SEARS CANADA INC. 2004 ANNUAL REPORT Table of Contents 2 We’ve got the goods 4 We’ve got the brands 6 We’ve got the channels 8 We’ve got the people 10 We’ve got the facts 12 Financial Highlights 13 Letter to Our Shareholders 20 Letter from the Chief Financial Officer 21 2004 Financial Information 22 Eleven Year Summary 23 Common Share Market Information 24 Management’s Discussion and Analysis 54 Statement of Management Responsibility 55 Auditors’ Report 56 Consolidated Statements of Financial Position 57 Consolidated Statements of Earnings/ Consolidated Statements of Retained Earnings 58 Consolidated Statements of Cash Flows 59 Notes to Consolidated Financial Statements 83 Corporate Governance 85 Directors and Officers 86 Corporate Information we’ve got it! Over the course of more than 50 years of operation in Canada, Sears has built the most extensive multi-channel retail network in the country. In this year’s Annual Report we are providing a visual snapshot of the breadth and depth of our Company’s broad array of merchandise, private and exclusive brands, channel shopping options for our customers and a profile of associates who strive to create a memorable experience for our customers every day. We receive communication from these customers throughout the year. Below are a few samples of recent feedback. “It is with deepest regret that I am writing to inform you of the recent demise of our Kenmore dryer….after 34 years of dedicated service….In all those years, there was only one call to service.” Denise R., Mission, BC “We own many Craftsman tools and bought a lawn tractor 7 years ago. That lawn tractor has never given us a moment of trouble.” Lorrie W., Calgary, AB “….what a pleasure it was to shop online with Sears. I ordered my product, requested the shipping date and it was delivered on time, no hassle by extremely polite delivery men who called ahead of their arrival.” Janet A., Ottawa, ON “Your service technicians are extremely polite, courteous, professional and reliable. Our appliances were repaired in a reasonable time, in fact, even faster than predicted.” Isabelle L., Sutton, QC “I just want to write about the excellent customer service that we received from one of your employees….she took the time we needed to answer all the questions we had…she was friendly and informative….after having had her as a salesperson, we knew we were making a good decision buying from Sears.” Nancy M., Moncton, NB Major Appliances Men’s/Women’s/ Sporting Goods/ & Electronics Children’s Wear Toys/Seasonal Fashion Cosmetics & Housewares/ Accessories/ Fragrances Bed & Bath Footwear Furniture/ Window Coverings we’ve got the ... goods Hardware/ Lawn & Garden Sears-O-Pedic Weir Golf Nevada Craftsman we’ve got the ... brands Kenmore Martha Stewart Whole Home Jessica Everyday Sears Home we’ve got the ... channels Sears Dealer Sears full-line Sears department Sears Travel HomeCentral stores Sears www.sears.ca Sears Catalogue Appliances & Mattresses HomeCentral Transportation/ technicians Logistics associates Customer Contact Centre associates we’ve got the ... people Travel consultants Store sales associates serving Catalogue customers throughout Canada sales agents Sears is Canada’s There is a #1 Retailer for: Sears location within a Furniture and major appliances Mattress sets Custom window coverings Bedding and linens 10 minute drive Women’s sportswear and accessories of 93% of Canadians #1Women’s petite size clothing Sears Canada Direct 219 Off-mall stores www.sears.ca is ranked the country’s Sears Home Sears Catalogue most trusted Dealer 2,200 merchandise Appliances & Mattresses pick-up locations company by TNS Outlet Canadian Facts survey Sears has the most extensive 112 Travel multi-channel retail offices Sears Kenmore is the network in Canada 121 Full-line 64 Home Improvement #1 department showrooms selling brand for major stores Floor Covering Centres appliances in Canada Covering stores Sears HomeCentral showrooms Sears Canada is 1-800-26-SEARS #1 order-taking and customer service line is in home delivery the most dialed phone number in Canada services The Sears Card is Sears Free Spirit Major Exercise Equipment is Canada’s #1 #1 credit card from a single-issuer best seller Sears Craftsman is Canada’s we’ve got the ... #1 facts selling brand for lawn mowers and snow blowers Financial Highlights For the 52-week period ended January 1, 2005 and the 53-week period ended January 3, 2004 2004 20031 Results for the year (in millions) Total revenues $ 6,230 $ 6,223 Interest expense 55 60 Earnings before unusual items and income taxes 193 226 Unusual items – expense 3 5 Income tax expense 61 96 Net earnings 129 125 Year end position (in millions) Inventories $ 790 $ 801 Working capital 1,319 1,124 Total assets 4,226 4,139 Shareholders’ equity 1,877 1,781 Per share of capital stock (in dollars) Net earnings $ 1.21 $ 1.17 Dividends declared 0.24 0.24 Shareholders’ equity 17.67 16.67 1 The 2003 financial results have been restated. See Note 1 in the “Notes to the Consolidated Financial Statements”. 12 Sears Canada Inc. Brent Hollister President and Chief Executive Officer Working Together for a Successful Future Letter to Our Shareholders As the retail landscape is continuously evolving, Sears Canada’s far-reaching presence is the Sears has also adapted its multi-channel product of a relationship of trust and respect approaches to the Canadian marketplace over with Canadians that has deepened and the past year to better characterize the breadth flourished since we began operations over of our operations. “Department stores” provide 50 years ago. The Sears name today resonates Sears full-line assortment of merchandise in profoundly with millions of Canadians, many major centres from coast to coast. “Off-mall” of whose parents and grandparents have stores incorporate Sears Home, Appliances shopped with us. and Mattresses stores, Outlet stores, and owner-operated Dealer stores serving smaller The Company has the most extensive multi- communities. “Home improvement showrooms” channel retail network in the country. There is consist of floor-covering centres, home installed- a Sears location within a 10-minute drive of 93% product display areas inside our Sears Home of Canadians and we are committed to providing stores, and our Coverings banner opened late in them with quality merchandise and exceptional the year, all of which have Sears HomeCentral service coast to coast through our 121 full-line installation as their largest sales driver. “Direct” department stores, 219 off-mall stores, 64 home business refers to our catalogue and internet improvement showrooms, over 2,200 catalogue channels, reflecting the true marketing nature of merchandise pick-up locations, 112 Sears Travel how we reach customers using these methods. offices and a nationwide home maintenance, These various channels operate not as totally repair and installation network. separate ways to shop, but rather as an integrated solution system for our customers. For example, 2004 Annual Report 13 Frank Rocchetti Ethel Taylor Ajit Khanna Senior Vice-President, Senior Vice-President, Senior Vice-President, Merchandising and Marketing Full-Line Sales Off-Mall Sales in 2004, we launched the Clinique syndicated store Within this merchandise selection there are private on sears.ca, extending into direct marketing that and exclusive brands that we continue to refine which had been available only through department in order to give customers even more reasons stores previously. Another example is our internet to come to Sears rather than other retailers. site which provides customers with an online Kenmore, Kenmore Elite, Craftsman, Whole Home, shopping service which contains exclusive sears.ca Nevada, Jessica, Mike Weir Golf, and Martha products while also providing a mechanism for Stewart Everyday are all strong category Catalogue customers to order by clicking or dialing. performers and all posted healthy increases in 2004 over the prior year. We were pleased to A solid outlet approach requires a solid product welcome former heavyweight boxing champion, approach. “Destination” categories, where we George Foreman in person last fall to kick off have an authority position with customers, are a new exclusive relationship with Casual Male men’s wear, women’s wear, bed & bath, home Big & Tall men’s apparel. furnishings, major appliances, and outdoor power equipment. We have a strong market position in From the customer’s perspective, the merging of other categories which customers also expect to a product approach with an outlet approach means find at Sears. We provide an in-store selection that greater access to a broad range of merchandise. is adapted to each market depending on size and We are, in essence, bringing quality merchandise customer demand, and we complement that to our customers wherever and whenever they with our direct business and our HomeCentral prefer to shop. As we move forward with this repair and installation services. We enhance our more holistic sales approach, we will focus offerings with associates who strive to provide on the most appropriate platform to reach an exceptional and memorable shopping customers, including Sears Catalogue and experience every time. through www.sears.ca. 14 Sears Canada Inc. We believe this provides uniqueness to Sears The structure of the Officer group in place since that no other retailer can offer. While we faced mid-fall, pictured throughout these pages, means challenges last year, we maintained steady control that all major business units are represented when of the organization and continued to expand important decisions are made. This is a team of systematically the flexibility and responsiveness dedicated executives that are able to build on the of our multi-channel network. foundation that exists, and lead the organization through growth and productivity improvements. Total revenues for the year reached $6.23 billion.