee Profit Sharing Plan b. Stock Option and Share Purchase Plans for Employees and Directors 32 34 35 36 36 37 37 37 Cautionary Statement Regarding Forward-looking Information Certain information in the Annual Report and in this MD&A is forward-looking and is subject to important risks and uncertainties.

Forward-looking information concerns, among other things, the Company’s future financial performance, business strategy, plans, expectations, goals and objectives, and includes statements concerning possible or assumed future results set out under Section 1 “Company Performance”, Section 2 “Segment Performance”, Section 3 “Liquidity and Financial Position”, Section 4 “Capital Resources” and Section 9 “Accounting Policies and Estimates”. Often, but not always, forward-looking information can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or statements that certain “endeavoured” actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved.Although the Company believes that the estimates reflected in such forward-looking information are reasonable, such forward-looking information involves known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information and undue reliance should not be placed on such information. Factors which could cause actual results to differ materially from current expectations include, but are not limited to: the ability of the Company to successfully implement its cost reduction, productivity improvement and strategic initiatives and whether such initiatives will yield the expected benefits; the results achieved pursuant to the Company’s long-term credit card marketing and servicing alliance with JPMorgan Chase Bank, N. A. Toronto Branch); general economic conditions; competitive conditions in the businesses in which the Company participates; changes in consumer spending; seasonal weather patterns; customer preference toward product offerings; the creditworthiness and financial stability of tenants and partners, with respect to the Company’s real estate joint venture interests; changes in the Company’s relationship with its suppliers; changes in the Company’s ownership by Sears Holdings Corporation (“Sears Holdings”), the controlling shareholder of the Company; interest rate fluctuations and other changes in funding costs and investment income; fluctuations in foreign currency exchange rates; the possibility of negative investment returns in the Company’s pension plan; new accounting pronouncements, or changes to existing pronouncements, that impact the methods the Company uses to report its financial condition and results from operations; uncertainties associated with critical accounting assumptions and estimates; the outcome of pending legal proceedings; and changes in laws, rules and regulations applicable to the Company.Information about these factors, other material factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in preparing forward-looking information, may be found under Section 11 “Risks and Uncertainties” and elsewhere in the Company’s filings with Canadian securities regulators.

The Company does not undertake any obligation to update publicly or to revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law. 9. Accounting Policies and Estimates a. Critical Accounting Estimates b. Accounting Standards Implemented in Fiscal 2009 c.

Future Accounting Standards 37 37 39 41 10. Disclosure Controls and Procedure 11. Risks and Uncertainties 45 46 2009 Annual Report 9 1. Company Performance a. VisionSears is committed to improving the lives of its customers by providing quality services, products and solutions that earn their trust and build lifetime relationships.

b. Business Segments Sears classifies its operations in two business segments: merchandising and real estate joint venture operations. Merchandising Operations – This segment includes the sale of goods and services through the Company’s Retail channel, which includes its Full-line, Sears Home, Dealer, Outlet, Appliances and Mattresses, Cantrex Group Inc. (“Cantrex”) and its wholly-owned subsidiary, Corbeil Electrique Inc. (“Corbeil”), and its Direct (catalogue/internet) channel.It also includes service revenues related to the Company’s product repair, home improvement, Cantrex, travel and logistics services, and performance payments received from JPMorgan Chase Bank, N. A. (Toronto Branch) (“JPMorgan Chase”) under the Company’s long-term credit card marketing and servicing alliance with JPMorgan Chase.

Real Estate Joint Venture Operations – Sears has joint venture interests in 11 shopping centres across Canada and carries the proportionate share of these interests in the Company’s consolidated financial statements. Joint venture interests range from 15% to 50%, and are co-owned with major shopping centre owners and institutional investors. Sears is not involved in the day-to-day management of the shopping centres, but is involved in major decisions regarding the joint venture interests. c.Core Capabilities The Company’s key resources and capabilities include its associates, brand equity, specialized services, national presence and logistics.

The Company’s ability to raise funds and working capital to support its operations is also a key capability and is discussed further in the “Liquidity and Financial Position” section of this MD&A. Associates • Sears associates are a critical asset to the Company. Sears works to inspire its associates to be committed to improving customers’ lives by providing quality services, products and solutions that earn their trust and build lifetime relationships so that Sears can become Canada’s #1 retailer.Sears employed 11,535 full-time and 19,814 part-time associates (Restated 2008 – 12,028 full-time and 21,357 part-time) for a total of 31,349 associates at the end of Fiscal 2009 (Restated 2008 – 33,385); Brand Equity • One of the Company’s most important capabilities is the recognition and reputation of the Sears brand, one of the most trusted brands in Canada. The Company also works closely with its suppliers in product development, design and quality standards.

Many lines of merchandise are manufactured with features exclusive to Sears and are sold under Sears private label brands, such as Jessica®, Nevada®, Attitude®, Distinction®, Kenmore®, Craftsman® and DieHard®.The Company believes that its private label and national brands have significant recognition and value with customers; Specialized Services • Apart from merchandise retail, the Company also offers a wide range of specialized services to attract a broad customer base. These services include the sale, installation, maintenance and repair of heating and cooling equipment, roofing, door and window replacement, flooring, window coverings and energy audits from the Company’s Home Improvement Products and Services business, kitchen and bathroom renovations, home security, carpet and upholstery cleaning, duct cleaning and maid services from its Home Maintenance Services business.The Company also maintains a Product Repair Services business as well as portrait studio, optical, floral, wireless and long distance, insurance and real estate services; 10 2009 Annual Report National Presence The Company’s expansive physical and online presence puts it in proximity to customers all across Canada.

Sears operates 122 Full-line department stores, 280 specialty stores (including 48 Sears Home stores, 186 Dealer stores operated under independent local ownership, 4 Appliances and Mattresses stores, 30 Corbeil stores and 12 Outlet stores), 22 Floor Covering Centres, 1,853 Catalogue merchandise pick-up locations and 108 Travel offices. Sears Canada also conducts business over the Internet through its website, Sears. ca, to enhance its multi-channel customer experience; Logistics The ability to move merchandise efficiently to stores, catalogue merchandise pick-up locations or directly to customers is one of the Company’s key capabilities. The Company’s wholly-owned subsidiary, S. L. H. Transport (“SLH”) transports merchandise to stores, catalogue merchandise pick-up locations and directly to customers.

SLH is responsible for providing logistics services for the Company’s merchandising operations by operating a fleet of tractors and trailers to provide carrier services for Sears and contract carrier services to commercial customers who are unrelated to Sears. The arrangements with third parties increase SLH’s fleet utilization and improve the efficiency of its operations.SLH continues to grow and has developed a nationwide distribution network to provide better and more consistent service to its customers; and • Sears also operates five distribution centres and one cross dock facility strategically located across the country. The total floor area of these service centres was 6. 3 million square feet at the end of Fiscal 2009, of which 5.

4 million square feet is devoted to warehouse and logistics operations. The remainder of the space is utilized for other Sears operations, including call centre services. d. Strategic Initiatives and Progress in 2009 Sears is committed to its mission of building customer relationships, increasing profitability and improving every day.The Company has aimed to achieve this mission by focusing on several key strategic initiatives geared toward: • Growing profitable sales; • Customer segmentation; and • Productivity improvement initiatives. These strategic initiatives are discussed in greater detail below and throughout this MD&A. Growing Profitable Sales The recession has made growing profitable sales and creating new demand for products and services more challenging.

In an environment where price competition is fierce as certain competitors continue to deeply discount merchandise at levels Sears believes are unsustainable, the Company remains focused on targeting profitable sales. During Fiscal 2009, the Company undertook various initiatives to mitigate the impacts of the recession and the competitive environment which included the following: Merchandising Initiatives Expanded and improved the Company’s private and national brand portfolio, which included the launch of Liz & Co® and the re-launch of Attitude® and Distinction®, to provide customers with product assortments that are exciting and relevant to their needs; • Expanded the gift registry business to cover a total of 107 stores. Sears is well placed to offer a total home solution of gift related products and services, from dinnerware to bedding, appliances, electronics and home improvement services such as customized window coverings. To grow the gift registry business, Sears implemented dedicated in-store registry consultants, expanded the assortment of gift and bridal merchandise, and actively participated in bridal and baby shows; and 2009 Annual Report 11 • Launched “Oasis” in two Full-line stores.

Oasis is a new beauty department concept offering ‘one-stop’, ‘head-to-toe’ shopping featuring a fulsome assortment of beauty brands and personal care tools. Margin Enhancement Initiatives • Streamlined promotional activity to maximize selling opportunities and margins; • Negotiated more favourable vendor terms for reduced costs and opportunity buys; and • Strengthened policy and procedures to significantly reduce inventory shrinkage and product returns. Internet Initiatives • Launched the first phase of the new Sears. ca website with an increased selection of categories and 76,000 new skus available to engage new customers and demographics. Sears. a is now built on a more robust, technologically advanced platform, featuring improved search capability, easier navigation, more detailed product information, as well as enhanced speed and reliability.

The Company continues to invest in online capabilities as it believes that a compelling multi-channel experience will be an important factor for success in the years and decades to come. Corporate Social Responsibility Initiatives • Focused on improving the Company’s profitability while being committed to achieving success at the social and environmental levels. Sears Canada focused on providing better choices of sustainable, energy efficient, green products and services, including: – A wider range of ENERGY STAR® appliances; – ecoENERGY evaluation services; – Little Footprint bedding made rom recycled pop bottles and unbleached cotton; – Organic cotton apparel – from women’s t-shirts to infant wear; – Heys© EcoCase luggage made from 100% recycled plastic; and – A complete line of PVC-free bath products from Whole Home®. Organizational Capability Initiative • Strengthened the Company’s organizational capability, with a focus on acquiring top level talent, to better position it to pursue company-wide goals and strategies. Customer Segmentation Initiatives To grow profitable sales, the Company must provide the right products to the right customers at the right time and at the right price. In Fiscal 2009, the Company undertook various initiatives to achieve this goal, including: • Used customer segmentation market research to develop unique strategies for each of the Company’s categories and channels to drive sales and market share growth.Sears has focused on revitalizing its brand assortment by securing additional exciting national brands like Mac & Jac©, kensie© and Press© to help attract a more contemporary customer as well as anchor its private label brands such as Attitude®, Distinction® and Jessica®, which have been re-launched to feature improved designs and fits for a more modern customer; • Continued merchandise initiatives to increase sales and volumes through expanded assortments, enhanced in-store presentation, signage and staff training; • Utilized information and technology to better understand its customers so that the Company can continue to fulfill its vision of improving their lives; and • Issued special, targeted catalogues (“Specialogues”) that are geared toward specific product and lifestyle themes. 12 2009 Annual Report Productivity Improvement Initiatives In light of the effects of the recession, the Company focused on organizational and productivity improvements to increase profitability.

During Fiscal 2009, the Company undertook the following initiatives: Expense Management • Focused efforts on managing semi-fixed and variable expenses and made the necessary discretionary spending decisions in order to position the Company for long-term stability, with a view to become Canada’s #1 retailer.Some expense management measures included associate wage freezes, up to 15% in salary reductions for associates at the Vice-President level and above, pension contribution reductions and strategic reductions to the Company’s associates and call centre. The staffing reduction affected approximately 300 associates and had no impact on customer service at the store level as reductions were initiated at the Company’s head office in Toronto and in the Product Repair Services business. To continue to provide efficient support to customers and Sears businesses, especially during peak seasonal times, and to remain competitive, certain call centre functions were outsourced to an experienced external service provider that the Company has used for several years; Operational Enhancement Re-engineered internal processes and capabilities to increase profitability and improve efficiencies, which included the completion of the relocation of head office operations to the vacant space above the Toronto Eaton Centre retail store to reduce costs and improve efficiencies; and Inventory Management • Reduced inventory levels by $116. 0 million through promotional events and improved inventory management practices through initiatives such as integrating return-to-vendor provisions into agreements as well as selling products on consignment. The Company also improved its replenishment and direct importing practices to increase margins, enhance its competitive pricing capabilities and to ensure customers have a broad and relevant selection of quality products from which to choose in order to grow sales. Real Estate InvestmentsThe Company reviews its real estate holdings and joint venture interests on a regular basis. The primary objective of the Company’s real estate joint venture operations is to maximize the returns on its investment in shopping centre real estate.

The Company’s real estate holdings and shopping centre joint venture investments are non-core assets that the Company sells when it is financially advantageous to do so. In December 2009, the Company completed the sale of its 50% joint venture interest in Les Promenades de Sorel in Sorel, Quebec. The financial details of this transaction are discussed in this MD&A under Section 2b “Real Estate Joint Venture Operations”. Business Development OpportunitiesOn an ongoing basis, management reviews the Company’s existing operations and opportunities for growing and expanding the products and services offered throughout its various channels. During Fiscal 2009, the Company: • Launched “Sears Certified Real Estate Services”, designed to help make real estate transactions professional, easy and rewarding for customers who are buying or selling a home in the Greater Toronto Area. Customers can earn 0.

6% of their home’s selling price in Sears gift cards, potentially receiving thousands of dollars in rewards; • Secured commercial agreements with a provincial electric utility company to supply energy efficient appliances for its major appliance replacement program as well as with reputable home builders to supply major appliances to new home buyers; 2009 Annual Report 13 Expanded its diverse product and services offerings to include a new residential painting service in select markets. The new service ranges from Sears professional consultants assisting customers with choosing the colour, finish and overall look they would like to achieve to ensuring that work performed is completed to the customer’s satisfaction; and • Launched the Sears Water Appliance Program (“SWAP”), a national program that encourages homeowners to upgrade their inefficient or non-functional water softeners to an ENERGY STAR® qualifying unit, providing Canadians with more energy efficient solutions and another way to reduce emissions of greenhouse gases into the environment. Corporate Social ResponsibilityThe Company conducts its operations with a commitment to achieving success at the economic, social and environmental levels. Throughout Fiscal 2009, the Company built upon the following three key areas of focus with respect to sustainability leadership: • Increasing the assortment of green products and services; • Reducing the environmental impact of the Company’s operations while also reducing costs, through initiatives such as upgrading the lighting and heating, ventilation and air conditioning systems to more energy efficient alternatives; and • Creating a culture of sustainability across the Company through the creation of a sustainability team as well as setting ambitious goals on environmental issues.

The following is a summary of the results of efforts of the Company and its associates during Fiscal 2009: • Sears Canada received the 2009 ENERGY STAR® Retailer of the Year award for the second consecutive year in recognition of the Company’s excellence and commitment to promoting ENERGY STAR® appliances, electronics and heating, ventilation and air conditioning equipment to help Canadians become more energy efficient. Since the ENERGY STAR® Market Transformation Awards were first presented in 2003, the Company has won the “Retailer of the Year” award three times; • Partnered with the Ontario Electronic Stewardship (“OES”) Council and ran three innovative pilot programs which diverted over 160,000 kilograms of waste electrical and electronic equipment such as televisions and computers from landfills into approved Ontario recycling facilities; • Sears Canada Charitable Foundation, a fundraising foundation separate from Sears Canada, set out a goal to provide a $5. million donation over eight years to The Hospital for Sick Children, in Toronto. The donation is for the establishment of the Sears Cancer Clinic which provides support for children living with cancer and their families and for the creation of a related endowment fund for research and education; • Worked with Scouts Canada to raise funds and awareness for Scoutrees, a program which involves 25,000 youth in an effort to plant approximately 250,000 trees across Canada during Fiscal 2009; • Teamed up with Coast to Coast Against Cancer Foundation to present the Sears National Kids Cancer Ride to help raise awareness, funds and support for children with cancer and their families throughout Canada.The 36 Sears National Kids Cancer Ride cyclists participated in the 7,200 kilometre trek across Canada from Vancouver to Halifax to make this the world’s longest charitable cycling event on behalf of childhood cancer.

In 2009, the Sears National Kids Cancer Ride raised approximately $1. 5 million from Canadians to fund both national and provincial pediatric and oncology research programs; and • Launched “Envirototes” nationwide. Envirototes are the Company’s next generation eco-friendly and fashionable bags, which feature a higher recycled content and updated styling. Envirototes are profit-neutral and 10 cents from the sale of each bag is donated to World Wildlife Fund in support of environmental initiatives that improve our planet. 14 2009 Annual Report e. OutlookThe recession has had a profound and pervasive impact on all aspects of the Canadian economy and created a challenging environment for retailers in Fiscal 2009. Consumer confidence fell to historic lows, unemployment rose to a high of 8. 7% and is expected to remain high for the next two years, household net worth declined, consumer spending tightened and competition was fierce.

1 In this environment, the Company remains cautious and both expects and is prepared to face similar challenges in the 2010 fiscal year (“Fiscal 2010”). Management is confident that the Company is financially strong and well positioned to operate should the current economic conditions worsen or persist in Fiscal 2010.For the upcoming year, Sears will continue its mission of building customer relationships, increasing profitability and improving every day and remains confident in its strategy geared towards growing profitable sales, customer segmentation, and productivity improvement. Some of the priorities for Fiscal 2010 include the following: Growing Profitable Sales • Continuing to develop the Company’s private brand and national portfolio to attract the younger-minded and modern customer; • Growing the dealer network through catalogue agent conversions and expanding product assortment and services; and • Utilizing Sears. ca to engage new customers and demographics through continued development of the new platform.Customer Segmentation • Improving market research and analytics to develop unique strategies to respond to emerging trends, preferences and choices. Productivity Improvements • Focusing on lean inventory management and implementing further reductions in inventory shrinkage and product returns; and • Continuing to focus on expense management and recovering costs while improving customer service.

Although management believes that Sears will achieve its long-term goal of sustainable and profitable growth, there can be no assurance that the Company will successfully implement these strategic initiatives or whether such initiatives will yield the expected results.See the discussion of risks and uncertainties inherent in the Company’s normal course of business in the “Risks and Uncertainties” section of this MD&A. f. Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA The Company’s financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). Management uses GAAP and non-GAAP measures as key performance indicators to better assess the Company’s underlying performance and provides this additional information in this MD&A so that readers may do the same. Same store sales is a measure used by management and the retail industry to compare retail operations, excluding the impact of store openings and closures.Same store sales represents merchandise sales generated through operations in the Company’s Full-line, Sears Home, Dealer and Corbeil stores that were continuously open during both of the periods being compared. More specifically, the same store sales metric compares the same calendar weeks for each period and represents the 13- and 52-week periods ended January 30, 2010 and the 13- and 1 Source: RBC Economics, Economic & Financial Market Outlook (December 2009), Royal Bank of Canada; and Canadian Industry Profile (Autumn 2009), “Retail Trade”, The Conference Board of Canada.

2009 Annual Report 15 52-week periods ended January 31, 2009. The calculation of same store sales is a non-GAAP measure and may be impacted by store space expansion and contraction. Operating net earnings is a non-GAAP measure and excludes unusual and/or non-comparable items.Operating earnings before interest, taxes, depreciation and amortization (“Operating EBITDA”) is also a non-GAAP measure. Operating EBITDA excludes unusual or non-comparable items, net interest expense, income tax expense and depreciation and amortization. These measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other reporting issuers.

A reconciliation of the Company’s net earnings to Operating net earnings and Operating EBITDA is outlined in the following table: Fourth Quarter 1 Full Year 1 Fiscal 2009 Restated 2008 $ 290. 7 – (29. 4) $ 261. 3 126. 9 10.

0 121. 9 $ 520. 1 (in millions, except per share amounts)Net earnings 2 Non-operating activities, net of taxes Restructuring expense Unusual items3 (gain) Operating net earnings 2 Depreciation and amortization Interest expense, net Income taxes expense excluding operating adjustments 2 Operating EBITDA Net earnings per share Operating net earnings per share 1 Fiscal 2009 $ 128. 2 – (1. 3) $ 126.

9 30. 3 7. 2 58. 5 $ 222. 9 Restated 2008 $ 99.

1 $ 234. 7 – – 31. 4 4.

5 50. 2 6. 5 (1. 3) 117.

4 25. 2 115. 1 $ 99. 1 $ 239.

9 $ 185. 2 $ 497. 6 $ 1. 19 $ 0. 92 $ 2. 18 $ 2. 70 $ 1.

18 $ 0. 92 $ 2. 23 $ 2.

43 2 3 The fourth quarter and full year of Fiscal 2009 and Restated 2008 represent the 13- and 52-week periods ended January 30, 2010 and January 31, 2009, respectively.Net earnings and income taxes expense for the fourth quarter and full year of Restated 2008 have been restated as a result of the retrospective application of the change in accounting policy related to the adoption of Goodwill and Intangible Assets. Unusual items in Fiscal 2009 represent the sale of a joint venture. Unusual items in Restated 2008 are primarily due to the sale of real estate. 16 2009 Annual Report g. Consolidated Financial Results As noted, certain comparative figures have been restated due to the adoption of new accounting standards which have been retroactively applied and/or reclassified to conform to the current year’s presentation.

See Section 9 – “Accounting Policies and Estimates” of this MD&A and the Notes to Consolidated Financial Statements for further information about the critical accounting estimates used and the accounting policies adopted by the Company.Consolidated Financial Results (in millions, except per share amounts) Total revenues Cost of merchandise sold, operating, administrative and selling expenses Add back restructuring expense Operating EBITDA*** Depreciation and amortization Interest expense, net Non-operating activities Restructuring expense Unusual items expense/(gain) Income taxes Net earnings Net earnings per share (basic reported) Diluted earnings per share (basic reported) Net earnings per share (basic operating) Diluted earnings per share (basic operating) $ $ $ $ $ Fiscal 2009 $ 5,200. 6 4,712. 3 9. 3 497.

6 117. 4 25. 2 9. 3 (1. 9) 112.

9 234. 7 2. 18 2. 18 2. 23 2. 23 Change Fiscal 2009 vs. Restated 2008* (9. 3%) (9.

6%) (4. 3%) (7. 5%) 152. 0% Restated 2008* $ 5,733. 2 5,213. 1 520. 1 126.

9 10. 0 – (38. 8) 131. 3 290. 7 $ $ $ $ 2. 70 2. 70 2. 43 2.

43 % Change Restated 2008* vs. Comparable 2007** (1. 9%) (2.

0%) (1. 0%) (7. 6%) (13. 0%) Comparable 2007** $ 5,844. 9 5,319. 3 525. 6 137. 4 11. 5 – (82. 2) 152. 1 $ $ $ $ $ 306. 8 2. 85 2. 85 2. 25 2. 25 nm nm (14. 0%) (19. 3%) nm nm (13. 7%) (5. 2%) ”nm” means “not meaningful” * Restated 2008 represents the 52-week period ended January 31, 2009, adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. * Comparable 2007 represents the 52-week period ended February 2, 2008, adjusted to reflect the change in fiscal year end; the adoption of the new accounting standards for inventories, goodwill and intangible assets and the reversal of the impact of the restatement resulting from the change to the Company’s financial instruments accounting policy choice regarding recognition of embedded derivatives. *** Please see section 1f “Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA” regarding use of non-GAAP measures. 2009 Annual Report 17 2009 Compared with 2008 – Total revenues in Fiscal 2009 declined 9. 3% to $5,200. 6 million as compared to $5,733. 2 million during the same period in Restated 2008. Net merchandise sales decreased 9. 4% primarily due to lower sales in the Company’s Full-line, Direct, Home, Dealer and Outlet channels, partially offset with higher sales in Corbeil stores. The largest sales decline was in the Direct channel where sales fell 20. % in Fiscal 2009 compared to Restated 2008, primarily due to a planned reduction of catalogue impressions by 16%, a strong Canadian dollar motivating consumers to cross border shop and the impact of the recession. Same store sales 2 decreased 6. 8% in Fiscal 2009 as compared to Restated 2008. However, the trend has improved as same store sales during the fourth quarter of Fiscal 2009 were 510 basis points higher than the year-to-date trend. The challenging retail environment, due to intense competition, high unemployment, historically low consumer confidence and tightened consumer spending all brought on by the recent recession, had a significant negative impact on the Company’s sales.An unseasonably cool summer and warm winter throughout many parts of Canada, including Ontario and Quebec, the Company’s two largest revenue generating provinces, also negatively impacted sales as consumers delayed, or in many cases, went without making purchases of seasonal goods such as swimwear, air-conditioners and snow blowers. Sales in home and hardlines categories decreased 9. 1% in Fiscal 2009 compared to Restated 2008, with the highest sales declines in electronics and seasonal goods. The warmer winter weather depressed sales in certain seasonal categories and an industry-wide slow down in sales of large screen size TV’s impacted sales of electronics. Sales in the apparel and accessories categories decreased 10. % in Fiscal 2009 compared to Restated 2008, with the highest sales decline in women’s apparel as a result of low assortment breadth in certain lines, increased deep discounts by certain competitors and unseasonably cool summer and warm winter weather as compared to the same period in Restated 2008. Despite the challenging times and a highly competitive retail industry, Sears has remained Canada’s number one retailer for women’s and men’s apparel for the past three consecutive years based on dollar sales. 3 In addition, Sears has the largest market share in major appliances and furniture as measured by dollar sales. 4 Additional information on the Company’s merchandising and real estate joint venture operations is set forth in Section 2 “Segment Performance” of this MD&A.Joint venture revenue increased 3. 5% in Fiscal 2009 compared to Restated 2008, due to the expansion of two of the Company’s joint venture interests at the end of Restated 2008. The cost of merchandise sold, operating, administrative and selling expenses were 9. 6% lower in Fiscal 2009 relative to Restated 2008. This decline is attributable to lower sales resulting in lower variable costs as well as a result of the Company’s focused efforts to manage variable and semi-fixed expenses. Operating expenses declined primarily due to a reduction in payroll and variable compensation expense, lower advertising and other non-customer related expenditures.In addition, the Company revised certain assumptions used to calculate the Sears Club Loyalty program based on new information regarding redemption rates and the costs associated with this program, resulting in a net decrease to the reserve and a pre-tax gain of $7. 0 million. The Company also simplified the earn rates and redemption values to allow for more effective communication and promotion of the program, which resulted in an additional decrease to the reserve and a pre-tax gain of $2. 9 million. This was partially offset by the one-time $7. 1 million accounting charge relating to the revision of certain assumptions used to estimate the value of vendor rebates remaining in inventory.Refer to Note 8, “Consideration from a Vendor” in the Notes to Consolidated Financial Statements for further details. The gross margin rate for Fiscal 2009 decreased 4 basis points relative to Restated 2008, though it would have increased 11 basis points if the one-time $7. 1 million charge is excluded. Excluding the charge, the improvement in gross margin rate is attributable to an increase in vendor allowances, partially offset by the margin compression resulting from increased promotional activity following the holiday shopping season. 2 Same store sales represent merchandise sales generated through operations in Full-line, Sears Home, Dealer and Corbeil stores that were continuously open during both of the periods being compared.More specifically, the same store sales metric compares the same calendar weeks for each period and represents the 13- and 52-week periods ended January 30, 2010 and the 13- and 52-week periods ended January 31, 2009. Source: The NPD Group, Inc. CAMM consumer data, Calendar Years 2009, 2008 and 2007. Source: Synovate Household Equipment Canada, Calendar Year 2009. 2009 Annual Report 3 4 18 Operating EBITDA for Fiscal 2009 decreased 4. 3% to $497. 6 million as compared with $520. 1 million for Restated 2008. Operating EBITDA does not include unusual or non-comparable gains and losses arising from activities outside of the Company’s principal operations.Refer to Section 1f “Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA” for further details. Depreciation and amortization expense was 7. 5% lower in Fiscal 2009 as compared to Restated 2008, due to lower capital expenditures in recent years. Net interest expense increased by 152. 0% to $25. 2 million in Fiscal 2009 as compared with $10. 0 million in Restated 2008 primarily due to a reduction in interest income earned on the Company’s cash and short-term investments. Investments consist primarily of Government of Canada treasury bills and bank term deposits. Income taxes decreased by 14. % in Fiscal 2009 relative to Restated 2008 due to a combination of lower taxable income and a lower statutory tax rate, partially offset by the favourable impact of the lower tax on capital gains on the sale of the Company’s Calgary Full-line store and the recovery of tax expense recognized in Restated 2008. 2008 Compared with 2007 – Total revenues in Restated 2008 decreased 1. 9% over Comparable 2007. Net merchandise sales in Restated 2008 declined 3% as compared to Comparable 2007 as a result of lower sales in Full-line, Direct, Outlet, Sears Home, Corbeil and Cantrex offset with higher revenues generated in the Dealer channel, which opened 12 new stores in Restated 2008. Credit revenues increased 2. % relative to the Comparable 2007 period. Service revenues increased 7. 8% relative to the Comparable 2007 period due to improved results from Home Improvement Products Services, Sears Line Haul and delivery revenue being partially offset by lower sales in Travel and Cantrex. Growth in internet sales remained positive, increasing 18. 3% in Restated 2008 over Comparable 2007. Joint venture revenue decreased 6. 7% as a result of the Company’s disposition of its interests in the Place Vertu shopping centre in Montreal, Quebec in the first quarter of Comparable 2007 and the Heritage Place shopping centre in Owen Sound in the third quarter of Comparable 2007.Same store sales for Restated 2008 declined by 1. 6% as compared to Comparable 2007 as sales were negatively impacted by the worsening economic climate and declining consumer confidence, specifically in the fourth quarter as same store sales increased 0. 3% for the first nine months of Restated 2008. Sales in home and hardlines in Restated 2008 decreased by 0. 7% relative to Comparable 2007, with the biggest decline in the home decor category. As a result of the Company’s recharge initiatives to expand and improve product assortment and relevance for the needs of its consumers, electronics and mattresses continued to exhibit significant growth at 19. 6% and 13. %, respectively, in relation to Comparable 2007. The Company also experienced 17. 7% sales growth in seasonal hardware driven by record snow blower sales. Sales in apparel and accessories categories decreased 6. 2% in Restated 2008 relative to Comparable 2007. The general state of the economy and increased competitive landscape were factors that represented challenges for all categories of apparel and accessories. In spite of these challenges, Sears national brands, seasonal footwear and outerwear experienced sales growth. The Company has addressed the challenges experienced in Restated 2008 by reviewing assortment, focusing on strategic sourcing and inventory management processes.The cost of merchandise sold, operating, administrative and selling expenses were 2. 0% lower in Restated 2008 as compared to Comparable 2007, driven by lower sales and resulting in lower variable costs, lower payroll and benefit costs and advertising expenses as a result of the Company’s continued effort to manage costs. Included in expenses are operational one-time items of $4. 9 million (Comparable 2007: $6. 9 million) providing a net increase to results from operations. These one-time items include a change in the Company’s historical accounting treatment of operating lease assets from a service business purchased in late 2003 and a modification made to the Company’s software capitalization policy.In Comparable 2007, these items included a gain on the sale of certain equity securities and an adjustment to the Company’s reserve for Home Improvement Products. The gross margin rate for Restated 2008 improved 24 basis points relative Comparable 2007. The improvement in gross margin rate is predominantly due to an improvement in inventory shrinkage and favourable exchange rates on imported merchandise due to the Company’s foreign exchange hedging program. 2009 Annual Report 19 Depreciation and amortization expense was 7. 6% lower in Restated 2008 as compared to Comparable 2007 predominantly due to lower capital expenditures in recent years and partially offset by a $1. 2 million asset impairment charge relating to four underperforming stores. Net interest expense declined by 13. % in Restated 2008 as compared to Comparable 2007 as a result of a lower average debt balance being maintained throughout the year due to the repayment on maturity of the $125 million debenture in November 2007 and higher cash balances. Income taxes decreased by 13. 7% in Restated 2008 relative to Comparable 2007, primarily due to a reduction in the statutory tax rates and lower taxes payable on the sale of the Company’s real estate holdings. Operating EBITDA decreased by 1. 0% relative to Comparable 2007. The decline, due to the decrease in sales indicated above, occurred in the last three months of Restated 2008 as Operating EBITDA for the first nine months of 2008 was up 11. 3% versus Comparable 2007.The following is a list of the unusual or non-comparable gains and losses in Comparable 2007. • During the third quarter of Comparable 2007, the Company recorded a $3. 2 million pre-tax gain from the disposition of its interest in the Heritage Place joint venture in Owen Sound, Ontario, recorded a $68. 9 million pre-tax gain on the sale of its headquarters office building and adjacent lands at 222 Jarvis Street, Toronto, Ontario, and recognized a $5. 1 million pre-tax gain on the sale of property where the Company operated its Full-line department store in Hamilton, Ontario. Subsequent to the sale the Company relocated its Hamilton Centre Mall to Eastgate Square. During the second quarter of Comparable 2007, the Company recognized a $3. 5 million pre-tax gain on the sale of the Company’s airplane and expended $5. 0 million to settle a lawsuit relating to a commercial dispute. Of the total settlement, a pre-tax expense of $3. 6 million is included in unusual items as $1. 4 million was accrued in previous years. • A $9. 3 million pre-tax gain was recognized on the sale of the Company’s interest in the Place Vertu shopping centre in Montreal, Quebec during the first quarter of Comparable 2007. Joint venture interests in shopping centres are non-core assets that the Company sells when it is financially advantageous to do so. Selected Annual Information and Trend AnalysisFiscal 2009 Results for the year (in millions) Total revenues Earnings before non-operating activities, unusual items and income taxes Non-operating activities Restructuring expense Unusual items expense/(gain) Income taxes Net earnings Year end position (in millions) Cash, restricted cash and investments Inventories Total assets Total long-term obligations, including principal payments on long-term obligations due within one year Shareholders’ equity Per share of capital stock Net earnings (basic reported) Net earnings (basic operating) Dividends declared Shareholders’ equity $ 5,200. 6 355. 0 9. 3 (1. 9) 112. 9 234. 7 $ 1,397. 6 852. 3 3,404. 8 350. 7 1,657. 5 $ $ 2. 18 2. 23 – 15. 40 $ Restated 2008* $ 5,733. 2 383. 2 – (38. 8) 131. 3 290. 7 971. 5 968. 3 3,237. 3 364. 6 1,483. 2 2. 70 2. 43 – 13. 78 $ Comparable 2007** $ 5,844. 9 376. 7 – (82. 2) 152. 1 306. 8 876. 8 879. 7 2,974. 7 372. 1,066. 4 2. 85 2. 25 – 9. 91 $ $ $ $ Restated 2008 represents the 52-week period ended January 31, 2009, adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. ** Comparable 2007 represents the 52-week period ended February 2, 2008, adjusted to reflect the change in fiscal year end; the adoption of the new accounting standards for inventories, goodwill and intangible assets and the reversal of the impact of the restatement resulting from the change to the Company’s financial instruments accounting policy choice regarding recognition of embedded derivatives. 20 2009 Annual Report *The global financial crisis and the recession have created a challenging environment for retailers since October 2008. Although total revenues and net earnings have been negatively impacted by the challenging economic conditions, the Company has managed to maintain profitability through: • Merchandising initiatives such as the Company’s expanded and improved private and national brand portfolio which provide customers with product assortments that are exciting and relevant to their needs; expanding the gift registry business into a total of 107 stores; and Company “recharges”, which improve product selection, promotion, customer service and staff product knowledge to drive profitable sales.During Fiscal 2009, the Company commenced recharges in: women’s wear, men’s wear, children’s wear and cosmetics – including the launch a new beauty department concept in two Full-line stores, called “Oasis”; • Maintaining gross margins through rationalizing promotional activity, negotiating more favourable vendor terms for reduced costs and opportunity buys, strengthening policy and procedures to reduce inventory shrinkage and product returns and increasing vendor allowances and subsidies; and • Controlling variable and semi-fixed expenses, which included executive wage reductions as well as the relocation of head office operations to reduce costs and improve efficiencies. The Company has improved an already strong balance sheet since Comparable 2007 by increasing cash, restricted cash and investments by 59. 4% to $1,397. 6 million in Fiscal 2009 from $876. 8 million in Comparable 2007, primarily generated through operations, and by reducing the total long-term obligations, which have decreased 5. 8% to $350. 7 million from $372. 1 million during the same period. h. Fourth Quarter Results % Change Fiscal 2009 vs. Restated 2008* (5. 6%) (9. 0%) 20. 4% (3. 5%) 60. 0% % Change Restated 2008* vs. Comparable 2007** (5. 8%) (4. 0%) (17. 5%) (4. 6%) 364. 7% (in millions, except per share amounts)Total revenues Cost of merchandise sold, operating, administrative and selling expenses Operating EBITDA*** Depreciation and amortization Interest expense/(income), net Non-operating activities Unusual items expense/(gain) Income taxes Net earnings Net earnings per share (basic reported) Diluted earnings per share (basic reported) Net earnings per share (basic operating) Diluted earnings per share (basic operating) $ $ $ $ $ Fourth Quarter Fiscal 2009 $ 1,525. 1 1,302. 2 222. 9 30. 3 7. 2 (1. 9) 59. 1 128. 2 1. 19 1. 19 1. 18 1. 18 Fourth Quarter Restated 2008* $ 1,616. 3 1,431. 1 185. 2 31. 4 4. 5 – 50. 2 $ $ $ $ $ 99. 1 0. 92 0. 92 0. 92 0. 92 Fourth Quarter Comparable 2007** $ 1,715. 2 1,490. 8 224. 4 32. 9 (1. 7) 4. 2 66. 3 $ $ $ $ $ 122. 7 1. 14 1. 14 1. 17 1. 17 m 17. 7% 29. 4% nm (24. 2%) (19. 2%) ”nm” means “not meaningful” * Restated 2008 represents the 13-week period ended January 31, 2009, adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. ** Comparable 2007 represents the 13-week period ended February 2, 2008, adjusted to reflect the change in fiscal year end; the adoption of the new accounting standards for inventories, goodwill and intangible assets and the reversal of the impact of the restatement resulting from the change to the Company’s financial instruments accounting policy choice regarding recognition of embedded derivatives. ** Please see section 1f “Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA” regarding use of non-GAAP measures. 2009 Annual Report 21 2009 Compared with 2008 – For the fourth quarter of Fiscal 2009, total revenue decreased 5. 6% to $1,525. 1 million as compared to $1,616. 3 million for the same quarter of Restated 2008. Same store sales decreased 1. 7% during the fourth quarter of Fiscal 2009 as compared to the fourth quarter of Restated 2008, however, the trend has improved as same store sales during the fourth quarter of Fiscal 2009 were 510 basis points higher than the year-to-date trend.Net merchandise sales decreased 5. 6% in the fourth quarter of Fiscal 2009 as compared to the fourth quarter of Restated 2008, primarily due to lower sales in Full-line, Direct, Dealer and Outlet, offset with higher sales in the Company’s Corbeil, Cantrex and Home stores. The largest sales decline was in the Direct channel where sales fell 21. 3% in the fourth quarter of Fiscal 2009 as compared to the fourth quarter of Restated 2008, primarily due to a strong Canadian dollar motivating consumers to cross border shop as well as a planned reduction in sales by reducing unprofitable catalogue pages and circulation by 21. 0%. Home stores exhibited positive results with 9. % sales growth in the fourth quarter of Fiscal 2009 as compared to the fourth quarter of Restated 2008, with effective promotions and merchandising strategies driving strong furniture and major kitchen appliance sales. Over a year has elapsed since the onset of the recession and the Canadian economy continues to experience high unemployment. The recessionary impact on consumer spending continues to be pervasive as discretionary spending remains tight. The challenging retail environment had a significant negative impact on the Company’s sales. An unseasonably warm winter throughout many parts of Canada, including Ontario and Quebec, the Company’s two largest revenue generating provinces, also negatively impacted sales as consumers delayed or, in many cases went without, making purchases of seasonal goods.Sales in home and hardlines categories decreased 4. 3% during the fourth quarter of Fiscal 2009 as compared to the same quarter in Restated 2008 with big ticket and seasonal items such as large screen size TV’s, snow blowers, washers and dryers experiencing the largest sales declines. Sales in the apparel and accessories categories decreased 8. 1% as compared to the fourth quarter of Restated 2008 with the highest sales decline in women’s apparel due primarily to unseasonably warm weather in fall and winter throughout most of Canada causing softer sales in winter-clothing, low assortment breadth in certain lines and increased deep discounts by certain competitors.Additional information on the merchandising and real estate joint venture operations is set forth in Section 2 “Segment Performance” of this MD&A. The cost of merchandise sold, operating, administrative and selling expenses were 9. 0% lower in the fourth quarter of Fiscal 2009 as compared to the same period in Restated 2008. This decline is attributable to lower sales resulting in lower variable costs and continued improvements in reducing variable and semi-fixed expenses. For the fourth quarter of Fiscal 2009, operating expenses declined primarily due to a reduction in payroll and variable compensation expense, lower advertising and other non-customer related expenditures.In addition, the Company simplified the earn rates and redemption values of the Sears Club Loyalty program to allow for more effective communication and promotion of the program, which resulted in a decrease to the reserve and a pre-tax gain of $2. 9 million. The gross margin rate increased 154 basis points in the fourth quarter of Fiscal 2009 as compared to the same quarter in Restated 2008. The improvement is due to an increase in vendor allowances, reduced freight costs and continued success at reducing inventory shrinkage. This was partially offset by the margin compression resulting from increased promotional activity following the holiday shopping season.Operating EBITDA for the fourth quarter for Fiscal 2009 increased 20. 4% to $222. 9 million as compared with $185. 2 million for the same quarter of Restated 2008. As discussed above in Section 1f “Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA”, Operating EBITDA does not include unusual or non-comparable gains and losses arising from activities outside of the Company’s principal operations. Depreciation and amortization expense decreased 3. 5% to $30. 3 million in the fourth quarter of Fiscal 2009 from $31. 4 million during the same period in Restated 2008. The decrease is predominantly due to lower capital expenditures in recent years.Net interest expense in the fourth quarter of Fiscal 2009 increased 60. 0% to $7. 2 million as compared with $4. 5 million in the same period last year. The increase is primarily attributable to a reduction in interest income earned on the Company’s cash and short-term investments. Investments consist primarily of Government of Canada treasury bills and bank term deposits. 22 2009 Annual Report Income taxes increased 17. 7% in the fourth quarter of Fiscal 2009 relative to the same period in Restated 2008 and is attributable to higher taxable income. 2008 Compared with 2007 – Total revenues and merchandise net sales for the fourth quarter of Restated 2008 decreased 5. % as compared to the fourth quarter of Comparable 2007. With the exception of Product Repair Services, all channels experienced lower sales. Internet sales for the fourth quarter of Restated 2008 increased 11. 9% relative to the fourth quarter of Comparable 2007 period. In relation to the 13-week period ended February 2, 2008, same store sales for the fourth quarter of Restated 2008 decreased by 6. 2%. Sales across most categories were negatively impacted by the worsening economic conditions which resulted in consumers holding back discretionary spending during the holiday shopping season in the fourth quarter of Restated 2008. Home and hardlines categories sales decreased by 6. % relative to the same period of Comparable 2007 with major appliances and home decor experiencing the largest sales declines, primarily driven by competitive pricing pressures. In spite of the economic downturn, electronics continued to exhibit healthy growth as sales increased 7. 0% in the fourth quarter of Restated 2008 relative to the fourth quarter of Comparable 2007 due to the Company’s recharge initiatives in prior periods designed to provide product offerings, such as high-definition televisions and other electronics that are relevant to consumers’ needs. The Company also experienced sales growth in its seasonal hardlines, led by record snow blower sales. Apparel and accessories categories sales declined 9. % in the fourth quarter of Restated 2008 in relation to the fourth quarter of Comparable 2007 with the biggest sales declines in women’s and men’s wear due to increased competitive pricing and difficult economic conditions. Relative to the fourth quarter of Comparable 2007, the cost of merchandise sold, operating, administrative and selling expenses were 4. 0% lower as compared to the fourth quarter of Restated 2008 primarily driven by lower sales resulting in lower variable costs and continued improvements in managing costs partially offset by a reduction in gross margin rates. Operating expenses declined due to a reduction in payroll and variable compensation expense, the benefits of a cost sharing arrangement entered into by the Company with respect to marketing expenses and lower advertising expenditures.The gross margin rate declined 156 basis points in the fourth quarter of Restated 2008 relative to the same period in Comparable 2007 due to a combination of lower selling prices resulting from promotional and price matching programs implemented to address the highly competitive environment and a shift in the balance of sale from higher margin to lower margin products, such as electronics, offset by a significant reduction in inventory shrinkage due to the Company’s initiative to improve inventory management and tighten loss prevention and higher markdown and price protection subsidies resulting from successful vendor negotiations. Operating EBITDA in the fourth quarter of Restated 2008 decreased 17. 5% as compared to the fourth quarter of Comparable 2007. As discussed above in Section 1f “Use of Non-GAAP Measures and Reconciliation of Net Earnings to Operating Net Earnings and Operating EBITDA”, Operating EBITDA does not include unusual or non-comparable gains and losses arising from activities outside of the Company’s principal operations.Depreciation and amortization expense was 4. 6% lower in the fourth quarter of Restated 2008 relative to the fourth quarter of Comparable 2007 predominantly due to a $1. 2 million asset impairment charge relating to four underperforming stores and there being lower capital expenditures in recent years. Net interest expense in the fourth quarter of Restated 2008 increased by 364. 7% relative to the fourth quarter of Comparable 2007 and is primarily attributable to a reduction in interest income earned on the Company’s cash and short-term investments. Income taxes in the fourth quarter of Restated 2008 decreased 24. 2% as compared to the fourth quarter of Comparable 2007.The decrease in income tax expense is predominantly due to lower income. The effect of the lower income is further compounded by a reduction in the statutory tax rates in Restated 2008 as compared to Comparable 2007. 2009 Annual Report 23 2. Segment Performance a. Merchandising Operations i. Overview The Company’s merchandising segment includes the sale of goods and services through the Company’s Retail and Direct channels. The Retail channel includes merchandise sales from the Company’s mall-based and off-mall format stores. Sears store formats are either corporate or independently-owned and operated. The corporate store formats include Full-line, Sears Home, Appliances and Mattresses, and Outlet stores.Sears Dealer locations are independently operated stores offering a merchandise selection that reflects local demand, often containing a catalogue merchandise pick-up location. The Direct channel encompasses catalogue and internet shopping at Sears. ca. Merchandising operations also include service revenues related to travel and home services, which include Home Improvement Products and Services and a nationwide home maintenance, repair and service network. Sears Home Improvement Products and Services include Floor Covering Centres and Sears Home Services showrooms located within Sears Home stores. Merchandising is also supported by the Company’s logistics operations.The Company’s locations were distributed across the country as follows: As at January 30, 2010 Pacific Total 15 5 1 – 21 35 2 – – – 5 118 16 159 122 48 12 4 186 186 13 19 11 30 22 793 108 1,853 As at January 31, 2009 Total 122 48 11 6 187 171 13 19 11 30 30 824 106 1,858 As at February 2, 2008 Total 121 48 13 5 187 163 14 19 11 30 37 825 106 1,826 Atlantic Full-line department stores Sears Home stores Outlet stores Specialty type: Appliances and Mattresses / Lands’ End stores Corporate stores Dealer stores Sears Home Services Showrooms Corbeil Franchise stores Corbeil Corporate stores Corbeil Sears Floor Covering Centres Cantrex Buying Group Members Travel offices Catalogue merchandise pick-up locations 12 2 1 – 15 33 1 – – – – 67 7 258 Quebec 27 12 1 – 40 15 3 17 11 28 3 303 20 451 Ontario 46 19 7 3 75 49 6 2 – 2 7 185 45 532 Prairies 22 10 2 1 35 54 1 – – – 7 120 20 453In Fiscal 2009, the Company opened 15 new Dealer stores and one new Outlet store. The Company also closed eight Floor Covering Centres, one Appliances and Mattresses store and one Lands’ End store. In Restated 2008, the Company relocated its Centre Mall Full-line department store to Eastgate Square, both of which were located in Hamilton, Ontario, relocated its Red Deer Parkland Mall Full-line store to Red Deer Bower Place Shopping Centre, both of which were located in Red Deer, Alberta, closed two Outlet stores and converted the one Outlet store in Deerfoot, Alberta to a Full-line department store. The Company also opened 12 new Dealer locations and closed four.New Dealer locations opened in Petawawa, Ontario, Blairmore, Alberta and Gander, Newfoundland during the Fourth Quarter of Restated 2008. One Sears Home Services Showroom and seven Sears Floor Covering Centres were closed during Restated 2008. The reduction in Cantrex members in Restated 2008 is due to the normal fluctuation of members choosing to source their inventory requirements through other means. 24 2009 Annual Report Although the Company closed certain catalogue merchandise pick-up locations which were in close proximity to other Sears locations, the number of catalogue locations increased in Restated 2008 following the formation of the arrangement with The UPS Store.Retail Channels Full-line Department Stores – Sears Full-line department stores are located primarily in suburban enclosed shopping centres. The major merchandise categories include the following: Home & Hardlines – Major appliances, home furnishings and mattresses, home decor, lawn and garden, hardware, electronics and leisure and seasonal products. Apparel & Accessories – Women’s, men’s and children’s apparel, nursery products, cosmetics, jewellery, footwear and accessories. Although merchandise varies by store, the merchandise sales mix between the two major categories is approximately 60% home and hardlines and 40% apparel and accessories.Full-line department stores also offer home improvement products and services and include a Sears catalogue merchandise pick-up location. Sears Travel offices and licensed businesses, such as optical centres and portrait studios, are also located in most of the Company’s Full-line department stores. Sears Home Stores – Sears Home stores are typically located in power centres and present an extensive selection of furniture, mattresses and box-springs, electronics and major appliances. The majority of these stores range in size from 35,000 to 60,000 square feet. Home Improvement Products and Services operations are located within 10 Sears Home stores and one Outlet store.The showrooms provide a range of products and services sold under the Sears Home Services banner that are complementary to home furnishings and major appliances. Appliances and Mattresses Stores – The Sears Appliances and Mattresses stores are part of the Company’s strategy to bring its product categories to a growing number of customers who shop in conveniently located power centres. These stores are smaller in size (approximately 10,000 to 15,000 square feet) and feature a wide selection of major appliances, mattresses and box-springs, and include Sears private labels and a variety of national brands. Outlet Stores – Sears Outlet stores offer clearance merchandise, particularly from the Company’s Direct channels, as well as surplus inventory of big-ticket items from all channels.Dealer Stores – Sears Dealer locations are independently operated and offer major appliances, furniture, home electronics, lawn and garden power products as well as a catalogue merchandise pick-up location. Selections vary by dealer – for example, mattress sets are offered in 134 Sears Dealer stores while 28 stores include furniture. Most Dealer stores are located in markets that had previously been served by a catalogue agent and continue to lack the population to support a Full-line department store. Home Improvement Products and Services – Sears Home Improvement Products and Services are marketed through 90 Full-line department stores and 13 Sears Home Services® showrooms located within Sears Home and Outlet stores, by elephone at 1-800-4-MY-HOME (English) or 1-800-LE-FOYER (French) and online at Sears. ca. Sears Home Services provides a broad range of home services, including the sale, installation, maintenance and repair of heating and cooling equipment, roofing, doors and windows, flooring, window coverings and energy audits. In addition, home services such as kitchen and bathroom renovations, home security, carpet and upholstery cleaning, duct cleaning and maid services are offered. Product Repair Services – Sears Product Repair Service is the largest and most comprehensive parts and service network in Canada, with over 1 million parts available and a network of more than 1,800 technicians and contractors.Floor Covering Centres – Sears Floor Covering Centres is a network, managed by Cantrex, of independently owned and operated retail outlets offering an assortment of broadloom and hard floor coverings. Cantrex – Cantrex is the largest buying group in Canada, representing 793 independent retailers with over 1,200 locations across Canada. 2009 Annual Report 25 Corbeil – Corbeil is a chain of major appliance specialty stores located throughout Quebec and Eastern Ontario. There are 30 stores in the chain, 19 of which are franchised. The chain also includes one liquidation centre. Stores average approximately 6,500 square feet in size. Travel – Sears Travel Service operates within 108 Sears locations, 83 private travel agents, an online travel service at www. searstravel. a and 1-866-FLY-SEARS, which connects customers to the nearest geographical branch and travel agent. As at the end of the Fiscal 2009 and Restated 2008 years, the gross square footage for corporate store locations was as follows: As at As at As at January 30, January 31, February 2, (square feet, millions) 2010 2009 2008 Full-line department stores Sears Home stores Outlet stores Appliances and Mattresses stores Corbeil Total 16. 5 2. 2 0. 9 0. 1 0. 1 19. 8 16. 5 2. 2 0. 9 0. 1 0. 1 19. 8 17. 4 2. 2 1. 1 0. 1 0. 1 20. 9 Gross square footage for corporate store locations as at January 30, 2010 remained the same as compared to January 31, 2009.Gross square footage for the Company’s Full-line department stores decreased as at January 31, 2009 compared to February 2, 2008 due to the relocation of the Hamilton, Ontario and Red Deer, Alberta Full-line department stores to smaller premises, the conversion of the Calgary Deerfoot location from an Outlet to a Full-line department store and the conversion of some of the Toronto Eaton Centre Full-line department store retail space to office space. The decrease in gross square footage for Outlet Stores is attributable to the conversion of the Calgary Deerfoot Outlet to Full-line department store space and the closure of the Brampton Shoppers World Outlet Store, in Brampton, Ontario. Direct Channels Sears is one of Canada’s largest direct marketing retailers. The Company’s Direct channel is comprised of its catalogue business, which is Canada’s largest general merchandise catalogue business, and Sears. ca, one of Canada’s leading online shopping destinations, with over 34. 8 million visitors in Fiscal 2009.With two distribution centres exclusively dedicated to servicing the direct channels and with 1,853 catalogue merchandise pick-up locations nationwide, Sears can deliver orders within 72 hours in most areas of the country. Orders can be placed by telephone at 1-800-26-SEARS, the most frequently called number in Canada, by mail, fax, online at Sears. ca or in person through Sears stores and catalogue agents. At the end of Fiscal 2009, approximately 1,694 of the total 1,853 catalogue merchandise pick-up locations were independently operated under independent local ownership, with the remaining 159 units located within Sears stores. Catalogue – In Fiscal 2009, 18 different catalogues were distributed throughout Canada reaching up to approximately 3. 6 million households.In addition, in Fiscal 2009, Sears distributed 14 Specialogues designed to offer more seasonally relevant merchandise to specific customers. Sears. ca – The Company’s website, Sears. ca enables the Company to provide new and exciting merchandise offers direct to web and highlights the Company’s extensive general catalogue selection. In Fiscal 2009, the Company launched the first phase of the new Sears. ca website with an increased selection of categories and skus available to engage new customers and demographies. Sears. ca is now built on a more robust, technologically advanced platform, 26 2009 Annual Report featuring improved search capability, easier navigation, more detailed product information, as well as speed and reliability.Sears is committed to maintaining its reputation as a trusted Canadian retailer by focusing on customer privacy, security and satisfaction when shopping on Sears. ca. Logistics Distribution Service Centres – Sears operates five distribution centres and one cross dock facility strategically located across the country. The total floor area of these service centres was 6. 3 million square feet at the end of Fiscal 2009, of which 5. 4 million square feet is devoted to warehouse and logistics operations. The remainder of the space is utilized for other Sears operations, including call centre services. S. L. H. Transport Inc. (“SLH”) – The Company’s wholly-owned subsidiary, SLH, transports merchandise to stores, catalogue merchandise pick-up locations and directly to customers.SLH is responsible for providing logistics services for the Company’s merchandising operations by operating a fleet of tractors and trailers to provide carrier services for Sears and contract carrier services to commercial customers who are unrelated to Sears. The arrangements with third parties increase SLH’s fleet utilization and improve the efficiency of its operations. SLH continues to grow and has developed a nationwide distribution network to provide better and more consistent service to its customers. ii. Strategic Initiatives Sears is committed to building customer relationships, increasing profitability and improving every day. The Company has undertaken several strategic merchandising initiatives to achieve these objectives, a number of which are listed below.Relevant and Current Product Assortment – The Company endeavours to produce profitable sales by increasing sales and volumes of product assortments that are relevant to its existing customers, while attracting new customers through innovative products and brands, including the Sears brand, private label brands and non-proprietary brands exclusive to Sears. On a regular basis, the Company undertakes “recharges” to improve product selection, promotion, customer service and staff product knowledge. These initiatives also permit Sears to introduce new brands and substitute or discontinue existing brands. During Fiscal 2009, the Company commenced recharges in: women’s wear, men’s wear, children’s wear, and cosmetics – including the launch of Oasis, a new beauty department concept, in two Full-line stores.The Company expects to continue these types of recharges and to undertake similar initiatives in Fiscal 2010. Private Brand Growth – One of the Company’s most important strengths is the recognition and reputation of its private-label brands, some of which include: • Jessica®, Nevada®, Attitude®, Distinction®, Boulevard Club®, Tradition®, Protocol®, Retreat®, Alpinetek®, Pure NRG®, Trendzone®, Baby Boots® and Whole Home® The Company also has licenses from Sears, Roebuck and Co. (“Sears Roebuck”) and Lands’ End Inc. , wholly-owned indirect subsidiaries of Sears Holdings, to use the following brands: • Kenmore®, Craftsman®, DieHard® and Lands’ End® In addition, the Company also has exclusivity relationships with many non-proprietary national brands.By leveraging and building upon its portfolio of brands, the Company strives to deliver relevant products that resonate with its customers and gives them additional reasons to continue to shop at Sears. Pricing Strategy – The Company’s pricing strategy is anchored to its Value Strategy, which offers everyday value with an active promotional program. Sears Value Strategy focuses on solutions for the customer, from coordinating a particular look to providing easy-to-understand product benefits and features. This strategy allows the Company to increase the average transaction value and improve profitability. 2009 Annual Report 27 Product and Service Innovation – The Company strives to provide an innovative and exciting product assortment and service selection that leverages the Company’s multi-channel capability.In Fiscal 2009, Sears Canada undertook several initiatives to introduce new businesses and products targeted to specific customer segments and local market opportunities, with a particular focus on its gift registry business, which has expanded to a total of 107 stores, and the launch of Oasis in two Full-line stores. Oasis is a new beauty department concept offering a ‘one-stop’, ‘head-to-toe’ shopping destination featuring an exceptional assortment of beauty brands and personal care tools. Customer Segmentation – The Company offers focused merchandise selection to specific customer segments, one of which is by way of Specialogues. In Fiscal 2009, 14 Specialogues were produced as compared to 16 Specialogues during Restated 2008. Direct Channel Business – One of the Company’s strengths is its multi-channel operations that permit an enhanced merchandise selection and a wide offering of services to consumers.In an effort to further improve the online shopping experience, Sears launched the first phase of the new Sears. ca website with an increased selection of products and categories available to engage new customers and demographics. Sears. ca is now operated by a more robust, technologically advanced platform, featuring improved search capability, easier navigation, more detailed product information, as well as enhanced speed and reliability. Loyalty Rewards Program – During Fiscal 2009, the Company, in conjunction with JPMorgan Chase, introduced modifications to the Sears Club Loyalty rewards program, one of the highest value reward programs in Canada.The Company revised certain assumptions used to calculate the Sears Club Loyalty program based on new information regarding redemption rates and the costs associated with the loyalty program, resulting in a net decrease to the reserve and a pre-tax gain of $7. 0 million. The Company also simplified the earn rates and redemption values to allow for more effective communication and promotion of the program, which resulted in an additional decrease to the reserve and a pre-tax gain of $2. 9 million. Productivity Improvement Initiatives – The Company focused on prudently managing its semi-fixed and variable expenses while making discretionary spending decisions in order to position the Company for long-term stability, with a view to become Canada’s #1 retailer.Some expense management measures included associate wage freezes, up to 15% in salary reductions for associates at the Vice-President level and above, pension contribution reductions and strategic reductions to its staff and call centre. The Company also completed the relocation of head office operations to the vacant space above the Toronto Eaton Centre retail store to reduce costs and improve efficiencies. Inventory levels were reduced by $116. 0 million through successful promotional events, realigning purchases with current sales trends and improved inventory management practices such as integrating return-to-vendor provisions into agreements as well as selling products on consignment.The Company also improved its replenishment and direct importing practices to uplift margins, enhance its competitive pricing capabilities and to ensure customers have a broad and relevant selection of quality products from which to choose in order to grow sales. iii. Results from Merchandising Operations Since November 15, 2005, revenues and earnings from the credit card marketing and servicing alliance with JPMorgan Chase, including costs associated with the Company’s loyalty program, certain overhead expenses and the remaining net assets of the former Credit and Financial Services operations, have been recorded in the merchandising segment.Refer to the Company’s Annual Reports from 2005 and prior years for historical information pertaining to the revenues and earnings reported in the credit segment. 28 2009 Annual Report (in millions) Revenues Cost of merchandise sold, operating, administrative and selling expenses Add back restructuring expense Operating EBITDA*** Fiscal 2009 $ 5,153. 1 4,690. 0 9. 3 $ 472. 4 % Change Fiscal 2009 vs. Restated 2008* (9. 4%) (9. 7%) (4. 7%) Restated 2008* $ 5,687. 3 5,191. 6 $ 495. 7 % Change Restated 2008* vs. Comparable 2007** (1. 9%) (2. 0%) (0. 4%) Comparable 2007** $ 5,795. 7 5,297. 8 $ 497. 9 Restated 2008 represents the 52-week period ended January 31, 2009, adjusted