Swot Analysis Of Sears

2009 ANNUAL REPORT Sears Canada Inc.

TABLE OF CONTENTS

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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

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FINANCIAL HIGHLIGHTS
Fiscal 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* $ 5,733.2 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 $ 21.54 $ 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 to important risks and uncertainties, which are described in the “Cautionary Statement Regarding Forward-looking Information” on page 9 of this Annual Report.
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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 $1,397.6 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 furnishings 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.

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Home 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. 2010 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

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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

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ELEVEN YEAR SUMMARY1
Fiscal 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
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2009

Restated 20082

Restated 20073

2006

2005

2004

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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

131 $ 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 15.4 123 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”.
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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.

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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 0.57 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.

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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

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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.

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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

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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

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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

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10. Disclosure Controls and Procedure 11. Risks and Uncertainties

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1. Company Performance
a. Vision
Sears 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;

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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

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• 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.ca 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 from 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.

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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 Investments
The 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, Québec. The financial details of this transaction are discussed in this MD&A under Section 2b “Real Estate Joint Venture Operations”.

Business Development Opportunities
On 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;

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• 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 Responsibility
The 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 $5.0 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.

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e. Outlook
The 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.
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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.

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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.

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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 20.7% 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 Québec, 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 10.5% 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.
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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 14.0% 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 2.1% 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 Montréal, Québec 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 décor 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 13.3%, 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.

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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 13.0% 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 Montréal, Québec 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 Analysis
Fiscal 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 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

nm 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.

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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 9.1% 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 Québec, 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 5.8% 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 6.3% relative to the same period of Comparable 2007 with major appliances and home décor 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 9.1% 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.

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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

Québec 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 20 453

In 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.

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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 décor, 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 telephone 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.

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Corbeil – Corbeil is a chain of major appliance specialty stores located throughout Québec 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.ca 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,

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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.

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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.

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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 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 Compared with 2008 – Revenues declined 9.4% in Fiscal 2009 as compared to Restated 2008 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 20.7% in Fiscal 2009 compared to 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 16.0%. Same store sales 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 Québec, 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 10.5% 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 warmer winter weather than 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.5 In addition, Sears has the largest market share in major appliances and furniture as measured by dollar sales.6 The cost of merchandise sold, operating, administrative and selling expenses were 9.7% 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

*

5 6

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 29

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. Operating EBITDA for Fiscal 2009 decreased 4.7% to $472.4 million as compared with $495.7 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. 2008 Compared with 2007 – Revenues from merchandising operations decreased 1.9% in Restated 2008 relative to Comparable 2007 due to lower sales across the Full Line, Sears Home, Direct, Outlet, Corbeil and Cantrex channels, which was partially offset by increased sales in the Dealer channel, which opened 12 new stores in Restated 2008. Service revenues increased 7.8% relative to Comparable 2007 due to improved results from Home Improvement Products Services, Sears Line Haul and delivery revenue partially offset by lower sales in Travel and Cantrex. Growth in internet sales remained positive, increasing 18.3% over Comparable 2007. Same store sales declined 1.6% in Restated 2008 relative 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% as compared to Comparable 2007, with the biggest decline in the home décor 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 13.3%, respectively, as compared to Comparable 2007. The Company also experienced 17.7% sales growth in Restated 2008 as compared to Comparable 2007 in seasonal hardware driven by record snow blower sales. Sales in apparel and accessories categories decreased 6.2% in Restated 2008 as compared 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 primarily due to improvements in gross margin rates and a continued focus on managing expenses. Payroll expenses in Restated 2008 were flat relative to Comparable 2007. Benefits expenses decreased due to lower variable compensation expenses. Advertising expense in Restated 2008 was lower than Comparable 2007 partially due to the benefits from a cost sharing arrangement entered into by the Company with respect to certain marketing costs. The gross margin rate for Restated 2008 improved 24 basis points as compared to 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. Operating EBITDA decreased by 0.4% as compared to Comparable 2007 and is primarily driven by the decline in sales as noted above. The decline is primarily from the last three months of the year as Operating EBITDA for the first nine months of Restated 2008 was up 13%.

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b. Real Estate Joint Venture Operations
i. Overview
As at January 30, 2010, Sears had joint venture interests in 11 shopping centres across Canada. The Company carries the proportionate share of these interests in its consolidated financial statements. Joint venture interests range from 15% to 50% and are co-owned with major shopping centre owners. Sears is not involved in the day-to-day management of the shopping centres but is actively involved in all major decisions.

ii. Strategic Initiatives
The primary objective of the Company’s real estate joint venture operations is to maximize the returns on its investments in shopping centre real estate. Sears reviews the performance of these joint ventures on a regular basis. Shopping centre investments are non-core assets that the Company sells when it is financially advantageous to do so. Similarly, the Company may also develop excess land within these joint venture investments when it is advantageous to do so. In December 2009, Sears sold its 50% joint venture interest in Promenades de Sorel in Sorel, Québec which resulted in a $1.9 million pre-tax gain.

iii. Results from Real Estate Joint Venture Operations
% Change Fiscal 2009 vs. Restated 2008* 3.5% 3.7% 3.3% $ $ % Change Restated 2008* vs. Comparable 2007** (6.7%) 0.0% (11.9%)

(in millions)
Revenues Cost of merchandise sold, operating, administrative and selling expenses Operating EBITDA*** $ $

Fiscal 2009 47.5 22.3 25.2

Restated 2008* 45.9 21.5 24.4

Comparable 2007** $ $ 49.2 21.5 27.7

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 Compared to 2008 – For Fiscal 2009, revenues for real estate joint venture operations increased by 3.5% and Operating EBITDA increased by 3.3% as compared to Restated 2008. The increase is due to the expansion of one of the Company’s joint venture interests completed at the end of Restated 2008. 2008 Compared to 2007 – For Restated 2008, revenues for real estate joint venture operations decreased by 6.7% and operating EBITDA decreased by 11.9% in relation to the Comparable 2007 period as a result of the Company’s disposition of its interests in the Place Vertu shopping centre in Montréal, Québec in the first quarter of Comparable 2007 and the Heritage Place shopping centre in Owen Sound in the third quarter of Comparable 2007.

*

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31

3. Liquidity and Financial Position
Current assets as at January 30, 2010 were $246.6 million higher than at January 31, 2009 due primarily to the net effect of higher cash, restricted cash and investment balances and future income tax assets. The Company continues to be in a strong financial position with cash, restricted cash and investments increasing $426.1 million to $1,397.6 million as at January 30, 2010 ($1,397.6 million recorded as current assets) compared to $971.5 million as at January 31, 2009 ($964.6 million recorded as current assets and $6.9 million recorded as other long-term assets), an increase of 43.9%. As at January 30, 2010, the Company’s short-term investments of $1,325.3 million and restricted cash and investments of $15.8 million are invested in highly liquid assets such as Government of Canada treasury bills and term deposits with Canadian chartered banks. See below and the Consolidated Statements of Cash Flows for further detail on the sources and uses of cash. Cash and investments are considered to be restricted when they are subject to contingent rights of a third party customer, vendor, or government agency. As at January 30, 2010, the Company recorded $15.8 million of restricted cash and investments as compared to $151.7 million ($144.8 million recorded as current assets and $6.9 million recorded as long-term assets) as at January 31, 2009. This decrease is due to the Company’s initiative to replace letter of credit obligations issued to support the Company’s offshore merchandise purchasing program with a direct payment method which does not require a credit facility or collateral. Inventories were $852.3 million as at January 30, 2010 as compared to $968.3 million at January 31, 2009. The $116.0 million decrease in the inventory balance is due to the Company’s continued focus on improving inventory performance and managing inventory levels through the reduction of unproductive inventory and the negotiation of better terms with vendors while ensuring that customers still have a broad selection of current quality products. Prepaid expenses and other assets include the market value of the Company’s foreign currency derivative contracts. See Section 5 “Financial Instruments and Off-Balance Sheet Arrangements” for further details on the Company’s derivative contracts. Total assets as at the end of Fiscal 2009 and Restated 2008 are as follows: As at, January 30, 2010 $ 3,404.8 As at January 31, 2009* (Restated) $ 3,237.3 As at February 2, 2008** $ 2,974.7

(in millions, as at fiscal year end)
Total assets

* Adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. ** 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.
Relative to January 31, 2009, the $167.5 million increase in total assets to $3,404.8 million as at January 30, 2010 is due mainly to higher current assets as noted above, partially offset by lower capital assets. Relative to February 2, 2008, the $262.6 million increase in total assets to $3,237.3 million as at January 31, 2009 from $2,974.7 million as at February 2, 2008 is primarily due to higher current assets noted above partially offset by lower capital assets. As at, January 30, 2010 $ 1,747.3 As at January 31, 2009* (Restated) $ 1,754.1 As at February 2, 2008** $ 1,908.3

(in millions, as at fiscal year end)
Total liabilities

* Adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. ** 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.
32 2009 Annual Report

Total liabilities as at January 30, 2010 decreased $6.8 million to $1,747.3 million as compared to January 31, 2009. Total liabilities as at January 31, 2009 decreased $154.2 million from $1,908.3 million as at February 2, 2008. The decrease for both periods is due to a decrease in debt obligations. The Company is not subject to any financial covenants and the Company’s debt consists of $300.0 million of medium-term notes with fixed interest rates and payment terms. These notes will come due in Fiscal 2010 ($200.0 million due May 10, 2010 and $100.0 million due September 20, 2010) and the Company expects to satisfy its repayment obligations primarily through cash generated from operations. Cash Flow from Operating Activities – Cash flow generated from operations for the 52-week period ended January 30, 2010 increased $330.2 million to $496.1 million from $165.9 million during Restated 2008. This increase is primarily driven by favourable changes in working capital balances due in part to the Company’s efforts in the sell-through and management of inventory, as well as improved terms and timing of payments, partially offset by lower net earnings. See Note 16, “Changes in Non-Cash Working Capital Balances” of the Notes to Consolidated Financial Statements for further details on non-cash working capital balances. Cash flow generated from operations was $165.9 million in Restated 2008, $59.4 million lower as compared to $225.3 million in Restated 2007. This decline in cash flow from operating activities is primarily driven by lower net earnings excluding non-cash items partially offset by favourable changes in working capital balances due in part to the Company’s efforts in improving inventory management as well as timing of payments. Cash Flow from Investing Activities – Cash flow generated from investing activities for the 52-week period ended January 30, 2010 increased $286.4 million to $76.2 million compared to cash flow of $210.2 million used for investing activities in Restated 2008. The increase is due primarily to the Company’s initiative to replace letter of credit obligations issued to support the Company’s offshore merchandise purchasing program with a direct payment method which does not require a credit facility or collateral. Given the challenging economic climate, capital expenditures were carefully monitored throughout Fiscal 2009. Cash used for capital expenditures was $65.7 million in Fiscal 2009, down 32.3%, as compared to Restated 2008. To position the Company to grow and become Canada’s #1 retailer a balanced approach to managing capital expenditures was taken. Cost reductions were balanced with investments in areas such as retail store initiatives, the internet business, information system infrastructure and logistics. Cash flow used for investing activities was $210.2 million in Restated 2008 compared to $56.2 million of cash flow generated from investing activities in Restated 2007. During Restated 2008, the Company received approximately $40 million in proceeds from the sale of the Calgary, Alberta property, used $7 million to acquire the assets of Excell and used $96.6 million for capital expenditures. During Restated 2007, the Company received proceeds of $108.9 million from the sale of corporate assets and the Company’s interest in the Place Vertu shopping centre, offset by capital expenditures of $54.6 million. Cash Flow used for Financing Activities – Cash flow used for financing activities for the 52-week period ended January 30, 2010 increased $2.8 million to $10.3 million from $7.5 million in Restated 2008. The increase is due to the regular repayment of capital lease and joint venture debt obligations. Cash flow used for financing activities in Restated 2007 was $132.8 million due to the repayment of the $125 million secured 6.55% debentures in November 2007 and the regular repayment of capital lease obligations. Share Data – The only shares of the Company outstanding are common shares. The number of outstanding common shares at the end of Fiscal 2009 and Restated 2008 are as follows: As at January 30, 2010 107,620,995 As at January 31, 2009* 107,620,995 As at February 2, 2008** 107,620,995

(as at fiscal year end)
Outstanding shares

* Adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. ** 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.
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In Fiscal 2009 and Restated 2008, there were no common shares issued upon the exercise of options pursuant to the Employees Stock Plan. As at March 23, 2010, there are 107,620,995 common shares outstanding and 39,020 tandem award options outstanding under the Employees Stock Plan. Contractual Obligations – Contractual obligations, including payments due over the next five fiscal years and thereafter, are shown in the following table: Payments Due by Period

(in millions, as at fiscal year end)
Long-term debt (excluding capital lease obligations) Capital lease obligations Operating leases Royalty license fees1
1

Total $ 351 2 661 5 $

2010 314 1 106 2

2011 to 2012 $ 14 1 184 2

2013 to 2014 $ 19 – 131 1

2015 & beyond $ 4 – 240 –

The Company pays royalties under various merchandise license agreements, which are generally based on sales of products covered under these agreements. The Company currently has license agreements for which it pays royalties, including those to use the Arnold Palmer, Nygard, Roots and Pierre Cardin trademarks. Royalty license fees represent the minimum Sears Canada is obligated to pay, regardless of sales, as guaranteed royalties under these license agreements.

Future Benefit Plans – In Fiscal 2009, the net expense incurred relating to the Company’s obligations for pensions and post-retirement benefits was $26.4 million, an increase of $2.2 million from $24.2 million in Restated 2008. See Note 1, “Summary of Accounting Policies and Estimates” and Note 11, “Associate Future Benefits” in the Notes to Consolidated Financial Statements for a description of the Company’s benefit plans. The last actuarial funding valuation report of the Sears Registered Retirement Plan (“SRRP”) is as of December 31, 2007 filed with the Financial Services Commission of Ontario. The next required valuation report to be filed is as of December 31, 2010. These reports determine the amount of cash contributions that the Company is required to contribute into the SRRP. The December 31, 2007 funding report showed the SRRP to be in a surplus position. As the SRRP pension fund assets consist of a mix of bonds and equities, recent market conditions have reduced the market value of the pension fund assets from a surplus as at December 31, 2007 into a solvency deficit position. If this reduced level of pension fund assets persists to the date of the next funding valuation report of the SRRP, to be filed as of December 31, 2010, then the Company would likely be required to begin making cash funding contributions to the SRRP in future years. However, due to the current solvency deficit position, the Company is no longer funding its Defined Contribution requirements from the assets of the SRRP and beginning in Fiscal 2010, the Company will be expensing a portion of the associated actuarial losses. The asset allocation for the Company’s pension fund assets may be changed from time to time in terms of weighting between fixed income, alternative investments, equity and other asset classes as well as within the asset classes themselves. The plan’s target allocation is determined taking into consideration the amounts and timing of projected liabilities, the Company’s funding policies and expected returns on various asset classes. To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.

4. Capital Resources
The Company’s capital expenditures, working capital needs, debt repayment and other financing needs are funded primarily through cash generated from operations. In selecting appropriate funding choices, the Company’s objective is to manage its capital structure in such a way as to diversify its funding sources while minimizing its funding costs and risks. Sears expects to be able to satisfy all of its financing requirements through cash on hand, cash generated by operations and available credit facilities. The Company’s cost of funds is affected by a variety of general economic conditions, including the overall interest rate environment, as well as the Company’s financial performance, credit ratings and fluctuations of its credit spread over applicable reference rates.
34 2009 Annual Report

The Company regularly monitors its sources and uses of cash and its level of cash on hand, and considers the most effective use of cash on hand including, for the repayment of obligations, potential acquisitions, stock purchases and dividends. During Restated 2008, the Company’s secured $200.0 million revolving credit facility expired, resulting in the release of the assets which had been pledged as security. The revolving facility had been solely used to support the Company’s offshore merchandise purchasing program and was replaced by a U.S. $120.0 million letter of credit facility. As at January 30, 2010, outstanding letters of credit of U.S. $13.1 million were issued under the Company’s offshore merchandise purchasing program, as compared to U.S. $92.0 million as at January 31, 2009. The Company has undertaken an initiative to replace the majority of its letters of credit issued to suppliers to support the offshore merchandise purchasing program with a direct payment method which does not require a credit facility. The letter of credit facility was renewed in December 2009 at a reduced level of U.S. $20.0 million. In September 2006, Moody’s Investors Service, Inc. (“Moody’s”) issued a corporate family rating for Sears Canada of Ba1. In December 2007, Standards & Poor’s (“S&P”) reduced the Sears Canada rating to BB from BB+ and again in December 2008 to BB-. There were no changes to Moody’s Ba1, S&P’s BB- or Dominion Bond Rating Service (“DBRS”) Limited’s BB ratings of the Company in Fiscal 2009. The Company’s corporate credit rating is influenced by the financial position of Sears Holdings, the Company’s majority shareholder, and may not reflect the independent credit risk profile of Sears Canada. These non-investment grade credit ratings may limit the Company’s future access to capital markets and adversely affect the Company’s cost of borrowing.

5. Financial Instruments and Off-Balance Sheet Arrangements
Currency Instruments – The Company mitigates the risk of currency fluctuations on offshore merchandise purchases made in U.S. currency by purchasing U.S. dollar denominated derivative contracts for a portion of its expected requirements. The Company’s total U.S. currency requirement in Fiscal 2010 is in the range of U.S. $600.0 to $700.0 million. As at January 30, 2010, there were U.S. dollar denominated foreign exchange contracts with a total notional value of U.S. $298.8 million (2008: U.S. $457.4 million) with settlement dates over the next 11 months. In addition, the Company is subject to foreign exchange risk on U.S. dollar denominated short-term investments pledged as collateral for U.S. dollar denominated letter of credit obligations issued under the Company’s offshore merchandise purchasing program. As at January 30, 2010, there was a swap contract outstanding with a notional value of U.S. $4.8 million with a settlement date matching the expected term of the outstanding obligations. Subsequent to January 30, 2010, the Company entered into foreign currency derivative contracts with a notional principal of U.S. $245.0 million. These derivative contracts have settlement dates extending to April 1, 2011 and have been designated as cash flow hedges for hedge accounting treatment under CICA Handbook Section 3865, “Hedges” (“Section 3865”). These contracts are intended to reduce the foreign exchange risk with respect to anticipated purchases of U.S. dollar denominated goods and services, including goods purchased for resale.

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6. Funding Costs
The funding costs for the Company in Fiscal 2009, Restated 2008 and Comparable 2007 are outlined in the table below: As at As at, January 31, As at January 30, 2009* February 2 (in millions) 2010 (Restated) 2008** Interest costs Total long-term obligations, including principal payments on long-term obligations due within one year Average long-term obligations for fiscal year Long-term funding cost Average rate of long-term funding $ 350.7 361.1 27.4 7.6% $ 364.6 369.5 28.5 7.7% $ 372.1 489.3 41.0 7.7%

* Adjusted for the new accounting standard issued under CICA Handbook Section 3064, “Goodwill and Intangible Assets”. ** 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.
The fixed-to-floating funding ratio as at January 30, 2010 was 10/90 (as at January 31, 2009: 91/9). Fixed rate debt maturing in the next 12 months is considered floating rate funding for the purposes of this calculation. See Section 4 “Capital Resources” for a description of the Company’s funding sources and credit ratings.

7. Related Party Transactions
As at March 23, 2010, Sears Holdings and its affiliates are the beneficial holders of 78,680,790 common shares of the Company, representing approximately 73.1% of the outstanding common shares of the Company. In the ordinary course of business, the Company and Sears Holdings periodically share selected services, associates, and tangible and intangible assets. Transactions between the Company and Sears Holdings are recorded either at fair market value or an appropriate allocation method that reflects the relative benefits derived from the shared service. Intangible Properties The Company has a license from Sears Roebuck to use the name “Sears” as part of its corporate name. The Company also has licenses from Sears Roebuck and Lands’ End Inc. to use other brand names, including Lands’ End®, Kenmore®, Craftsman®, and DieHard®. Sears Canada pays Lands’ End Inc. a stipulated royalty for the use of the Lands’ End trademark. The Company has established procedures to register and otherwise vigorously protect its intellectual property, including the protection of the Sears Roebuck and Lands’ End Inc. trademarks used by the Company in Canada.

Import Services
Pursuant to an agreement between Sears Roebuck and the Company dated January 1, 1995, Sears Canada utilizes the international merchandise purchasing services of Sears Holdings. Sears Holdings may provide assistance to the Company with respect to monitoring and facilitating the production, inspection and delivery of imported merchandise and the payment to vendors. Sears Canada pays Sears Holdings a stipulated percentage of the value of the imported merchandise. In Fiscal 2009, Sears Canada paid $6.5 million to Sears Holdings in connection with this agreement, as compared to $7.3 million in Restated 2008.

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2009 Annual Report

Review and Approval
Material related party transactions are currently reviewed by the Company’s Audit Committee. The Audit Committee is responsible for pre-approving all related party transactions that have a value greater than $1.0 million.

8. Company Initiated Purchases and Sales of Shares
a. Employee Profit Sharing Plan
The Sears Plan for Sharing Profits with Employees (“Employee Profit Sharing Plan”), established in 1976, was discontinued on January 1, 2005. Upon the announcement of the discontinuance of the plan, members had the option to retain or sell their common shares of the Company held in the plan. As at January 30, 2010, there were 5,753 (January 31, 2009 – 9,167) outstanding common shares in the tax deferred portion of the Employee Profit Sharing Plan.

b. Stock Option and Share Purchase Plans for Employees and Directors
The Company has three stock-based compensation plans: the Employees Stock Plan, the Stock Option Plan for Directors and the Directors’ Share Purchase Plan. The Employees Stock Plan, which expired on April 19, 2008, provided for the granting of options and Special Incentive Shares and Options, which vested over three years and expired ten years from the grant date. The Employee Stock Plan permitted the issuance of tandem awards. Following the last grant in 2004, the Company discontinued the granting of options and Special Incentive Shares and Options under the Employees Stock Plan. The Stock Option Plan for Directors provides for the granting of stock options to Directors who are not employees of the Company or Sears Holdings. Options granted under the Stock Option Plan for Directors generally vest over three years and are exercisable within ten years from the grant date. No stock options have been granted under the Stock Option Plan for Directors since the last grant in 2003. The Directors’ Share Purchase Plan provides for the granting of common shares to Directors, to be purchased by the Company on the Toronto Stock Exchange, as part of their annual remuneration for services rendered on the Board. Following the last grant in 2005, the Company has discontinued the granting of shares under the Directors’ Share Purchase Plan.

9. Accounting Policies and Estimates
a. Critical Accounting Estimates
The preparation of the Company’s consolidated financial statements, in accordance with Canadian GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for items such as inventory valuation provisions, useful lives of asset for amortization, tax provisions, future cash flow to assess asset impairment, estimated returns and allowances, estimated vendor rebates, self-insurance reserves, associate benefit obligations, environmental remediation reserves, warranty-related provisions, loyalty program reserves and others. See Note 1, of the “Notes to Consolidated Financial Statements” for a summary of accounting policies and estimates. Inventory Valuation – Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted average cost method, based on individual items. The cost is comprised of the purchase price plus the costs incurred in bringing the inventories to the present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Rebates and allowances received from vendors are recognized as a reduction to the cost of inventory unless the rebate clearly relates to the reimbursement of a specific expense. A provision for shrinkage and obsolescence is calculated based on historical experience. Management reviews the entire provision to assess whether, based on economic conditions, it is adequate.
2009 Annual Report 37

Revenue Recognition – Revenues from merchandise sales and services are recorded net of estimated returns and allowances, exclude sales taxes and are recorded upon delivery to the customer and when all significant obligations of the Company have been satisfied. Revenues relating to the travel business and licensed department businesses are recorded in revenues net of cost of sales. The Company sells extended service contracts with terms of coverage generally between 12 and 60 months. Revenues from the sale of each contract are deferred and amortized on a straight-line basis over the term of the related contract. Income from JPMorgan Chase, which is based on a percentage of sales charged on the Sears Card or Sears MasterCard and a percentage of the sales of financial products, is included in revenue when the sale occurs. Payments from JPMorgan Chase to reimburse the Company for the cost to generate new accounts and process account payments are recorded as an offset to operating, administrative and selling expenses when the transaction occurs. Joint venture revenues are recorded based on monthly rentals. Vendor Allowances – The Company receives allowances from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Given the promotional nature of the Company’s business, the allowances are generally intended to offset the Company’s costs of promoting, advertising and selling the vendors’ products in its stores. Vendor allowances are recognized as an increase in gross margin when the purpose for which the vendor funds were intended to be used has been fulfilled. Co-operative advertising allowances are reported in the period in which the advertising occurred. Markdown reimbursements are reported in the period in which the related promotional markdown was taken, and all other allowances are reported when the related inventory is sold. Self-Insurance Reserves – The Company purchases third-party insurance for automobile, product and general liability claims that exceed a certain dollar level. However, the Company is responsible for the payment of claims under these insured limits. In estimating the obligation associated with incurred losses, the Company utilizes loss development factors validated by an independent third party. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based on actual claims settlements and reported claims. During Fiscal 2009 there were no changes in assumptions which materially impacted the reserve. Defined Benefit Retirement Plans – The plan obligations and related assets of defined benefit retirement plans are presented in the Notes to Consolidated Financial Statements. Plan assets consist primarily of cash, alternative investments and marketable equity and debt instruments. Marketable equity and debt instruments are valued using market quotations. Alternative investments are valued based on the market quotations of the underlying assets. For more details about the plan, see Section 3 “Liquidity and Financial Position – Future Benefit Plans”. For details about the variability of the plan, see Section 11 “Risks and Uncertainties”. Loyalty Program Reserves – The Sears Club Loyalty Program (the “Program”) allow members to earn points from eligible purchases made on the Sears Card and Sears MasterCard. Members can then redeem points, in accordance with the Program rewards schedule. When points are earned by Program members, the Company records an expense and establishes a liability for future redemptions by multiplying the number of points outstanding by the estimated cost per point. The Program liability is included in “Accrued liabilities” on the Company’s Consolidated Statements of Financial Position. The estimated cost per point is determined based on many factors, including the historical redemption behaviour of Program members, expected future redemption patterns and associated costs. The Company monitors, on an ongoing basis, trends in redemption rates (points redeemed as a percentage of points issued) and net redemption values. To the extent that estimates differ from actual experience, the Program costs could be higher or lower. The Company continues to evaluate and revise certain assumptions used to calculate the Program reserve, based on redemption experience and expected future activity. During Fiscal 2009, the Company revised certain assumptions used to calculate the Program based on new information regarding redemption rates and the costs associated with the 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.
38 2009 Annual Report

Other Estimates – The Company has made certain other estimates that, while not involving the same degree of judgment as the estimates described above, are important to understanding the Company’s financial statements. These estimates are in the areas of assessing recoverability of long-lived assets (including intangible assets) and in establishing reserves in connection with restructuring initiatives, environmental remediation and other unusual items. On an ongoing basis, management evaluates its estimates and judgments in these areas based on its substantial historical experience and other relevant factors. Management’s estimates as of the date of the financial statements reflect its best judgment giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change.

b. Accounting Standards Implemented in Fiscal 2009
During Fiscal 2009, Sears adopted several new accounting pronouncements from the Canadian Institute of Chartered Accountants (“CICA”). These new standards are discussed in the Notes to Consolidated Financial Statements and most significant of these are described below:

Goodwill and Intangible Assets
In February 2008, the CICA issued Handbook Section 3064, “Goodwill and Intangible Assets” (“Section 3064”), which replaced Section 3062, “Goodwill and Other Intangible Assets” and Section 3450, “Research and Development Costs”. The new standard is effective for interim and annual financial statements issued for fiscal years beginning on or after October 1, 2008. The new standard provides further guidance on the recognition and treatment of internally developed intangibles and requires elimination of the practice of deferring costs that do not meet the definition and recognition criteria of assets. Section 3064 reinforces a principle-based approach to the recognition of costs as assets in accordance with the definition of an asset and criteria for the recognition of an asset in CICA Handbook Section 1000, “Financial Statement Concepts”. The Company has adopted the new accounting standard issued by the CICA Section 3064, effective Fiscal 2009. The primary impact of implementing this standard was with respect to the accounting policy for Catalogue Production Costs (“CPC”). On adoption of the standard, CPC has been expensed once the catalogue has been mailed to the customer. Prior to the adoption of the standard, CPC costs were capitalized and amortized over the life of the catalogue. As a result, certain figures from 2008 have been restated due to the retrospective application of a change in accounting policy, as required under CICA Handbook Section 1506, “Accounting Changes”. As a result of this retrospective restatement the following table summarizes the increase (decrease) to the 2008 comparative figures for the year ended January 31, 2009 from the figures previously reported:

(increase (decrease) in millions)
Prepaid expenses and other assets Current portion of future income tax assets Deferred charges Future income tax assets Future income tax liabilities Net earnings Opening retained earnings Closed retained earnings

2008 $ (34.6) 8.4 (1.7) 0.5 (2.5) 2.1 (27.0) (24.9)

The Company’s intangible assets are comprised of software costs. These costs were previously recorded as a capital asset prior to the adoption of Section 3064. Intangible assets are amortized on a straight-line basis over their estimated useful lives and are reported separately as “Intangible assets” in the Consolidated Statements of Financial Position. Intangible assets are tested for impairment whenever events or changes in circumstances indicate a potential impairment. Impairment is recognized in net earnings and is measured as the amount by which the carrying amount exceeds its fair value.

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Goodwill represents the excess of the cost of acquisition over the fair value of the identifiable assets acquired, resulting from the acquisition of a duct cleaning business in Restated 2008, Cantrex in 2005 and a home services operation in 2001. Goodwill is not amortized, and is reported separately as “Goodwill” in the Consolidated Statements of Financial Position. Goodwill is tested for impairment annually or more frequently if changes in circumstances indicate a potential impairment. Impairment is recognized in net earnings and is measured as the amount by which the carrying amount of the goodwill exceeds its fair value. No impairment has been recognized on the Company’s goodwill since acquisition.

Transaction Costs
In the fourth quarter of Fiscal 2009, the Company made a voluntary change in its accounting policy for the treatment of transaction costs relating to financial assets or liabilities not classified as held-for-trading. Under the Company’s revised accounting policy, these costs will be added to the carrying value of the associated financial instrument and amortized over the instrument’s life using the effective interest rate method. Under the Company's previous accounting policy adopted in Comparable 2007, these costs were to be recognized as a reduction to net earnings in the period in which the costs were incurred. Since the adoption of this policy in Comparable 2007, the Company has not incurred transaction costs, therefore the Company has not yet applied this policy. The new policy will provide more relevant information as it will tie the costs related to securing the financing with the associated interest costs incurred over the life of the financing. Upon the adoption of International Financial Reporting Standards (“IFRS”) in Fiscal 2011 (52-week period ended January 29, 2011), the Company would be required to retroactively restate transaction costs to be measured at amortized cost using the effective interest method. Given the IFRS accounting policy is an available choice under Canadian GAAP, management believes that it would be appropriate to change its policy to align with the future IFRS accounting policy to provide more relevant and reliable information to the users of the financial statements. The change in accounting policy has been made in accordance with CICA Handbook Section 1506, “Accounting Changes” (“Section 1506”). Accounting policy changes in accordance with Section 1506 are applied retroactively unless it is impractical to determine the impact of such change in prior periods. As the Company has not recognized any transaction costs since the adoption of the previous method of recognizing transaction costs in earnings there is no impact of prior periods on the Company’s results of operations, financial position or disclosure

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
The Company adopted Emerging Issues Committee “EIC”-173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. The EIC reached a consensus that a company’s credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities. The abstract is to be applied retrospectively without restatement of prior periods to interim and annual financial statements for periods ending on or after January 20, 2009. The implementation of the new abstract has had no material impact on the Company’s results of operations, financial position or disclosures.

Financial Instruments – Recognition and Measurement
In April 2009, the CICA amended CICA Handbook Section 3855, “Financial Instruments – Recognition and Measurement”, (“Section 3855”) to converge with International Accounting Standards 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). The amendment was made to clarify the calculation of interest on an interest-bearing asset after recognition of an impairment loss. The amendment is effective on issuance. The Company adopted the amendment with no impact on the Company’s results of operations, financial position or disclosures. In June 2009, the CICA amended Handbook Section 3855 to converge with IAS 39 and International Financial Reporting Interpretations Committee 9, “Reassessment of Embedded Derivatives” (“IFRIC 9”). The amendment was made to provide guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category. The amendment is effective for reclassifications made on or after July 1, 2009. The Company adopted the amendment with no impact on the Company’s results of operations, financial position or disclosures.

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2009 Annual Report

In July 2009, the CICA amended Handbook Section 3855 to converge with International Financial Reporting Standards (“IFRS”) for impairment of debt instruments by changing the categories into which debt instruments are required and permitted to be classified. The amendments are effective for annual financial statements relating to fiscal years beginning on or after November 1, 2008. An entity is permitted, but not required, to apply these amendments to interim financial statements relating to periods within the fiscal year of adoption only if those interim financial statements are issued on or after August 20, 2009. The Company adopted the amendment with no impact on the Company’s results of operations, financial position or disclosures. In April 2009, the CICA amended Handbook Section 3855 to converge with IAS 39 to provide guidance on when a put, call, surrender or prepayment option embedded in a host debt instrument is closely related to the host instrument. The amendment is effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011 with earlier adoption permitted. The Company has early adopted this amendment with no impact on the Company’s results of operations, financial position or disclosure.

Financial Instruments – Disclosures
In June 2009, the CICA amended Handbook Section 3862, “Financial Instruments – Disclosures” (“Section 3862”), to adopt the amendments recently proposed by the International Accounting Standards Board (“IASB”) to IFRS 7, “Financial Instruments: Disclosures”. The amendments were made to enhance disclosures about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial instruments. The amendments are effective for annual financial statements relating to fiscal years ending after September 30, 2009 for publicly accountable enterprises, private enterprises, co-operative business enterprises, rate-regulated enterprises and not-for-profit organizations that choose to apply Section 3862. Comparative information for the disclosures required by the amendments is not required in the first year of application. The Company adopted the amendment reflecting the additional disclosure requirements within Note 22, “Financial Instruments” in the Notes to Consolidated Financial Statements.

c. Future Accounting Standards
The Company monitors the standard setting process for new standards issued by the CICA that the Company may be required to adopt in the future. Since the impact of a proposed standard may change during the review period, the Company does not comment publicly until the standard has been finalized and the effects have been determined.

International Financial Reporting Standards
The Canadian Accounting Standards Board will require all publicly accountable enterprises to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition from Canadian GAAP to IFRS will be applicable to the Company’s first quarter of operations for Fiscal 2011, at which time the Company will prepare both its Fiscal 2011 and Fiscal 2010 comparative financial information in accordance with IFRS. In order to compile comparative IFRS compliant financial statements and notes in Fiscal 2010, the Company’s IFRS transition date is January 30, 2010. In order to meet the requirement for transition to IFRS, the Company has established an enterprise-wide project team and formed an executive steering committee. The Company’s IFRS team utilizes dedicated resources and other resources on an as needed basis. The Company’s IFRS team analyzes and recommends accounting policies, develops approaches to implementing each IFRS standard and manages the implementation process. Quarterly progress reports are provided to the Company’s executive steering committee and to the audit committee of the Company’s board of directors. The Company’s external auditors are also consulted throughout the process. As the IASB is revising multiple IFRS standards, the Company will continue to assess the impact on changeover as additional information becomes available.

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Accounting Policies
Below is a summary of required changes to the Company’s accounting policies for those standards which are significant and which are not expected to change before the date of changeover from Canadian GAAP to IFRS: IFRS Standard IAS 16 Property, Plant and Equipment Changes to Accounting Policies • Buildings will be split into significant components. Each component will be depreciated based on its estimated useful life • Useful lives and residual values will be reviewed at least annually • Depreciation will commence when an asset is available for use IAS 17 Leases • In classifying operating and finance leases, the following changes will be made: • A substance over form assessment will be applied to each lease • The discount rate used in the determination of the present value of the minimum lease payments will be the interest rate implicit in the lease (if the rate is not determinable, then the lessee’s incremental borrowing rate will be used) • Buildings in finance leases will be split into significant components using the same methodology as IAS 16 • Gains on sale-leaseback transactions will be immediately recognized if the sale occurred at fair market value and the lease is classified as operating IAS 31 Joint Ventures • The Company expects the current exposure draft relating to IAS 31 to be issued as the final standard and will therefore report joint ventures under the equity method instead of proportionate consolidation • Componentization of buildings, as described under IAS 16 will be applied to joint venture buildings IAS 36 Impairment of Assets • Impairment of assets will occur at the Cash Generating Unit (“CGU”) level, the lowest level at which separately independent cash inflows can be identified • Corporate assets will be allocated to CGUs when the allocation can be done on a reasonable and consistent basis • Recoverable amount will be the higher of fair value less cost to sell and the value in use • Value in use will be the present value of the cash flows expected from a CGU • Cash flow forecast will be limited to five years unless a longer period can be justified • Discount rate will be the pre-tax rate that reflects the risk specific to the CGU • Impairment loss will be recognized when a CGU’s carrying amount exceeds its recoverable amount • Impairment indicators will be reviewed every quarter and will be assessed for reversals • Goodwill will be allocated to the CGU(s) that are expected to benefit from the synergies that goodwill represents • Goodwill impairments will be recognized when the carrying amount of a CGU to which the goodwill has been allocated exceeds the recoverable amount of the CGU • Impairment losses will be allocated first to goodwill and pro-rata to the remaining assets in the CGU • Investments in joint ventures reported under the equity method will be tested for impairment • If the conditions causing an impairment end, any non-goodwill impairment will be reversed

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IFRS Standard IAS 37 Liabilities

Changes to Accounting Policies • Onerous contracts relating to operating leases will be accrued as liabilities • Rates to discount liabilities will be specific to the liability and the subsequent expense will be reported as interest • Catalogue production advertising costs will be expensed as costs are incurred • Hedging instruments will be split into intrinsic value and market value components • The changes in the market value component will be recognized into net income every period • Property held to earn rentals, for capital appreciation or both will be classified as investment property instead of property, plant and equipment • A portion of dual-use property will be classified as investment property if that portion could be sold or leased out under a finance lease or if the Company’s use portion of the dual-use property is insignificant and meets the investment property definition • Loyalty points granted under customer loyalty programs will be recognized as a separately identifiable component of revenue and deferred at the date of initial sale • The consideration received or receivable from the customer will be allocated between the item sold and the loyalty points by reference to their fair values • Revenue attributable to loyalty points is recognized when the entity has fulfilled its obligation (i.e. at the redemption of points for merchandise) or when a third party assumes the underlying obligation

IAS 38 Intangible Assets IAS 39 Financial Instruments IAS 40 Investment Property

IFRIC 13 Customer Loyalty Programs

The Company has made assumptions regarding future changes to IFRS. The Company expects that the current standards for IAS 19 and IAS 37 will be effective for Fiscal 2011; therefore, the Company is planning to apply these standards. The Company expects that the current exposure draft relating to IAS 31 will be published prior to Fiscal 2011; therefore, the Company is planning to apply the exposure draft. In addition to the above noted changes in accounting policies, the Company is required to make accounting policy selections from a number of IFRS standards.The Company has made preliminary selections which are currently under review and will disclose these selections once finalized and approved.

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IFRS Changeover Plan The Company’s IFRS changeover plan is currently on schedule. Below is a summary of the key activities and status updates on the Company’s IFRS changeover plan. Key Activity Financial Statement Preparation: Initial Assessment • Completion of assessment of differences between Canadian GAAP and IFRS relevant to the Company Financial Statement Preparation: Analysis of Standards • Completion of a detailed systematic analysis of accounting and disclosure differences between Canadian GAAP and IFRS impacting the Company • Selection of IFRS accounting policies including certain IFRS 1 exemptions and elections at the date of transition Status Timetable

• Completed

Completed

• Completed the systematic analysis of IFRS standards and interpretations

Completed

• Preliminary selections of significant IFRS Completed accounting policy choices and IFRS 1 elections have been identified

Financial Statement Preparation: Implementation • Preparation of detailed plans to implement changes to accounting policies • Execution of plans to implement the selected accounting policies, including quantification of their effect • Preparation of the opening balance sheet at the date of transition and the required IFRS 1 disclosures • Preparation of the interim and annual consolidated financial statements and the associated disclosure, including Fiscal 2010 comparative financial statements Infrastructure: Expertise & Training • Dissemination of IFRS accounting policy changes, process changes and IFRS project timelines to accounting staff, corporate head office, senior executives and the Board of Directors

• Detailed plans for significant IFRS accounting policies have been created and implementation is underway • Preparation of the opening retained earnings adjustments is underway • Preparation of draft consolidated financial statements and notes is underway

Fiscal 2010

Q2 2010

Fiscal 2010

• For finance staff involved in IFRS changes, detailed training on IFRS standards and preliminary policy choices is complete

Completed

• General finance staff to be trained on changes to processes in Fiscal 2010 • Senior executives and the Board of Directors are updated quarterly on progress of IFRS changeover plan
44 2009 Annual Report

Q4 2010 Every Quarter

Key Activity Infrastructure: Information Technology / Dual Reporting • Creation of parallel IFRS ledgers for processing of Fiscal 2010 comparatives and for budgeting/forecasting purposes Business Policy Assessments • Determination of the impact to compensation arrangements, customer and supplier contracts Control Environment: ICFR and DC&P • Modification of process narratives and reassessment of design and effectiveness of Internal Controls over Financial Reporting (“ICFR”) & Disclosure Controls and Procedures (“DC&P”) External Communications • Determination of impact of IFRS Changeover on Key Performance Indicators • Modification of MD&A after IFRS Changeover date to be IFRS compliant • Quarterly update of MD&A for changes to accounting policy, policy selections and progress of the IFRS Changeover plan

Status

Timetable

• Parallel IFRS ledgers have been created

N/A

• Assessment of the impact of IFRS Changeover on compensation arrangements is underway

Fiscal 2010

• Revision of process narratives and reassessment of ICFR & DC&P design and effectiveness to be completed throughout Fiscal 2010 and Fiscal 2011, as per CEO/CFO Certification process timelines • Publish impact of IFRS changeover on Key Performance Indicators in MD&A • Draft IFRS compliant MD&A • Quarterly updates of MD&A to be completed

Fiscal 2010 & Fiscal 2011

Q3 2010 Fiscal 2011 Fiscal 2010

10. Disclosure Controls and Procedure
Disclosure Controls and Procedures (“DC&P”)
Management of the Company is responsible for establishing and maintaining a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in its public disclosure documents, including its Annual and Interim MD&A, Annual and Interim Financial Statements, and Annual Information Form is recorded, processed, summarized and reported within required time periods and includes controls and procedures designed to ensure that the information required to be disclosed by the Company in its public disclosure documents is accumulated and communicated to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required Disclosure Controls and Procedures. Management of the Company, including the CEO and CFO, has caused to be evaluated under their supervision, the Company’s DC&P and has concluded that the Company’s DC&P was effective as at the fiscal year end, being January 30, 2010.

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Internal Control over Financial Reporting
Management, including the CEO and CFO, have designed a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. ICFR includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the Company; and (iii) are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the annual or interim financial statements. Internal control systems, regardless of superiority in design, have inherent limitations. Therefore, even those systems that have been determined to have been designed effectively can only provide reasonable assurance with respect to financial reporting and financial statement preparation. Management, including the CEO and CFO, has caused to be evaluated under their supervision, the effectiveness of ICFR and has concluded that the Company’s ICFR was effective as at the financial year-end, being January 30, 2010.

11. Risks and Uncertainties
Sears attempts to mitigate and manage risks where practicable through various tactics including transferring the risk to a third party (outsourcing), protecting against the risk (insurance), planning for the risk (contingency planning) and by monitoring its internal and external environment for threats and opportunities. This section highlights risks and uncertainties that are inherent in the Company’s normal course of business and have the potential to impact the financial performance of the Company. The risks and uncertainties described below are not the only risks the Company may encounter. Additional risks and uncertainties not presently known to the Company may also negatively impact financial performance.

Business and Operating Risks
Retail Competition – The Canadian retail market remains highly competitive as key players and new entrants compete for market share. International retailers continue to expand into Canada while existing competitors enhance their product offerings and become direct competitors. The Company’s competitors include traditional Full-line department stores, discount department stores, wholesale clubs, “big-box” retailers, internet retailers and specialty stores offering alternative retail formats. Failure to develop and implement appropriate competitive strategies could have an adverse effect on the Company’s performance. The majority of the performance payments earned pursuant to the credit card marketing and servicing alliance with JPMorgan Chase are related to customers’ purchases using the Sears Card and Sears MasterCard. The credit card industry is highly competitive as credit card issuers continue to expand their product offerings to distinguish their cards. As competition increases, there is a risk that a reduction in the percentage of purchases charged to the Sears Card and Sears MasterCard may negatively impact the Company’s performance. Additional risk may arise when foreign retailers carrying on business in Canada in competition with the Company engage in marketing activities which are not in full compliance with Canadian legal requirements regarding advertising and labelling rules and product quality standards. Such retailers gain an unfair advantage and their activities may negatively affect the Company’s performance. Seasonality – The Company’s operations are seasonal in nature with respect to operating results and in products and services offered. Merchandise and service revenues, as well as performance payments received from JPMorgan Chase, 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 of the other three quarters 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.

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This business seasonality results in quarterly performance that is not necessarily indicative of annual performance. In addition, Sears offers many seasonal goods and services. The Company sets budgeted inventory levels and promotional activity to be in accord with its strategic initiatives and expected consumer demand. Businesses that generate revenue from the sale of seasonal merchandise and services are subject to the risk of changes in consumer spending behaviour as a result of unseasonable weather patterns. Merchandise Selection and Services Offered – To be successful, the Company must identify, obtain supplies of and offer its customers attractive, relevant and high-quality merchandise and services on a continuous basis. Customers’ preferences may change over time. Failure by the Company to effectively anticipate customers’ purchasing habits, tastes or the demand for products and services offered may result in the Company missing opportunities for products or services not offered which could have an adverse effect on the business. Organizational Capability – The Company’s success is dependent on its ability to attract, motivate and retain senior leaders and other key personnel. The inability to attract and retain key personnel could have an adverse effect on the business. Business Interruption – Closure of one or more stores, or disruption in the supply chain due to any of the following events: natural disasters, extreme weather, terrorism, issues with labour management, systems breakdown or other events such as power outages may negatively impact the Company’s performance due to its inability to provide customers with products and services. Inventory Management – The Company must maintain sufficient in-stock inventory levels to operate the business successfully while minimizing out-of-stock levels. A significant portion of inventory is sourced from vendors requiring advance notice periods in order to supply the quantities that the Company requires. Lead times may adversely impact the Company’s ability to respond to changing consumer preferences, resulting in inventory levels that are insufficient to meet demand or in merchandise that may have to be sold at lower prices. Inappropriate inventory levels may negatively impact the Company’s performance. Reliance on Technology – Given the number of individual transactions that the Company processes each year, it is critical that the Company maintains uninterrupted operation of its computer and communications hardware and software systems. These systems are subject to obsolescence, damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as fires, natural disasters and adverse weather occurrences, and usage errors by the Company’s employees. If the systems are damaged or cease to function properly, the Company may have to make a significant investment to fix or replace them and it may suffer interruptions in its operations in the interim. Any material interruption in the Company’s computer operations may have a material adverse effect on the Company’s performance. International Trade – The Company is dependent upon a significant amount of products that originate from non-Canadian markets. The Company’s performance may be adversely impacted by the additional risks that are associated with the sourcing and delivery of this merchandise including potential economic, social and political instability in jurisdictions where suppliers are located, increased shipping costs, potential transportation delays and interruptions, adverse foreign currency fluctuations, changes in international laws, rules and regulations pertaining to the importation of products, quotas, and the imposition and collection of taxes and duties. Supplier and Brand Reputations – As a diverse and multi-channel retailer, Sears promotes many brands as part of its normal course of business. These brands include the Sears brand, its private label brands for product lines such as Jessica®, and non-proprietary brands exclusive to Sears. Damage to the reputation of these brands or the reputation of the suppliers of these brands could negatively impact consumer opinions of Sears or its related products and have an adverse effect on the Company’s performance. Supplier Relationships – Although the Company’s business is not substantially dependent on any one supplier, its relationship with certain suppliers is of significance to the Company’s merchandising strategy, including attracting customers to its locations, cross-segment sales and image. The loss of a significant supplier relationship could negatively impact the Company’s performance.

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Product Liability Claims – The Company sells products produced by third party manufacturers. Some of these products may expose the Company to product liability claims relating to personal injury, death or property damage caused by such products, and may require the Company to take actions, such as product recalls. In addition, the Company also provides various services which could give rise to such claims. Although the Company maintains liability insurance to mitigate these potential claims, the Company cannot be certain that its coverage will be adequate for liabilities actually incurred or that insurance will continue to be available on economically reasonable terms or at all. Product liability claims could negatively impact the Company’s performance. Real Estate – The primary objective of the Company’s real estate joint venture operations is to maximize the returns on its investments in shopping centre real estate. Sears reviews the performance of these joint ventures on a regular basis. Shopping centre investments are non-core assets that the Company sells when it is financially advantageous to do so. Similarly, the Company may also develop excess land within these real estate holdings and shopping centre joint venture investments when it is advantageous to do so. The return on such transactions is contingent on the state of the economic environment and other factors. In addition, the credit worthiness and financial stability of tenants and partners could negatively impact the Company’s financial performance. Lease Obligations – Sears operates a total of 186 stores, 16 of which are Company-owned with the majority of the remainder held under long-term leases. Company-owned stores consist of 14 Full-line department stores and two Sears Home stores. While the Company is able to change its merchandise mix and relocate stores in order to maintain its competitiveness, it is restricted from vacating a current site without breaching its contractual obligations and incurring lease-related expenses for the remaining portion of the lease-term. The long-term nature of the leases limits the Company’s ability to respond in a timely manner to changes in the demographic or retail environment at any location. Operating Covenants – Sears has operating covenants with landlords for approximately 100 of its corporate stores. Corbeil has operating covenants for 13 of its stores. An operating covenant generally requires Sears or Corbeil, as the case may be, during normal operating hours, to operate a store continuously as per the identified format in the lease agreement. As at January 31, 2010, the remaining term of the various Sears operating covenants range from less than one year to 26 years, with the average remaining term being approximately seven years. Corbeil operates ten leased corporate stores and one leased outlet, with the average remaining term of the Corbeil leases being approximately six years. Failure to observe its operating covenants may result in legal proceedings against the Company. Changes in Laws and Regulations – Laws and regulations are in place to protect the interests and well-being of our customers and communities, business partners, suppliers, employees, shareholders and creditors. Changes to statutes, laws, regulations or regulatory policies, including changes in the interpretation, implementation or enforcement of statutes, laws, regulations and regulatory policies, could adversely affect the Company’s operations and performance. In addition, Sears may incur significant costs in the course of complying with any changes to applicable statutes, laws, regulations and regulatory policies. The Company’s failure to comply with applicable statutes, laws, regulations or regulatory policies could result in a judicial or regulatory judgment or sanctions and financial penalties that could adversely impact the Company’s reputation and financial performance. Although the Company believes that it has taken reasonable measures designed to ensure compliance with governing statutes, laws, regulations and regulatory policies in the jurisdictions in which the Company conducts business, there is no assurance that the Company will always be in compliance or deemed to be in compliance. Environmental – Sears is exposed to environmental risk as an owner, lessor and lessee of property. Under federal and provincial laws, the owner, lessor or lessee could be liable for the costs of removal and remediation of certain hazardous substances on its properties or disposed of at other locations. The failure to remove or remediate such substances, if any, could lead to claims against the Company. The Company is currently remediating various locations across Canada where it operated auto centres, gas bars and a logistics facility. The extent of the remediation and the costs thereof have not yet been determined. The Company continues to monitor the costs of remediation and appropriately provide for these costs in its reserves.

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If the Company commits to renovating a leased or owned building that contains or may contain asbestos, or if asbestos is inadvertently disturbed, the Company is legally obligated to comply with asbestos removal standards. The extent of this liability has not yet been determined because the costs to remove asbestos depend upon factors including the location and extent of any renovations undertaken. Inadvertent disturbance of asbestos cannot be foreseen. The costs incurred by the Company could be significant and may negatively impact the Company’s performance. Proceedings – The Company is involved in various legal proceedings incidental to the normal course of business. Sears is of the view that although the outcome of such litigation cannot be predicted with certainty, the final disposition is not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations. In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax filing positions are appropriate and supportable, periodically, certain matters are reviewed and challenged by the tax authorities. As the Company routinely evaluates and provides for potentially unfavourable outcomes with respect to any tax audits, the Company believes that the final disposition of tax audits will not have a material adverse effect on its liquidity, consolidated financial position or results of operations. If the result of a tax audit materially differs from the existing provisions, the Company’s effective tax rate and its net earnings could be affected positively or negatively in the period in which the tax audits are completed. Three class actions in the provinces of Québec, Saskatchewan and Ontario were commenced against the Company in 2005 arising out of the Company’s pricing of tires. The plaintiffs allege that Sears inflated the regular retail price of certain brands of tires sold by Sears in order to then claim that the same brands were on sale for up to 45% off the regular retail price so as to induce potential customers into believing that substantial savings were being offered. The plaintiffs seek general damages, special damages, and punitive damages, as well as costs and pre- and post-judgment interest. No dollar amounts are specified. The plaintiffs intend to proceed with the Québec action and seek certification as a class action on a national basis. The outcome of this action is indeterminable, and the monetary damages, if any, cannot be reliably estimated. Therefore, the Company has not made a provision for any potential liability. Unusual Events – Events such as social or political unrest, natural disasters, disease outbreaks or acts of terrorism could have a material adverse effect on the Company’s financial performance, particularly during a peak season such as the month of December, which may account for up to 40% of a year’s earnings.

Financial Risks
The Company plans its operations giving regard to economic and financial variables that are beyond the control of the Company. Changes to these variables may adversely impact the performance of the Company. Economic Environment – Should the current economic conditions persist, heightened competition, a further decline in consumer confidence, lower disposable income, higher unemployment and personal debt levels may result. As indicated in Section 1 “Company Performance”, the Company’s financial performance has been negatively impacted as a result of the recession. Given the volatility in the Canadian and global economy, it is difficult to accurately assess the potential impact on the Company’s business. If the economy continues to worsen, however, the Company could experience a decline in same store sales, erosion of gross margins and profitability. Liquidity – The Company faces a liquidity risk due to various factors, including and not limited to, the unpredictability of the current economic climate, failure to secure appropriate funding vehicles and cash flow issues relating to the operation and management of the business. Failure to fulfill financial obligations due and owing from the Company as a result of this liquidity risk can have undesirable consequences on the Company. Foreign Exchange – The Company’s foreign exchange risk is limited to currency fluctuations between the Canadian and U.S. dollar. The Company uses foreign currency forward and option contracts to hedge the exchange rate risk on a significant portion of its expected requirement for U.S. dollars. There can be no assurance that the Company’s hedging efforts will achieve their intended results or that the Company’s estimate of its requirement for U.S. dollars will be accurate, with the result that currency fluctuations may have an adverse impact on the Company’s financial performance.

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Credit Risk – Credit risk refers to the possibility that the Company can suffer financial losses due to failure of the Company’s counterparties to meet their payment obligations. Exposure to credit risk exists for derivative instruments, cash and short-term investments, restricted cash and investments and accounts receivable. The Company’s only exposure to counterparty risk as it relates to derivative instruments is represented by the fair value of the derivative contracts. The Company attempts to manage this risk by placing these contracts with approved financial institutions with acceptable credit ratings. The Company’s cash and short-term investments and restricted cash and investments also expose the Company to credit risk should the borrower default on maturity of the investment. The Company attempts to manage this exposure through policies that require borrowers to have a minimum credit rating of A and limiting investments with individual borrowers at maximum levels based on credit rating. The Company is exposed to credit risk from customers as a result of ongoing credit evaluations and review of accounts receivable collectability. As at January 31, 2010, approximately 45% of the Company’s accounts receivable are due from two customers both of whom are in good standing. Investment Returns – The Company invests its surplus cash in investment grade, short-term money market instruments, the return on which depends upon interest rates and the credit worthiness of the issuer. The Company attempts to mitigate credit risk resulting from the possibility that an issuer may default on repayment is by requiring that issuers have a minimum credit rating and limiting exposures to individual borrowers. Future Benefit Plans – There is no assurance that the Company’s future benefit plans will be able to earn the assumed rate of return. New regulations and market driven changes may result in changes in the discount rates and other variables which would result in the Company being required to make contributions in the future that differ significantly from the estimates. Management is required to use assumptions to account for the plans in conformity with GAAP. However, actual future experience will differ from these assumptions giving rise to actuarial gains or losses. In any year, actual experience differing from the assumptions may be material. The relevant accounting standard contemplates such differences and allows these actuarial gains or losses to be recognized over the expected average service life of the employee group covered. Plan assets consist primarily of cash, alternative investments and marketable equity and debt instruments. The value of the marketable equity and debt investments will fluctuate due to changes in market prices. Plan obligations and annual pension expense are determined by independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the benefit obligations and pension plan costs include the discount rate, the rate of compensation increase, and the expected return on plan assets. The discount rate is based on the yield of high-quality, fixed-income investments, at the year-end date, with maturities corresponding to the anticipated timing of future benefit payments. The compensation increase assumption is based upon historical experience and anticipated future management actions. The expected return on plan assets reflects the investment strategy and asset allocations of the invested assets. Refer to Notes to the Consolidated Financial Statements for more information on the weighted-average actuarial assumptions for the plans.
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 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, rolling 12 months ending June 2009. Source: Synovate Household Equipment Canada, period ended August 2009. Source: The NPD Group, Inc. CAMM consumer data, rolling 12 months ending June 2009. Source: Synovate Household Equipment Canada, period ended August 2009.

2

3 4 5 6

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The preparation and presentation of the Company’s consolidated financial statements and the overall accuracy and integrity of the Company’s financial reporting are the responsibility of management. The accompanying consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include certain amounts that are based on management’s best estimates and judgments. Financial information contained elsewhere in this Annual Report is consistent with the information set out in the consolidated financial statements. In fulfilling its responsibilities, management has developed and maintains an extensive system of disclosure controls and procedures and internal control over financial reporting processes that are designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded and reported within the required time periods, and financial records are reliable for the preparation of the financial statements. The Company’s auditors, who are employees of the Company, also review and evaluate internal controls on behalf of management. The Board of Directors monitors management’s fulfillment of its responsibilities for financial reporting and internal controls principally through the Audit Committee. The Audit Committee, which is comprised solely of independent directors, meets regularly with management, the internal audit department and the Company’s external auditors to review and discuss audit activity and results, internal accounting controls and financial reporting matters. The external auditors and the internal audit department have unrestricted access to the Audit Committee, management and the Company’s records. The Audit Committee is also responsible for recommending to the Board of Directors the proposed nomination of the external auditors for appointment by the shareholders. Based upon the review and recommendation of the Audit Committee, the consolidated financial statements and Management’s Discussion and Analysis have been approved by the Board of Directors. The Company’s external auditors, Deloitte & Touche LLP, have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards.

25MAR200914261029 15MAR200802293395
Dene L. Rogers President and Chief Executive Officer Allen R. Ravas Senior Vice-President and Chief Financial Officer

Toronto, Ontario March 23, 2010

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AUDITORS’ REPORT TO THE SHAREHOLDERS OF SEARS CANADA INC.
Deloitte & Touche LLP 5140 Yonge Street Suite 1700 Toronto ON M2N 6L7 Canada Tel: [phone] Fax: [phone] www.deloitte.ca

To the Shareholders of Sears Canada Inc.

We have audited the consolidated statements of financial position of Sears Canada Inc. as at January 30, 2010 and January 31, 2009 and the consolidated statements of earnings and comprehensive income, retained earnings and accumulated other comprehensive income and cash flows for the 52-week periods ended January 30, 2010 and January 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at January 30, 2010 and January 31, 2009 and the results of its operations and its cash flows for the 52-week periods ended January 30, 2010 and January 31, 2009 in accordance with Canadian generally accepted accounting principles.

Chartered Accountants Licensed Public Accountants Toronto, Ontario March 23, 2010

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at January 31, 2009 (Restated – Note 1)

(in millions)
ASSETS Current Assets Cash and short-term investments (Note 3) Restricted cash and investments (Note 17) Accounts receivable Income taxes recoverable Inventories Prepaid expenses and other assets Current portion of future income tax assets (Note 4)

As at January 30, 2010

$

1,381.8 15.8 131.1 6.0 852.3 74.7 29.7 2,491.4 620.2 179.2 22.6 11.2 32.0 48.2

$

819.8 144.8 138.7 16.6 968.3 147.9 8.7 2,244.8 696.0 185.2 16.8 11.2 28.4 54.9

Capital assets (Note 6) Deferred charges (Note 9) Intangible assets (Note 10) Goodwill Future income tax assets (Note 4) Other long-term assets $ LIABILITIES Current Liabilities Accounts payable Accrued liabilities Income and other taxes payable Principal payments on long-term obligations due within one year (Note 12)

3,404.8

$

3,237.3

$

647.7 342.1 72.7 314.2 1,376.7

$

640.9 383.6 39.4 32.1 1,096.0 332.5 158.5 4.1 163.0 1,754.1 15.7 1,399.1 68.4 1,483.2

Long-term obligations (Note 12) Accrued benefit liabilities (Note 11) Future income tax liabilities (Note 4) Other long-term liabilities

36.5 167.7 4.3 162.1 1,747.3

SHAREHOLDERS' EQUITY Capital stock (Note 13) Retained earnings Accumulated other comprehensive income $ On Behalf of the Board of Directors,

15.7 1,633.8 8.0 1,657.5 3,404.8 $

3,237.3

W.C. Crowley Chairman of the Board
54 2009 Annual Report

E.J. Bird Director

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
For the 52-week periods ended January 30, 2010 and January 31, 2009 (in millions, except per share amounts)
Total revenues Cost of merchandise sold, operating, administrative and selling expenses Depreciation and amortization Interest expense, net (Note 12) Unusual items - (gain) (Note 15) Earnings before income taxes Income taxes expense (recovery) (Note 4) Current Future Net earnings Net earnings per share (Note 23) Diluted net earnings per share (Note 23) Net earnings Other comprehensive income (loss), net of taxes: Mark-to-market adjustment related to short-term investments, net of income taxes expense of less than $0.1 (2008: less than $0.1) Gain (loss) on foreign exchange derivatives designated as cash flow hedges, net of income taxes recovery of $14.6 (2008: expense of $35.4) Reclassification to net earnings of gain on foreign exchange derivatives designated as cash flow hedges, net of income taxes expense of $13.3 (2008: $3.8) Other comprehensive (loss) income (Note 22) Comprehensive income $ $ $ $ $ $ 2009 5,200.6 4,712.3 117.4 25.2 (1.9) 347.6 109.4 3.5 112.9 234.7 2.18 2.18 234.7 $ $ $ $ 2008 (Restated –Note 1) $ 5,733.2 5,213.1 126.9 10.0 (38.8) 422.0 161.3 (30.0) 131.3 290.7 2.70 2.70 290.7

0.1 (31.7) (28.8) (60.4) 174.3 $

0.1 76.6 (8.3) 68.4 359.1

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE INCOME
For the 52-week periods ended January 30, 2010 and January 31, 2009 (in millions)
Retained earnings Opening balance Adjustment to opening retained earnings resulting from adoption of new accounting standards for goodwill and intangible assets, net of income taxes of $12.4 (Note 1) Net earnings Closing balance Accumulated other comprehensive income Opening balance Other comprehensive (loss) income Closing balance Retained earnings and accumulated other comprehensive income $ $ $ $ $ 2009 1,399.1 – 234.7 1,633.8 68.4 (60.4) 8.0 1,641.8 $ $ $ $ 2008 (Restated –Note 1) $ 1,135.4 (27.0) 290.7 1,399.1 – 68.4 68.4 1,467.5

2009 Annual Report

55

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 52-week periods ended January 30, 2010 and January 31, 2009 (in millions)
Cash flow generated from (used for) operating activities Net earnings Non-cash items included in net earnings, principally depreciation, pension expense, future income taxes and gain on sale of real estate and real estate joint ventures Changes in non-cash working capital balances related to operations (Note 16) Other, principally pension contributions and changes to long-term assets and liabilities Cash flow generated from (used for) investing activities Purchases of capital assets and intangible assets Proceeds from sale of capital assets and joint venture Changes in restricted cash and investments (Current and Long-term) (Note 17) Acquisition, net of cash acquired Cash flow used for financing activities Repayment of long-term obligations Increase (decrease) in cash and short-term investments Cash and short-term investments at beginning of period Cash and short-term investments at end of period Cash at end of period Short-term investments at end of period Total cash and short-term investments at end of period $ $ $ $ 2008 (Restated –Note 1) $ 290.7 90.9 (197.9) (17.8) 165.9 (97.1) 40.4 (146.5) (7.0) (210.2) (7.5) (51.8) 871.6 $ $ $ 819.8 66.4 753.4 819.8

2009 234.7 135.4 135.7 (9.7) 496.1 (65.7) 6.0 135.9 – 76.2 (10.3) 562.0 819.8 1,381.8 56.5 1,325.3 1,381.8

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2009 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements of Sears Canada Inc. (the “Company” or “Sears Canada Inc.”) have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”).

Principles of Consolidation
The consolidated financial statements include the accounts of Sears Canada Inc. and its subsidiaries together with its proportionate share of the assets, liabilities, revenues and expenses of real estate joint ventures. The results and balances of the real estate joint ventures are proportionately consolidated based on their interim or annual 12-month period ending closest to January 31.

Fiscal Year
The fiscal year of the Company consists of a 52 or 53-week period ending on the Saturday closest to January 31. The fiscal years for the consolidated financial statements presented for 2009 and 2008 are the 52-week periods ended January 30, 2010 (“2009”) and January 31, 2009 (“2008”).

Estimates
The preparation of the Company’s consolidated financial statements, in accordance with Canadian GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for items such as inventory valuation provisions, useful lives of asset for amortization, tax provisions, future cash flow to assess asset impairment, estimated returns and allowances, estimated vendor rebates, self-insurance reserves, associate benefit obligations, environmental remediation reserves, warranty-related provisions, loyalty program reserves and others.

Cash and Short-Term Investments
Cash and short-term investments include all highly liquid investments with maturities of six months or less at the date of purchase.

Restricted Cash and Investments
Cash and investments are considered to be restricted when it is subject to contingent rights of a third-party customer, vendor, or government agency.

Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted average cost method, based on individual items. The cost is comprised of the purchase price plus the costs incurred in bringing the inventories to the present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Rebates and allowances received from vendors are recognized as a reduction to the cost of inventory unless the rebate clearly relates to the reimbursement of a specific expense. A provision for shrinkage and obsolescence is calculated based on historical experience. Management reviews the entire provision to assess whether, based on economic conditions, it is adequate.

Prepaid Catalogue Production Expense
Catalogue production costs are expensed once the catalogue has been mailed to the customer. Costs incurred to advertise the catalogue are expensed consistent with the Company’s advertising expense policy. Up until the time the catalogue has been mailed to the customer, prepaid catalogue production expenses are included in “Prepaid expenses and other assets” in the Consolidated Statements of Financial Position.

Advertising Expense
Advertising costs for newspaper, television, radio and other media advertising are expensed the first time the advertising occurs.

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57

Capital Assets
Capital assets are stated at cost. Depreciation and amortization provisions are generally computed using the straight-line method based on estimated useful lives at the rates indicated below. Equipment and fixtures Buildings and improvements Buildings held in Joint Ventures 2 to 13 years 3 to 50 years 10 to 40 years

The Company capitalizes specific incremental interest charges for major construction projects and depreciates these charges over the life of the related assets. No interest charges were capitalized in 2009 or 2008. Capital assets acquired through the incurrence of a liability do not result in a cash outflow for the Company until the liability is paid. In the period the related liability is incurred, the change in accounts payable in the Consolidated Statements of Cash Flows is reduced by such amount. When the liability is paid, the amount is reflected as a cash outflow for investing activities in the Consolidated Statements of Cash Flows. The Company evaluates the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. Impairment has occurred if the projected undiscounted cash flows resulting from the use and eventual disposition of the assets are less than the carrying value of the assets. When impairment has occurred, a write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. If market valuations are not available, fair value is measured based on the projected discounted cash flow from the asset or group of assets. The Company recognizes legal obligations associated with the retirement of capital assets when those obligations result from the acquisition, construction, development or normal operation of the asset (“Asset Retirement Obligation” or “ARO”), at the time the asset is purchased or at the time the obligation becomes legally mandated. For AROs for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity (“conditional ARO”), a liability will be recognized by the Company if the fair value of the obligation can be reasonably estimated. Otherwise, the Company discloses the fact that a conditional ARO exists, including the reasons why fair value cannot be estimated. The legal obligation to remove asbestos is a conditional ARO. If the Company commits to renovating a leased or owned building that contains or may contain asbestos, or if asbestos is inadvertently disturbed, for example, through normal wear and tear, the Company will be legally obligated to comply with asbestos removal standards at which time an estimate of removal costs are made and accrued. The cost to remove asbestos can vary significantly depending on the extent of renovation and the location of the asbestos, among other factors. The timing of asbestos removal is often indeterminable as it is dependant on plans for the nature of future renovations, which are revised regularly, or on the inadvertent disturbance of asbestos, which cannot be foreseen.

Deferred Charges
The cumulative excess of contributions to the Company’s pension plan over the amounts expensed is included in deferred charges. Other costs are deferred and amortized using the straight-line method over the remaining life of the related asset.

Goodwill and Intangible Assets
Goodwill represents the excess of the cost of acquisition over the fair value of the identifiable assets acquired. Goodwill is not amortized but is tested for impairment annually or more frequently if changes in circumstances indicate a potential impairment. Impairment is recognized in net earnings and is measured as the amount by which the carrying amount of the goodwill exceeds its fair value. Intangible assets are amortized on a straight line basis over the estimated useful lives of the assets. The intangible assets consist of software costs amortized over three to five years. Intangible assets are tested for impairment if changes in circumstances indicate a potential impairment. Impairment is recognized in net earnings and is measured as the amount by which the carrying amount exceeds its fair value.
58 2009 Annual Report

Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, future income tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts of assets and liabilities and their respective income tax bases. A future income tax asset or liability is estimated for each temporary difference using substantively enacted income tax rates and laws for the year when the asset is realized or the liability is settled. A valuation allowance is established, if necessary, to reduce any future income tax asset to an amount that is more likely than not to be realized.

Loyalty Program Reserves
The Sears Club Points Program (the “Program”) allows members to earn points from eligible purchases made on the Sears Card and Sears MasterCard. Members can then redeem points, in accordance with the Program rewards schedule. When points are earned by Program members, the Company records an expense and establishes a liability for future redemptions by multiplying the number of points outstanding by the estimated cost per point. The Program liability is included in “Accrued liabilities” in the Company’s Consolidated Statements of Financial Position.The estimated cost per point is determined based on many factors, including the historical redemption behaviour of Program members, expected future redemption patterns and associated costs. The Company monitors, on an ongoing basis, trends in redemption rates (points redeemed as a percentage of points issued) and net redemption values. To the extent that estimates differ from actual experience, the Program costs could be higher or lower. The Company continues to evaluate and revise certain assumptions used to calculate the Program reserve, based on redemption experience and expected future activity.

Associate Future Benefits
The Company currently maintains a defined contribution and a defined benefit registered pension plan which covers certain of its regular full-time associates and part-time associates, a non-registered supplemental savings arrangement and a defined benefit non-pension post retirement plan which provides life insurance, medical and dental benefits to eligible retired associates through a funded health and welfare trust (Note 11). The Company has adopted the following accounting policies: • The cost of pensions and other retirement benefits earned by associates is actuarially determined using the projected benefit method pro-rated on service and management’s best estimate of the discount rate to value the accrued benefit obligations, the expected plan investment performance, salary escalation, retirement ages of associates, expected health care costs and other actuarial factors. • For the purpose of calculating the expected return on plan assets, those assets are valued at their estimated fair value. • Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of associates active at the date of amendment. • Actuarial gains/losses arise from the difference between the actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period or from changes in actuarial assumptions used to determine the accrued benefit obligation. For the pension plan, the excess of the net actuarial gain/loss over 10% of the greater of the accrued benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active associates. The average remaining service period of the active associates covered by the pension plan is eight years. For the non-pension plan, the excess of the net actuarial gain/loss over 10% of the greater of the accrued benefit obligation and the fair value of plan assets is amortized over the average remaining life expectancy of the former employees, given almost all members are inactive. The average remaining life expectancy of the former employees is 13 years. • When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

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59

Self-Insurance Reserves
The Company purchases third-party insurance for automobile, product and general liability claims that exceed a certain dollar level. However, the Company is responsible for the payment of claims under these insured limits. In estimating the obligation associated with incurred losses, the Company utilizes loss development factors validated by an independent third-party. These development factors utilize historical data to project the future development of incurred losses. Loss estimates are adjusted based on actual claims settlements and reported claims. During 2009 there were no changes in assumptions which materially impacted the reserve.

Foreign Currency Translation
Obligations payable and receivable in foreign currencies are translated at the exchange rate in effect at the balance sheet date. Transactions in foreign currencies are translated into Canadian dollars at the rate in effect on the date of the transaction.

Transaction Costs
Transaction costs relating to financial assets or liabilities not classified as held-for-trading are added to the carrying value and amortized using the effective interest rate method as an interest expense.

Hedge Accounting
The Company formally identifies, designates and documents all relationships between hedging instruments and hedged items, as well as its risk assessment objective and strategy for undertaking various hedge transactions. The Company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When such derivative instruments cease to exist or be highly effective as hedges, or when designation of a hedging relationship is terminated, any associated deferred gains or losses are recognized in net earnings in the same period as the corresponding gains or losses associated with the hedged item. When a hedged item ceases to exist, any associated deferred gains or losses are recognized in net earnings in the period the hedged item ceases to exist. Changes in the fair value of the Company’s derivatives are non-cash transactions and are therefore not recognized in the Consolidated Statements of Cash Flows.

Net Earnings per Share
Net earnings per share is calculated using the weighted average number of shares outstanding during the period. Diluted net earnings per share is determined using the treasury stock method, the application of which increases the number of shares used in the calculation.

Revenue Recognition
Revenues from merchandise sales and services are net of estimated returns and allowances, exclude sales taxes and are recorded upon delivery to the customer and when all significant obligations of the Company have been satisfied. Revenues relating to the travel business and licensed department businesses are recorded in revenues net of cost of sales. The Company sells extended service contracts with terms of coverage generally between 12 and 60-months. Revenues from the sale of each contract are deferred and amortized on a straight-line basis over the term of the related contract. Income from JPMorgan Chase & Co, N.A. (Toronto Branch) (“JPMorgan Chase”), which is based on a percentage of sales charged on the Sears Card or Sears MasterCard and a percentage of the sales of financial products, is included in revenue when the sale occurs. Payments due from JPMorgan Chase to reimburse the Company for the cost to generate new accounts and process account payments are recorded as an offset to operating, administrative, and selling expenses when the transaction occurs. Joint venture revenues are recorded based on monthly rentals.

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2009 Annual Report

Accounting for Consideration from a Vendor
The Company has arrangements with its vendors that provide for discretionary rebates and rebates subject to binding agreements. Discretionary rebates are recognized when paid by the vendor or when the vendor becomes obligated to pay. Rebates subject to binding agreements are recognized as a reduction of purchases for the period, provided the rebate is probable and reasonably estimable.

Changes in Accounting Policies

Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants (“CICA”) issued Handbook Section 3064, “Goodwill and Intangible Assets” (“Section 3064”), which replaced Section 3062, “Goodwill and Other Intangible Assets” and Section 3450, “Research and Development Costs”. The new standard was effective for interim and annual financial statements issued for fiscal years beginning on or after October 1, 2008. The new standard provides further guidance on the recognition and treatment of internally developed intangibles and requires elimination of the practice of deferring costs that do not meet the definition and recognition criteria of assets. Section 3064 reinforces a principle-based approach to the recognition of costs as assets in accordance with the definition of an asset and criteria for the recognition of an asset in CICA Handbook Section 1000, “Financial Statement Concepts”. The Company has adopted the new accounting standard issued by the CICA Section 3064, effective 2009. The primary impact of implementing this standard was with respect to the accounting policy for Catalogue Production Costs (“CPC”). On adoption of the standard, CPC are expensed once the catalogue has been mailed to the customer. Prior to the adoption of the standard CPC costs were capitalized and amortized over the life of the catalogue. As a result, certain figures from the prior year have been restated due to the retrospective application of a change in accounting policy, as required under CICA Handbook Section 1506, “Accounting Changes”. As a result of this retrospective restatement the following table summarizes the increase (decrease) to the 2008 comparative figures for the year ended January 31, 2009 from the figures previously reported:

(increase (decrease) in millions)
Prepaid expenses and other assets Current portion of future income tax assets Deferred charges Future income tax assets Future income tax liabilities Net earnings Opening retained earnings Closing retained earnings $

2008 (34.6) 8.4 (1.7) 0.5 (2.5) 2.1 (27.0) (24.9)

The Company’s intangible assets are comprised of software costs. These costs were previously recorded as a capital asset prior to the adoption of Section 3064. Intangible assets are amortized on a straight-line basis over their estimated useful lives and are reported separately as “Intangible assets” in the Consolidated Statements of Financial Position. Intangible assets are tested for impairment whenever events or changes in circumstances indicate a potential impairment. Impairment is recognized in net earnings and is measured as the amount by which the carrying amount exceeds its fair value. Goodwill represents the excess of the cost of acquisition over the fair value of the identifiable assets acquired, resulting from the acquisition of a duct cleaning business in 2008, Cantrex Group Inc. (“Cantrex”) in 2005 and a home services operation in 2001. Goodwill is not amortized, and is reported separately as “Goodwill” in the Consolidated Statements of Financial Position. Goodwill is tested for impairment annually or more frequently if changes in circumstances indicate a potential impairment. Impairment is recognized in net earnings and is measured as the amount by which the carrying amount of the goodwill exceeds its fair value. No impairment has been recognized on the Company’s goodwill since acquisition.
2009 Annual Report 61

Transaction Costs
In the fourth quarter of 2009, the Company made a voluntary change in its accounting policy for the treatment of transaction costs relating to financial assets or liabilities not classified as held-for-trading. Under the Company’s revised accounting policy, these costs will be added to the carrying value of the associated financial instrument and amortized over the instrument’s life using the effective interest rate method. Under the Company's previous accounting policy adopted in 2007, these costs were to be recognized as a reduction to net earnings in the period in which the costs were incurred. Since the adoption of this policy in 2007, the Company has not incurred transaction costs, therefore the Company has not yet applied this policy. The new policy will provide more relevant information as it will tie the costs related to securing the financing with the associated interest costs incurred over the life of the financing. Upon the adoption of International Financial Reporting Standards (“IFRS”) in fiscal 2011, the Company would be required to retroactively restate transaction costs to be measured at amortized cost using the effective interest method. Given the IFRS accounting policy is an available choice under Canadian GAAP, management believes that it would be appropriate to change its policy to align with the future IFRS accounting policy to provide more relevant and reliable information to the users of the financial statements. The change in accounting policy has been made in accordance with CICA Handbook Section 1506, “Accounting Changes” (“Section 1506”). Accounting policy changes in accordance with Section 1506 are applied retroactively unless it is impractical to determine the impact of such change in prior periods. As the Company has not recognized any transaction costs since the adoption of the previous method of recognizing transaction costs in earnings there is no impact of prior periods on the Company’s results of operations, financial position or disclosure.

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
The Company adopted Emerging Issues Committee (“EIC”) 173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. The EIC reached a consensus that a company’s credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities. The abstract is to be applied retrospectively without restatement of prior periods to interim and annual financial statements for periods ending on or after January 20, 2009. The implementation of the new abstract has had no material impact on the Company’s results of operations, financial position or disclosures.

Financial Instruments – Recognition and Measurement
In April 2009, the CICA amended Handbook Section 3855, “Financial Instruments – Recognition and Measurement”, (“Section 3855”) to converge with International Accounting Standards 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). The amendment was made to clarify the calculation of interest on an interest-bearing asset after recognition of an impairment loss. The amendment is effective on issuance. The Company adopted the amendment with no impact on the Company’s results of operations, financial position or disclosures. In June 2009, the CICA amended Handbook Section 3855 to converge with IAS 39 and International Financial Reporting Interpretations Committee 9, “Reassessment of Embedded Derivatives” (“IFRIC 9”). The amendment was made to provide guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category. The amendment is effective for reclassifications made on or after July 1, 2009. The Company adopted the amendment with no impact on the Company’s results of operations, financial position or disclosures. In July 2009, the CICA amended Handbook Section 3855 to converge with IFRS for impairment of debt instruments by changing the categories into which debt instruments are required and permitted to be classified. The amendments are effective for annual financial statements relating to fiscal years beginning on or after November 1, 2008. An entity is permitted, but not required, to apply these amendments to interim financial statements relating to periods within the fiscal year of adoption only if those interim financial statements are issued on or after August 20, 2009. The Company adopted the amendment with no impact on the Company’s results of operations, financial position or disclosures.

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In April 2009, the CICA amended Handbook Section 3855 to converge with IAS 39 to provide guidance on when a put, call, surrender or prepayment option embedded in a host debt instrument is closely related to the host instrument. The amendment is effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011 with earlier adoption permitted. The Company has early adopted this amendment with no impact on the Company’s results of operations, financial position or disclosures.

Financial Instruments – Disclosures
In June 2009, the CICA amended Handbook Section 3862, “Financial Instruments – Disclosures” (“Section 3862”), to adopt the amendments recently proposed by the International Accounting Standards Board (“IASB”) to IFRS 7, “Financial Instruments: Disclosures”. The amendments were made to enhance disclosures about fair value measurements, including the relative reliability of the inputs used in those measurements, and about the liquidity risk of financial instruments. The amendments are effective for annual financial statements relating to fiscal years ending after September 30, 2009. Comparative information for the disclosures required by the amendments is not required in the first year of application. The Company adopted the amendment reflecting the additional disclosure requirements within Note 22, Financial Instruments.

Future Accounting Policies:

International Financial Reporting Standards
The Canadian Accounting Standards Board confirmed, in February 2008, that it will require all public companies to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. In the year of adoption, companies will be required to provide comparative information as if IFRS had been used in the preceding fiscal year. The transition from Canadian GAAP to IFRS will be applicable to the Company’s first quarter of operations for fiscal 2011, at which time the Company will prepare both its fiscal 2011 and fiscal 2010 comparative financial information using IFRS. The Company expects the transition to IFRS to impact financial reporting, business processes, internal controls and information systems. The Company is currently assessing the impact of the transition to IFRS on these areas and will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.

Multiple Deliverable Revenue Arrangements
In December 2009, the EIC issued EIC-175, “Multiple Deliverable Revenue Arrangements” to amend EIC-142, “Revenue Arrangements with Multiple Deliverables”. This requires consideration at inception to be allocated using the relative selling price method and prohibiting the residual method. This abstract is to be applied prospectively to revenue arrangements with multiple deliverables entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011. Early adoption is permitted and should be applied retroactively from the beginning of the entity’s fiscal period of adoption. EIC-142 is effective until adoption of EIC-175. Throughout 2010, the Company will evaluate whether or not to early adopt this EIC. In 2011 the Company will be adopting IFRS, therefore, this EIC will not be applicable to the Company in 2011.

Business Combinations
In January 2009, the CICA issued Handbook Sections; 1582, “Business Combinations”; 1601, “Consolidated Financial Statements”; and 1602, “Non-controlling Interests” (“Section 1602”) which are based on the IASB, IFRS 3, “Business Combinations”. The new standard replaces the existing guidance on Business Combinations (“Section 1581”) and Consolidated Financial Statements (“Section 1600”). The new standards were issued to harmonize Canadian accounting for business combinations with the international and U.S. accounting standards. The new standards are to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with earlier adoption permitted. Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the new standards shall not be adjusted upon application of these new standards. Section 1602, should be applied retrospectively except for certain items. The Company is evaluating the future impact of these sections on its operations, financial position and disclosures to assess whether it will early adopt the new sections or will be implemented upon adoption of IFRS as part of the Company’s IFRS transition project.
2009 Annual Report 63

2. ACQUISITION
In 2008, the Company acquired the assets of Excell Duct Cleaning Inc. and a related company, both based in Ontario. As a result of this $7.0 million acquisition, net of cash acquired of Nil, assets with a fair value of $0.4 million and goodwill in the amount of $6.6 million were recorded in the Consolidated Statements of Financial Position during the first quarter of 2008.

3. CASH AND SHORT-TERM INVESTMENTS
The components of cash and short-term investments were as follows:

(in millions)
Cash Short-term investments Government treasury bills Bank term deposits Other Total $

2009 56.5 1,265.5 59.8 – $ 1,381.8 $ $

2008 66.4 732.4 15.0 6.0 819.8

4. INCOME TAXES
The average combined federal and provincial statutory income tax rate applicable to the Company was 31.4% for 2009 (2008: 31.9%). A reconciliation of income taxes at the average statutory tax rate to the actual income taxes is as follows: 2008 2009 (Restated –Note 1) $ $ 347.6 109.0 – 1.1 110.1 Effective tax rate before the following adjustments Future income tax assets revaluation for tax rate changes Prior year assessment (recovery) Income taxes Effective tax rate $ 31.7% 5.4 (2.6) 112.9 32.5% $ $ $ 422.0 134.5 (3.3) 0.5 131.7 31.2% 1.3 (1.7) 131.3 31.1%

(in millions)
Earnings before income taxes Income taxes at average statutory tax rate Increase (decrease) in income taxes resulting from Non-taxable portion of capital gains Non-deductible items

The Company’s total net cash payments of income taxes in 2009 were $95.4 million (2008: $231.4 million). In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax filing positions are appropriate and supportable, certain matters are periodically challenged by tax authorities. As the Company routinely evaluates and provides for potentially unfavourable outcomes with respect to any tax audits, the Company believes that the final disposition of tax audits will not have a material adverse effect on its liquidity, consolidated financial position or results of operations. If the result of a tax audit materially differs from the existing provisions, the Company’s effective tax rate and its net earnings may be affected positively or negatively in the period in which the tax audits are completed. Included in “Other long-term assets” in the Consolidated Statements of Financial Position are receivables of $20.9 million related to payments made by the Company for tax assessments that are being disputed.

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The tax effects of the significant components of temporary differences giving rise to the Company’s net future income tax assets and liabilities are as follows: 2008 (Restated – Note 1) Current Long-Term $ (3.9) 44.6 – – – – – (0.4) 40.3 (31.6) $ 8.7 $ $ – 15.4 (48.6) 43.8 1.4 13.3 (1.1) 0.1 24.3 – 24.3

(in millions)
Prepaid expenses Accrued liabilities and other long-term liabilities Deferred pension Other post retirement benefits Amounts related to tax losses carried forward Depreciable capital assets Deferred charges Other Subtotal Amounts related to Other compherensive income (loss) Total $ $

2009 Current Long-Term (4.9) $ 38.6 – – – – – (0.3) 33.4 (3.7) 29.7 $ – 16.0 (43.8) 43.1 1.4 12.0 (1.1) 0.1 27.7 – 27.7

5. INVENTORIES
The amount of inventories recognized as an expense in 2009 was $2,720.7 million (2008: $3,008.2 million), including $105.7 million (2008: $87.7 million) related to write-downs. This expense is included in “Cost of merchandise sold, operating, administrative and selling expenses” in the Consolidated Statements of Earnings and Comprehensive Income. A negligible amount of write-downs were reversed during the period ended January 30, 2010. With the exception of $26.6 million (2008: $32.1 million) of inventories from the Company’s parts and service and home improvement businesses, the Company’s entire inventories balance consists of merchandise finished goods.

6. CAPITAL ASSETS
(in millions)
Cost Land Buildings and improvements Equipment and fixtures Gross capital assets Accumulated depreciation Buildings and improvements Equipment and fixtures Total accumulated depreciation Capital assets $ $ 2008 2009 (Restated –Note 1) 54.8 1,134.2 1,126.2 2,315.2 758.1 936.9 1,695.0 620.2 $ $ 56.0 1,143.3 1,117.0 2,316.3 716.8 903.5 1,620.3 696.0

The above amounts include $12.7 million (2008: $12.7 million) of assets under capital lease, and accumulated amortization of $11.3 million (2008: $10.7 million) related thereto, as well as gross capital assets and accumulated depreciation relating to the Real Estate Joint Venture segment in the amount of $142.6 million (2008: $153.6 million) and $58.1 million (2008: $56.7 million).

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As at January 30, 2010, gross capital assets include $0.5 million of capital assets that have not yet been put into use and are not being depreciated (2008: $1.0 million). During 2009, the Company sold capital assets with a net book value of $6.5 million (2008: $1.6 million) resulting in a gain of $3.1 million (2008: gain of $38.8 million), of which, $1.9 million (2008: $37.2 million) was recognized as an unusual gain (Note 15). The gain of $1.9 million (2008: $1.6 million) was included in “Cost of merchandise sold, operating, administrative and selling expenses” in the Consolidated Statements of Earnings and Comprehensive Income. Also included in “Cost of merchandise sold, operating, administrative and selling expenses” is a loss on disposal of $0.9 million (2008: $1.6 million) relating to capital assets retired during the fiscal year. As at January 30, 2010, a liability of $13.0 million (2008: $27.1 million) was outstanding for capital assets acquired in 2009 not reflected as a cash outflow in the purchases of capital assets line in the Consolidated Statements of Cash Flows.

7. LOYALTY PROGRAM RESERVES
In 2009, the Company revised certain assumptions used to calculate the Program reserves based on new information regarding redemption rates and the associated cost of the Program resulting in a net decrease to the reserve and a decrease in the “Cost of merchandise sold, operating, administrative and selling expenses” in the Consolidated Statements of Earnings and Comprehensive Income resulting in a pre-tax gain of $7.0 million. The Company also aligned the program earn rates of the Sears Card and Sears MasterCard to allow for more effective communication and promotion of the Program resulting in a net decrease to the reserve and a decrease in the “Cost of merchandise sold, operating, administrative and selling expenses” in the Consolidated Statements of Earnings and Comprehensive Income resulting in a pre-tax gain of $2.9 million.

8. CONSIDERATION FROM A VENDOR
In 2009, the Company revised certain assumptions used to estimate the value of vendor rebates remaining in inventory. The net impact was a reduction to inventory and an increase to the “Cost of merchandise sold, operating, administrative and selling expenses” in the Consolidated Statements of Earnings and Comprehensive Income resulting in a reduction to pre-tax earnings of $7.1 million.

9. DEFERRED CHARGES
(in millions)
Accrued benefit asset (Note 11) Tenant allowances in joint ventures Other deferred charges Total deferred charges $ 2008 2009 (Restated –Note 1) 170.5 6.4 2.3 179.2 $ 176.0 5.9 3.3 185.2

$

$

Amortization of other deferred charges of $1.0 million (2008: $2.0 million) is included in “Cost of merchandise sold, operating, administrative and selling expenses” in the Company’s Consolidated Statements of Earnings and Comprehensive Income.

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10. INTANGIBLE ASSETS
(in millions)
Software Cost Accumulated Amortization Net book value $ $ 2009 135.5 112.9 22.6 $ $ 2008 122.8 106.0 16.8

Amortization of software costs of $6.9 million (2008: $5.3 million) is included in “Depreciation and amortization” in the Consolidated Statements of Earnings and Comprehensive Income.

11. ASSOCIATE FUTURE BENEFITS
In July 2008, the Company amended its pension plan and introduced a defined contribution component. The defined benefit component continues to accrue benefits related to future compensation increases although no further service credit is earned. In addition, the Company no longer provides medical, dental and life insurance benefits at retirement for associates who had not achieved the eligibility criteria for these non-pension post retirement benefits as at December 31, 2008. Effective December 2009, the Company made the decision to change funding for non-pension post retirement benefits from an actuarial basis to a pay-as-you-go basis to allow the surplus in the fund to be utilized to make benefit payments. The Company currently maintains a defined benefit registered pension plan and a defined contribution registered pension plan which covers some of its regular full-time associates as well as some of its part-time associates. The defined benefit plan provides pensions based on length of service and final average earnings. In addition to a registered retirement savings plan, the pension plan includes a non-registered supplemental arrangement in respect to the defined benefit plan. The non-registered portion of the plan is maintained to enable certain associates to continue saving for retirement in addition to the registered limit as prescribed by the Canada Revenue Agency. The Company also maintains a defined benefit non-pension post retirement plan which provides life insurance, medical and dental benefits to eligible retired associates through a funded health and welfare trust (“other benefits plan”). The Company’s accounting policies are described in Note 1, Summary of Accounting Policies and Estimates. The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at January 31. The most recent actuarial valuation of the pension plan for funding purposes is dated December 31, 2007. The next actuarial valuation assessment is required for December 31, 2010.The most recent actuarial valuation of the health and welfare trust for purposes of funding the other benefits plan was on December 31, 2008. An actuarial valuation of the health and welfare trust is performed annually. Total cash payments for associate future benefits for 2009, consisting of cash contributed by the Company to its defined contribution pension plan, defined benefit pension plan and other benefits plan, was $10.8 million (2008: $18.7 million).

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Information about the Company’s defined benefit plans as at January 30, 2010 and January 31, 2009, is as follows: 2009 NonRegistered Other Pension Benefits Plan1 Plan1 42.3 $ 1.0 9.8 – (5.6) 47.5 35.9 $ – 2.6 (5.6) 12.7 45.6 1.9 $ 14.3 16.2 $ 2008 NonRegistered Other Pension Benefits Plan1 Plan1 42.3 $ 0.3 2.7 – (3.0) 42.3 44.1 $ 0.2 2.6 (3.0) (8.0) 35.9

(in millions)
Defined benefit plan assets Fair value at beginning of fiscal year Actual return on plan assets Employer contributions Associate contributions Benefits paid 2,4 Fair value of plan assets at end of fiscal year Defined benefit plan obligations Accrued benefit obligations at beginning of fiscal year3 Total current service cost Interest cost Benefits paid 4 Actuarial loss (gain) Accrued benefit obligation at end of fiscal year Funded status of plan – surplus (deficit) Unamortized net actuarial loss (gain) Accrued benefit asset (liability) at end of fiscal year

Sears Registered Retirement Plan

Total

Sears Registered Retirement Plan

Total

$ 1,250.3 $ 121.3 (14.0) – (108.9) 1,248.7 $ 1,030.9 $ – 77.5 (108.9) 297.7 1,297.2 $ $ (48.5) $ 202.8 154.3 $

114.4 $ 1,407.0 $ 1,496.0 $ 8.7 131.0 (99.0) – (4.2) (13.6) – – 6.4 (15.6) (130.1) (139.5) 107.5 1,403.7 1,250.3

109.7 $ 1,648.0 5.9 (92.8) 16.0 5.1 – 6.4 (17.2) (159.7) 114.4 1,407.0

233.0 $ 1,299.8 $ 1,359.2 $ 0.9 0.9 19.6 17.5 97.6 79.5 (16.3) (130.8) (139.5) 49.2 359.6 (287.9) 284.3 (176.8) $ 9.1 (167.7) $ 1,627.1 (223.4) $ 226.2 2.8 $ 1,030.9 219.4 $ (50.9) 168.5 $

285.5 $ 1,688.8 1.3 21.1 17.0 99.1 (17.2) (159.7) (53.6) (349.5) 233.0 1,299.8 107.2 (89.7) 17.5

6.4 $ (118.6) $ 1.1 (39.9) 7.5 $ (158.5) $

The accrued benefit asset (liability) is included in the Company's Consolidated Statements of Financial Position as follows: Deferred charges (Note 9) Accrued benefit liability Accrued benefit asset (liability) at end of year
1 2 3 4

$ $

154.3 $ – 154.3 $

16.2 $ – 16.2 $

– $ (167.7) (167.7) $

170.5 $ (167.7) 2.8 $

168.5 $ – 168.5 $

7.5 $ – $ 176.0 – (158.5) (158.5) 7.5 $ (158.5) $ 17.5

Neither the non-registered portion of the pension plan nor the other benefits plan are fully funded. Benefits paid include amounts paid from funded assets. Other benefits are paid directly by the Company. Accrued benefit obligation represents the actuarial present value of benefits attributed to associate service rendered to a particular date. Includes $38.9 million of payments made to associates in fiscal 2008 who, where permitted by law, elected to withdraw their commuted pension values upon transition to the defined contribution plan.

The plan’s target allocation was 50% fixed income, 30% alternative investments and 20% equity. The asset allocation may be changed from time to time in terms of weighting between fixed income, alternative investments, equity and other asset classes as well as within the asset classes themselves. The plan’s target allocation is determined taking into consideration the amounts and timing of projected liabilities, the Company’s funding policies and expected returns on various asset classes. To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.

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At the end of the fiscal year, plan assets were invested in the following classes of securities: 2009 NonRegistered Pension Plan 20.1% 48.1% 31.8% 100.0% 2008 NonRegistered Pension Plan 30.2% 45.4% 24.4% 100.0%

Sears Registered Retirement Plan Fixed income securities Alternative investments Equity securities Total 48.7% 31.3% 20.0% 100.0%

Sears Other Registered Benefits Retirement Plan Plan 49.1% 31.3% 19.6% 100.0% 50.2% 33.6% 16.2% 100.0%

Other Benefits Plan 51.4% 30.9% 17.7% 100.0%

The net expense for the defined benefit plans for 2009 and 2008 is as follows: 2009 Sears NonRegistered Registered Retirement Pension Plan Plan $ – $ 77.5 (121.3) 297.7 – $ 2.6 (1.0) 12.7 14.3 (0.4) (12.7) $ $ $ 1.2 – 1.2 $ $ $ $ Other Benefits Plan Sears Registered Retirement Plan $ 2008 NonRegistered Pension Plan Other Benefits Plan

(in millions)
Current service cost, net of associate contributions Interest cost Actual (gain) loss on plan assets Actuarial loss (gain) Benefit plan expense (recovery), before adjustments below Difference between Actual (gain) loss on plan assets and expected return Actuarial loss (gain) in the year and actuarial loss (gain) amortized Net defined benefit plan expense (gain) recognized Net defined contribution expense Total pension expense recognized

Total

Total

0.9 $ 0.9 17.5 97.6 (8.7) (131.0) 49.2 359.6 58.9 1.4 (50.4) 9.9 – 9.9 $ $ $ $ 327.1 45.1 (360.8) 11.4 15.0 26.4

13.2 $ 79.5 99.0 (287.9)

0.2 $ 1.3 $ 14.7 2.6 17.0 99.1 (0.3) (5.9) 92.8 (8.0) (53.6) (349.5) (5.5) $ (41.2) $ (142.9) (1.1) 8.3 1.7 – 1.7 $ $ $ (2.1) 53.6 10.3 – 10.3 $ $ $ (196.3) 349.8 10.6 13.6 24.2

$ 253.9 $ 44.1 (297.7) $ $ $ 0.3 15.0 15.3

$ (96.2) $ (193.1) 287.9 $ $ $ (1.4) $ 13.6 12.2 $ $

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The significant actuarial assumptions are as follows (weighted average assumptions): 2009 Sears NonRegistered Registered Retirement Pension Plan Plan Discount rate used in calculation of Accrued benefit obligation Benefit plan expense Rate of compensation increase used in calculation of Accrued benefit obligation Benefit plan expense Expected long-term rate of return on plan assets used in calculation of Benefit plan expense Health care cost trend rates Used in calculation of accrued benefit obligation Used in calculation of benefit plan expense Cost trend rate declines to Year that the rate reaches the rate at which it is assumed to remain constant Sensitivity analysis for future health care costs Total of service and interest cost (in millions) Accrued benefit obligation (in millions) 1% Increase $ $ 1.2 23.9 6.00% 7.90% 3.50% 3.50% 6.50% 6.00% 7.90% 3.50% 3.50% 6.50% 2008 NonRegistered Pension Plan 7.90% 6.00% 3.50% 4.00% 7.00%

Sears Other Registered Benefits Retirement Plan Plan 6.00% 7.80% 3.50% 3.50% 6.50% 6.90% 7.05% 4.48% 2030 1% Decrease $ (1.2) $ (20.8) 7.90% 6.00% 3.50% 4.00% 6.50%

Other Benefits Plan 7.80% 6.10% 3.50% 4.00% 7.00% 7.05% 7.50% 4.48% 2023

1% Increase $ $ 1.6 15.6

1% Decrease $ $ (1.5) (15.4)

12. LONG-TERM OBLIGATIONS
The Company has a corporate credit rating of BB from Dominion Bond Ratings Service, BB- from Standard & Poor’s and a corporate family rating of Ba1 from Moody’s Investors Service, Inc.

(in millions)
Unsecured medium-term notes 7.45% due May 10, 2010 7.05% due September 20, 2010 Proportionate share of long-term debt of joint ventures with a weighted average interest rate of 7% due 2010 to 2016 Capital lease obligations Interest rates from 7% to 11% due 2010 to 2013 Less: principal payments due within one year included in current liabilities Total long-term obligations $ $

2009 200.0 100.0 48.5 2.2 350.7 314.2 36.5 $ $

2008 200.0 100.0 61.6 3.0 364.6 32.1 332.5

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In 2009, the Company reclassified $300.0 million of medium-term notes from long-term obligations to current liabilities. The Company is not subject to any financial covenants and the Company’s debt consists of unsecured medium-term notes with fixed interest rates and payment terms. As at January 30, 2010, the Company had outstanding letters of credit of U.S. $13.1 million used to support the Company’s offshore merchandise program with restricted cash and investments pledged as collateral. Interest expense on long-term debt including the current portion and the Company’s proportionate share of interest on long-term debt of joint ventures for 2009 totalled $27.4 million (2008: $28.5 million). Interest expense on short-term debt for 2009 totalled less than $0.1 million (2008: $0.7 million). Interest revenue primarily related to cash and short-term investments for 2009 totalled $2.2 million (2008: $19.2 million). The Company’s cash payments for interest on long-term debt in 2009 totalled $27.2 million (2008: $28.0 million). Cash payments for interest on short-term debt in 2009 totalled less than $0.1 million (2008: $0.9 million). The Company received cash related to interest revenue for 2009 totalling $2.7 million (2008: $22.7 million). The Company’s proportionate share of the long-term debt of joint ventures is secured by the shopping malls owned by the joint ventures. The Company’s total principal payments due within one year include $13.4 million (2008: $31.2 million) of the Company’s proportionate share of the current debt obligations of joint ventures.

Principal Payments
For fiscal years subsequent to the fiscal year ended January 30, 2010, principal payments required on the Company’s total long-term obligations are as follows:

(in millions)
2010 2011 2012 2013 2014 Subsequent years Total debt outstanding $ 314.2 9.2 4.3 7.4 11.2 4.4 350.7

$

13. CAPITAL STOCK
The Company is authorized to issue an unlimited number of common shares and an unlimited number of non-voting, redeemable and retractable Class 1 Preferred Shares in one or more series. As at January 30, 2010, the only shares outstanding were common shares of the Company. Sears Holdings Corporation (“Sears Holdings”), the controlling shareholder of the Company, is the beneficial holder of 78,680,790, or 73.1%, of the common shares of the Company as at January 30, 2010. The number of outstanding common shares as at January 30, 2010, was 107,620,995 with a stated value of $15.7 million. The number of outstanding common shares and stated value did not change from the end of 2008.

14. STOCK-BASED COMPENSATION
The Company has outstanding options under its Employees Stock Plan (the “Plan”) that expired on April 19, 2008. The Plan provides for the granting of options and Special Incentive Shares and Options, which generally vest over three years and are exercisable within ten years from the grant date. Under the Plan, employees have the right to elect to take their Special Incentive Shares, upon vesting, either on a current or deferred basis or a combination of both. Special Incentive Shares taken on a current basis are issued as common stock. Special Incentive Shares taken on a deferred basis are credited to a Deferred Share Unit (“DSU”) account. Since the last grant in 2004, the Company discontinued the granting of options and Special Incentive Shares and Options under the Plan.

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The expiration of the Plan does not affect the rights of current option-holders under the Plan. Options expire ten years from the grant date. As there have been no options granted since February 2004, options that are currently outstanding will expire before or in February 2014. As at January 30, 2010, there were 43,340 stock options, Nil Special Incentive Shares and Options and Nil DSUs outstanding under the Plan. The Plan permitted the issuance of tandem awards in connection with the granting of options. Tandem awards provide option-holders with the choice of exercising their awards for either an option to purchase common shares of the Company or a Share Appreciation Right (“SARs”). The exercise price of an option is determined using the weighted average price at which the Company’s shares traded on the Toronto Stock Exchange on the five trading days preceding the grant date. SARs allow option-holders to receive cash payments equal to the amount by which the weighted average market price of the shares on the five trading days preceding the date of exercise of the SARs exceeds the exercise price of the corresponding options. All stock options outstanding under the Plan are tandem awards. At the end of each fiscal period, the Company records a liability for previously issued tandem awards equal to the amount by which the market price of its shares at the end of the period exceeds the exercise price of the vested tandem awards. Stock compensation expense is recorded to adjust this liability for changes in the market price of the Company’s shares and for awards exercised in the period. Total stock-based compensation expense related to tandem awards issued from the Plan was $0.2 million for the fiscal year ended January 30, 2010 (2008: credit of $0.2 million). During 2009, 1,680 options (2008: 3,504 options) were exercised for SARs resulting in cash payments of less than $0.1 million (2008: less than $0.1 million). Details of the stock option transactions for the Plan during the fiscal year ended January 30, 2010 is presented below: Weighted Average Exercise price $ 33.98 18.95 33.48 34.47 18.53 39.69 18.60

Number of Options Outstanding and exercisable as at February 2, 2008 Exercised Cancelled/forfeited Outstanding and exercisable as at January 31, 2009 Exercised Cancelled/forfeited Outstanding and exercisable as at January 30, 2010 The following stock options were outstanding and exercisable as at January 30, 2010: Options Outstanding and Exercisable 6,840 13,730 7,480 15,290 43,340 251,740 (3,504) (69,345) 178,891 (1,680) (133,871) 43,340

$

$

Exercise Price Employees Stock Plan $ 21.72 18.37 18.23 17.59

Weighted Average Remaining Life 1.0 2.0 3.0 4.0

Total

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15. UNUSUAL ITEMS
During the fourth quarter ended January 30, 2010, the Company sold its capital assets in a real estate joint venture resulting in a pre-tax gain of $1.9 million. The Company disposed of total assets of $7.0 million and settled liabilities totalling $8.9 million associated with the joint venture. During 2008 the Company recorded a total pre-tax gain of $38.8 million primarily from the sale of real estate. The Company sold property in Calgary, Alberta, where it operated a full-line store, receiving proceeds of approximately $40.0 million. A pre-tax gain of $37.2 million, net of transaction costs, was recorded in the first quarter of 2008.

16. CHANGES IN NON-CASH WORKING CAPITAL BALANCES
Cash generated from (used for) non-cash working capital balances are comprised of the following: 2008 2009 (Restated – Note 1) $ 7.6 116.0 (8.0) 20.9 (41.6) 40.8 135.7 $ (20.4) (3.1) (3.4) (41.8) (54.4) (74.8) (197.9)

(in millions)
Accounts receivable Inventories Prepaid expenses and other assets Accounts payable Accrued liabilities Income and other taxes payable Cash generated (used for) non-cash working capital balances

$

$

17. COMMITMENTS AND CONTINGENCIES
Minimum capital and operating lease payments, exclusive of property taxes, insurance and other expenses payable directly by the Company, having an initial term of more than one year as at January 30, 2010 are as follows:

(in millions)
2010 2011 2012 2013 2014 Subsequent years Minimum lease payments Less: imputed weighted average interest of 7.2% Total capital lease obligations (Note 12)

Capital Leases $ 0.9 0.6 0.5 0.4 – – 2.4 0.2 2.2

Operating Leases $ 105.7 97.1 87.2 72.2 59.1 240.0 661.3

$ $

$

Total rentals charged to earnings under all operating leases for the fiscal year ended January 30, 2010 amounted to $115.7 million (2008: $117.4 million). Operating lease commitments includes $10.6 million related to the Company’s proportionate share of the commitments of its Real Estate Joint Ventures. Three class actions in the provinces of Québec, Saskatchewan and Ontario were commenced against the Company in 2005 arising out of the Company’s pricing of tires. The plaintiffs allege that the Company inflated the regular retail price of certain brands of tires sold by the Company in order to then claim that the same brands were on sale for up to 45% off the regular retail price so as to induce potential customers into believing that substantial savings were being offered. The plaintiffs seek general damages, special damages, and punitive damages, as well as costs,

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pre-judgment and post-judgment interest. No dollar amounts are specified. The plaintiffs intend to proceed with the Québec action and seek certification as a class action on a national basis. The outcome of this action is indeterminable, and the monetary damages, if any, cannot be reliably estimated. Therefore, the Company has not made a provision for any potential liability. In addition, the Company is involved in various legal proceedings incidental to the normal course of business. The Company is of the view that although the outcome of such litigation cannot be predicted with certainty, the final disposition is not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

Restricted Cash and Investments
Cash and investments are considered to be restricted when it is subject to contingent rights of a third-party customer, vendor, or government agency. As at January 30, 2010, the Company recorded $15.8 million (2008: $144.8 million) of restricted cash and investments recorded as current assets and Nil (2008: $6.9 million) of restricted cash deposits recorded in other long-term assets. These restricted cash and investment balances represent cash and investments pledged as collateral for letter of credit obligations issued under the Company’s offshore merchandise purchasing program of $5.2 million (2008: $110.4 million) the Canadian equivalent of U.S. $4.8 million (2008: U.S. $90.0 million), current and long-term cash deposits pledged as collateral with counterparties related to outstanding derivative contracts of $6.4 million (2008: $28.3 million) and Nil (2008: $6.9 million), respectively, and funds held in trust in accordance with regulatory requirements governing advance ticket sales related to Sears Travel of $4.2 million (2008: $6.1 million).

18. GUARANTEES
The Company has provided the following significant guarantees to third-parties:

Sub-Lease Agreements
The Company has a number of sub-lease agreements with third-parties. The Company retains ultimate responsibility to the landlord for payment of amounts under the lease agreements should the sub-lessee fail to pay. The total future lease payments under such agreements, included in Commitments and Contingencies (Note 17), are $17.6 million.

Royalty License Agreements
The Company pays royalties under various merchandise license agreements, which are generally based on sales of products under these agreements. The Company currently has license agreements for which it pays royalties regardless of sales, as guarantee royalties under these license agreements. Total future minimum royalty payments under such agreements are $4.8 million.

Other Indemnification Agreements
In the ordinary course of business the Company has provided indemnification commitments to counterparties in transactions such as leasing transactions, royalty agreements, service arrangements, investment banking agreements, director and officer indemnification agreements and indemnification of trustees under indentures for outstanding public debt. The Company has also provided certain indemnification agreements in connection with the sale of the Credit and Financial Services operations in November 2005. The foregoing indemnification agreements require the Company to compensate the counterparties for costs incurred as a result of changes in laws and regulations or as a result of litigation claims or statutory claims or statutory sanctions that may be suffered by a counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based on the contract and typically do not provide for any limit on the maximum potential liability. Historically, the Company has not made any significant payments under such indemnifications and no amount has been accrued in the financial statements with respect to these indemnification commitments.

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19. SEGMENTED INFORMATION
The Company has two reportable operating segments: Merchandising and Real Estate Joint Venture operations. • The Merchandising segment includes the sale of goods and services through the Company’s Retail and Direct channels. The Retail channel includes Full-line, Sears Home, Dealer, Outlet, Appliances and Mattresses stores, Cantrex and its wholly owned subsidiary, Corbeil Electrique Inc. The Direct channel includes catalogue and internet operations. Merchandising operations also include service revenues related to the Company’s product repair, home improvement, travel and logistics services, and performance payments received pursuant to the long-term credit card marketing and servicing alliance with JPMorgan Chase. • The Real Estate Joint Venture segment includes income from the Company’s joint venture interests in eleven shopping centres across Canada, most of which contain a Sears store. Joint venture interests range from 15% to 50% and are co-owned with major shopping centre owners. Shopping malls in which the Company is a joint venture partner and the proportionate ownership as at January 30, 2010, are as follows: Carrefour Angrignon Place Angrignon Promenades de Drummondville Carrefour Richelieu Carrefour de Nord Place Pierre Caisse 50% 50% 50% 50% 50% 50% Kildonan Place Chatham Centre Galeries de Hull Les Rivieres Medicine Hat Mall 20% 50% 15% 15% 40%

The reportable segments reflect the basis on which management measures performance and makes decisions regarding the allocation of resources. The accounting policies of the segments are the same as those described in the Summary of Accounting Policies and Estimates (Note 1). During the preparation of the consolidated financial statements, the revenues and expenses between segments are eliminated. The Company evaluates the performance of each segment based on earnings before interest expense and income taxes, as well as capital employed. The Company does not allocate interest expense or income taxes to either segment. Segmented Statements of Net Earnings for the fiscal years ended January 30, 2010 and January 31, 2009 are as follows: 2008 2009 (Restated - Note 1) Real Estate Joint Ventures6 $ $ 47.5 19.9 $ Real Estate Joint Ventures 6 $ $ 45.9 20.4 $

(in millions)
Total revenues Segment operating profit Interest expense, net Unusual items – (gain) Income taxes Net earnings
5

Mdse.5 $ 5,153.1 $ 351.0

Total $ 5,200.6 370.9 $ 25.2 (1.9) 112.9 234.7

Mdse.5 $ 5,687.3 372.8

Total $ 5,733.2 393.2 10.0 (38.8) 131.3 290.7

$

$

6

In 2009, merchandising includes revenue and pre-tax earnings from the alliance with JPMorgan Chase of $74.8 million (2008: $83.0 million) and $68.8 million (2008: $65.7 million), respectively. The real estate joint venture revenues are net of $2.2 million (2008: $2.2 million), representing the elimination of rental revenues earned from Sears department stores. Rental expense of the Real Estate Joint Venture segment has been decreased by the same amount, resulting in no effect on the total segment operating profit.

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Segmented Statements of Financial Position as at January 30, 2010 and January 31, 2009 are as follows: 2008 (Restated - Note 1) Real Estate Joint Ventures $ 116.4 –104.3 101.7 6.9 5.3

2009 Real Estate Joint Ventures $ 101.9 – 91.3 99.6 – 5.3

(in millions)
Total assets Goodwill Capital employed Average capital employed Capital expenditures 7 Depreciation and amortization 8
7

Mdse. $ 3,302.9 11.2 1,916.9 1,788.4 51.6 112.1

Total $ 3,404.8 11.2 2,008.2 1,888.0 51.6 117.4

Mdse. $ 3,120.9 11.2 1,743.5 1,554.7 89.1 121.6

Total $ 3,237.3 11.2 1,847.8 1,656.4 96.0 126.9

8

Capital expenditures do not correspond to figures presented in the Company’s Consolidated Statements of Cash Flows, as a portion of the expenditures above have not yet been settled in cash but are included in “Accounts payable” in the Consolidated Statements of Financial Position at the end of the period (Note 6: Capital Assets). There were no capital lease additions for 2009 and 2008. Included in Depreciation and amortization is the impairment charge of Nil for 2009 (2008: $1.2 million) related to the Merchandise segment.

In addition to the information above, the following amounts with respect to joint ventures are recorded in the Company’s consolidated financial statements:

(in millions)
Current assets Long-term assets Total liabilities excluding debt Cash flow generated from (used for) – operating – investing – financing $

2009 9.3 92.6 10.5 20.5 1.1 (22.7) $

2008 12.1 104.3 12.0 19.0 (7.4) (7.8)

20. RELATED PARTY TRANSACTIONS
Sears Holdings, the controlling shareholder of the Company, is the beneficial holder of 73.1% of the outstanding common shares of Sears Canada Inc. as at January 30, 2010. During the fiscal year, Sears Holdings charged the Company $7.4 million (2008: $8.8 million), and the Company charged Sears Holdings $2.3 million (2008: $3.0 million), in the ordinary course of business for shared merchandise purchasing services, employee expenses, software support, inventory purchases and royalties. Of the above amount charged by Sears Holdings, $0.2 million (2008: less than $0.1 million) is included in inventory at year end and the remaining charges are included in “Cost of merchandise sold, operating, administrative, and selling expenses” in the Consolidated Statements of Earnings and Comprehensive Income. These transactions were recorded either at fair market value or the exchange amount, which was established and agreed to by the related parties. As at January 30, 2010, the following related party balances existed with respect to the above transactions and are expected to be received or paid in 2010: amounts payable to Sears Holdings totalling $0.5 million (2008: $0.7 million) and amounts receivable from Sears Holdings totalling $0.7 million (2008: $0.8 million). Material related party transactions are currently reviewed by the Company’s Audit Committee. The Audit Committee is responsible for pre-approving all related party transactions that have a value greater than $1.0 million.

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21. CAPITAL DISCLOSURES
The Company’s objectives when managing capital are: • Maintain financial flexibility thus allowing the Company to preserve its ability to meet financial objectives and continue as a going concern; • Provide an appropriate return to shareholders; and • Maintain a capital structure that allows the Company to obtain financing should the need arise. The Company manages and makes adjustments to its capital structure, when necessary, in light of changes in economic conditions, the objectives of its shareholders, the cash requirements of the business and the condition of capital markets. In order to maintain or adjust the capital structure, the Company may pay a dividend or return capital to shareholders, increase/decrease debt or sell assets. The Company defines capital as follows: • Long-term obligations, including the current portion (“Long-term obligations”); and • Shareholders’ equity. The following table presents summary quantitative data with respect to the Company’s capital: 2008 2009 (Restated –Note 1) $ $ 350.7 1,657.5 2,008.2 $ 364.6 1,483.2

(in millions)
Long-term obligations Shareholders’ equity

$ 1,847.8

As at January 30, 2010, the Company is not subject to any financial covenants or ratios and the outstanding notes are unsecured. A U.S. $120.0 million letter of credit facility used to support the Company’s offshore merchandise purchase program was reduced in the fourth quarter of 2009 to a U.S. $20.0 million letter of credit facility. Restricted cash and investments have been pledged as collateral against outstanding amounts.

22. FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into financial agreements with banks and other financial institutions to reduce underlying risks associated with interest rates and foreign currency. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

Financial Instrument Risk Management
The Company is exposed to credit, liquidity and market risk as a result of holding financial instruments. Market risk consists of foreign exchange, interest rate risk and fuel price risk.

Credit Risk
Credit risk refers to the possibility that the Company can suffer financial losses due to failure of the Company’s counterparties to meet their payment obligations. Exposure to credit risk exists for derivative instruments, cash and short-term investments, restricted cash and investments and accounts receivable. As at January 30, 2010, the Company’s only exposure to counterparty risk as it relates to derivative instruments is represented by the fair value of the derivative contracts of $9.9 million. The Company has determined the credit valuation adjustment to be immaterial as at January 30, 2010. Cash and short-term investments, restricted cash and investments and other long-term assets of $1,398.9 million also expose the Company to credit risk should the borrower default on maturity of the investment. The Company manages this exposure through policies that require borrowers to have a minimum credit rating of A and limiting investments with individual borrowers at maximum levels based on credit rating.

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The Company is exposed to minimal credit risk from customers as a result of ongoing credit evaluations and review of accounts receivable collectability. As at January 30, 2010, approximately 45% of the Company’s accounts receivable are due from two customers who are both current on their account.

Liquidity Risk
Liquidity risk is the risk that the Company may not have cash available to satisfy financial liabilities as they come due. The Company actively maintains access to adequate funding sources to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost. The following table summarizes the carrying amount and the contractual maturities of both the interest and principal portion of significant financial liabilities as at January 30, 2010: Contractual Cash Flow Maturities

(in millions)
Accounts payable Accrued liabilities Long-term obligations and payments due within 1 year Operating lease obligations 9 $

Carrying Amount 647.7 342.1 350.7 – $ 1,340.5 $ $

Total 647.7 $ 342.1 375.3 661.3 2,026.4 $

Within 1 year 647.7 342.1 332.8 105.7 1,428.3 $ $

1 year to 3 years – – 17.4 184.3 201.7 $ $

3 years to 5 years – – 20.5 131.3 151.8 $ $

Beyond 5 years – – 4.6 240.0 244.6

9

Operating lease obligations are not reported in the Consolidated Statements of Financial Position.

Management believes that cash on hand, future cash flows generated from operations and availability of current and future funding will be adequate to support these financial liabilities.

Market Risk
Market risk exists as a result of the potential for losses caused by changes in market factors such as interest rates, foreign currency exchange rates and commodity prices.

Foreign Exchange Risk
The Company enters into foreign exchange contracts to reduce the foreign exchange risk with respect to U.S. dollar denominated assets, liabilities, goods or services. • As at January 30, 2010, there were derivative contracts outstanding with a notional value of U.S. $303.6 million and a combined carrying value of $9.9 million, included in prepaid expenses and other assets. These derivative contracts have settlement dates extending to December 2010. Option contracts with a notional value of U.S $298.8 million and a carrying value of $9.9 million have been designated as a cash flow hedge for hedge accounting treatment under CICA Handbook Section 3865, “Hedges” (“Section 3865”). These contracts are intended to reduce the foreign exchange risk with respect to anticipated purchases of U.S. dollar denominated goods and services, including goods purchased for resale (“hedged item”). As at January 30, 2010, all hedges were considered effective with no ineffectiveness recognized in earnings. • As at January 30, 2010, there were swap contracts outstanding with a notional value of U.S. $4.8 million and a carrying value of less than $0.1 million, included in accrued liabilities. These contracts are intended to reduce the foreign exchange risk on U.S. dollar denominated short-term investments pledged as collateral for letter of credit obligations issued under the Company’s offshore merchandise purchasing program.

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• Subsequent to January 30, 2010, the Company entered into foreign currency derivative contracts with a notional principal of U.S. $245.0 million. These derivative contracts have settlement dates extending to April 1, 2011 and have been designated as cash flow hedges for hedge accounting treatment under CICA Handbook Section 3865, “Hedges” (“Section 3865”). These contracts are intended to reduce the foreign exchange risk with respect to anticipated purchases of U.S. dollar denominated goods and services, including goods purchased for resale. While the notional principal amounts of these outstanding financial instruments are not recorded in the Consolidated Statements of Financial Position, the fair value of the contracts is included in the Consolidated Statements of Financial Position in one of the following categories, depending on the derivative’s maturity and value: prepaid expenses and other assets, other long-term assets, accrued liabilities or other long-term liabilities. Changes in fair value of those contracts designated as hedges are included in Other Comprehensive Income (“OCI”) for cash flow hedges to the extent the hedges continue to be effective. Amounts previously included in OCI are reclassified to net earnings in the same period in which the hedged item impacts net earnings. Based on historic movements, volatilities in foreign exchange and management’s current assessment of the financial markets, the Company believes a variation of +10% (appreciation of the Canadian dollar) and -10% (depreciation of the Canadian dollar) in foreign exchange rate against the U.S. dollar is reasonably possible over a 12-month period. The period end rate was 0.9352 U.S. dollar to Canadian dollar. Cash and short-term investments (other than those discussed above), derivative contracts that have not been designated as cash flow hedges, accounts receivable and accounts payable include U.S. dollar denominated balances which net to an insignificant balance, therefore, any changes in the U.S./Canadian dollar exchange rates would have an immaterial impact on net earnings. For the fiscal year ended January 30, 2010, the Company recorded a loss of $0.8 million (2008: loss of $8.8 million), relating to the translation or settlement of U.S. dollar denominated monetary items consisting of cash, accounts receivable, accounts payable, excluding the reclassification from other comprehensive income of the gain on foreign exchange derivatives designated as cash flow hedges.

Interest Rate Risk
From time to time the Company enters into interest rate swap contracts with approved financial institutions to manage exposure to interest rate risks. As at January 30, 2010 and January 31, 2009, the Company had no interest rate swap contracts in place. Interest rate risk reflects the sensitivity of the Company’s financial condition to movements in interest rates. Financial assets and liabilities which do not bear interest or bear interest at fixed rates are classified as non-interest rate sensitive. Based on historic movements, volatilities in interest rates and management’s current assessment of the financial markets, the Company believes a variation of +1%/-1% in the interest rates applicable to the Company’s cash and short-term investments and restricted cash and investments are reasonably possible over a 12-month period. Cash and short-term investments and restricted cash and investments are subject to interest rate risk. The total subject to interest rate risk as at January 30, 2010, was $1,394.7 million. A movement in interest rate of +/-1% would cause a variance in net earnings in the amount of $9.6 million.

Fuel Price Risk
The Company entered into a fuel derivative contract to manage the exposure to diesel fuel prices to help mitigate volatility in cash flow for the transportation service business. As at January 30, 2010 there was a fixed to floating rate swap contract outstanding for a notional volume of 0.8 million litres and a carrying value of less than $0.1 million. This derivative contract has settlement dates extending to February 2010 and a portion has been designated as a cash flow hedge for hedge accounting treatment under Section 3865. Changes in the fair value of the effective portion of the designated component of the derivative contract that qualifies as a cash flow hedge is recognized in accumulated other comprehensive income. Upon maturity of the designated component of the swap contract, the effective gains and losses are recorded in net earnings. Any gain or loss in fair value relating to the ineffective portion is recognized immediately in net earnings.

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Classification and Fair Value of Financial Instruments
The estimated fair values of financial instruments as at January 30, 2010 and January 31, 2009 are based on relevant market prices and information available at those dates. The following tables summarize the classification and fair value of certain financial instruments as at the 2009 and 2008 year ends. The Company determines the classification of a financial instrument when it is originally recorded, based on the underlying purpose of the instrument. As a significant number of the Company’s assets and liabilities, including inventories and capital assets, do not meet the definition of financial instruments, values in the tables below do not reflect the fair value of the Company as a whole. The fair value of financial instruments are classified and measured according to the following three levels based on the following fair value hierarchy. • Level 1: Quoted prices in active markets for identical assets or liabilities • Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices) • Level 3: Inputs for the asset or liability that are not based on observable market data

(in millions)
Classification Available for sale Short-term investments Held for trading Cash Cash and investments U.S. $ derivative contracts U.S. $ derivative contracts Cash Fixed price energy contracts Commodity derivative contracts Long-term investments Balance Sheet Category Cash and short-term investments11 Cash and short-term investments Restricted cash and investments11 Prepaid expenses & other assets Prepaid expenses & other assets (Accrued liabilities) Other long-term assets Accrued liabilities Accrued liabilities Other long-term assets Fair Value Hierarchy10 Level 1 Level 1 Level 1 Level 2 2009 $ 1,325.3 56.5 15.8 9.9 – – – 0.1 1.3 2008 $ 753.4 66.4 144.8 90.4 0.7 6.9 – (0.1) 1.6

Level 2 Level 3

(in millions)
Classification Available for sale Short-term investments Long-term investments Held for trading Cash Cash and investments U.S. $ derivative contracts U.S. $ derivative contracts Cash Fixed price energy contracts Commodity derivative contracts
10 11

Balance Sheet Category Cash and short-term investments11 Other long-term assets Cash and short-term investments Restricted cash and investments11 Prepaid expenses & other assets Prepaid expenses & other assets (Accrued liabilities) Other long-term assets Accrued liabilities Accrued liabilities $

2008 753.4 1.6 66.4 144.8 90.4 0.7 6.9 – (0.1)

2007 $ 806.9 2.6 64.7 5.2 – (0.2) – (0.1) –

Classification of fair values relates to 2009. Interest revenue to short-term investments is disclosed in Long-term Obligations (Note 12).

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All other assets that are financial instruments, excluding long-term notes discussed below, have been classified as “loans and receivables” and all other financial instrument liabilities have been classified as “other liabilities” and are measured at amortized cost in the Consolidated Statements of Financial Position. The carrying value of these financial instruments, with the exception of long-term obligations, approximates fair value as they are short-term in nature. Long-term obligations with a carrying value of $348.5 million, including the portion due within one year, but excluding all capital lease obligations, have a fair value as at January 30, 2010 of $352.2 million. The fair value of the Company’s proportionate share of long-term debt of joint ventures, with a carrying value of $48.5 million as at January 30, 2010, was calculated using a valuation technique based on assumptions that are not supported by observable market prices or rates. The term and interest rate applicable to each joint venture’s debt together with management’s estimate of a risk-adjusted discount rate were used to determine the fair value of $47.6 million. The fair value of the Company’s medium term notes, with a carrying value of $300.0 million at January 30, 2010, is $304.6 million and was determined with reference to observable market prices and rates.

23. NET EARNINGS PER SHARE
A reconciliation of the number of shares used in the net earnings per share calculations are as follows:

(Number of shares)
Average number of shares per basic net earnings per share calculation Effect of dilutive instruments outstanding Average number of shares per diluted net earnings per share calculation

2009 107,620,995 5,432 107,626,427

2008 107,620,995 5,124 107,626,119

For the fiscal year ended January 30, 2010, 6,840 options (2008: 136,751 options) were excluded from the calculation of diluted net earnings per share as they were anti-dilutive.

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Board of Directors
E.J. Bird Analyst Levine Investments William C. Crowley Executive Vice President and Chief Administrative Officer Sears Holdings Corporation Deidra D. Cheeks Merriwether Senior Vice President, Procurement and Finance Sears Holdings Corporation William R. Harker Senior Vice President, General Counsel and Corporate Secretary Sears Holdings Corporation R. Raja Khanna Co-Chief Executive Officer GlassBOX Television Jon Lukomnik Managing Partner Sinclair Capital LLC Dene L. Rogers President and Chief Executive Officer of the Corporation Debi E. Rosati President RosatiNet, Inc.

Officers
Dene L. Rogers President and Chief Executive Officer Timothy E. Flemming Senior Vice-President, Corporate Procurement and Supply Chain Allen R. Ravas Senior Vice-President and Chief Financial Officer Dennis Singh Senior Vice-President, Retail Sales

Committees
Audit Committee Human Resources and Compensation Committee Investment Committee Nominating and Corporate Governance Committee

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CORPORATE INFORMATION
Head Office
Sears Canada Inc. 290 Yonge Street Suite 700 Toronto, Ontario M5B 2C3 Website: E-mail: www.sears.ca [e-mail]

Annual Meeting
The Annual Meeting of Shareholders of Sears Canada Inc. will be held on Friday, April 23, 2010 at 8:00 a.m. in Room 5B1, Fifth floor, 290 Yonge Street, Suite 700, Toronto, Ontario, Canada.

Édition française du Rapport annuel
On peut se procurer l’édition française de ce rapport en écrivant au : Service national de communication Sears Canada Inc. 290 Yonge Street Suite 700 Toronto (Ontario) M5B 2C3 Pour de plus amples renseignements au sujet de la Société, veuillez écrire au Service national de communication, ou composez le 416-941-4425. Le dépôts réglementaires de la Société figurent sur le site Web de SEDAR à l’adresse www.sedar.com.

For more information about the Company, or for additional copies of the Annual Report, write to the Corporate Communications Department at the Head Office of Sears Canada Inc., or call 416-941-4425. The Company’s regulatory filings can be found on the SEDAR website at www.sedar.com.

Stock Exchange Listing
Toronto Stock Exchange Trading symbol: SCC

Transfer Agent and Registrar
CIBC Mellon Trust Company Toronto, Ontario Montréal, Québec Answerline: 416-643-5500 1-800-387-0825 www.cibcmellon.com [e-mail]

Website: E-Mail:

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Produced by Sears Canada Inc., Corporate Communications Typesetting by Parker Pad & Printing Ltd. Canada Printed in Canada by Parker Pad & Printing Ltd.

Certain brands mentioned in this report are the trademarks of Sears Canada Inc., Sears, Roebuck and Co., or used under license. Others are the property of their respective owners.

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