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at aD E PA R T M E N T S T O R E S ÒSears is now the only full-line department store in Canada.ÓSears has 109 full-line department stores across the country,

with the 110th store slated to open in Abbotsford, B.C. in

1999. 29 stores have been retrofitted to reflect Sears

refreshing new look with a vastly expanded apparel and

home fashion selection.

S E A R SO U T L E T S TO R E S

ÒSears quality at outlet prices.Ó

Sears has 12 outlet stores. 4 stores were opened

in 1998 featuring a new format with 80,000

sq. ft. The outlet stores offer a wide selection of

merchandise, including in-season clearance.

D E A L E R S T O R E S ÒThe national resources of Sears and personal service

from your neighbour.ÓDealer stores are independently owned and

operated, and offer full catalogue services, a

large selection of appliances, lawn and garden

products and electronics. 14 dealer stores were

opened in 1998 to bring the total to 93. Plans

are to open another 17 dealer stores in 1999.

F U R N I T U R E & A P P L I A N C E S T O R E S ÒOffering one of the largest selections of furniture in Canada.ÓSears sells more furniture than any other single retailer in Canada.

Sears has 20 free-standing furniture stores with 10 more planned

for 1999. 12 of these stores offer both furniture and appliances.

These stores present triple the selection of furniture offered in

Sears traditional department stores, with the added advantage of

specially trained home decor consultants.

C ATA LO G U E ÒThe only full-line general merchandise catalogue in Canada.ÓSears published 19 different catalogues in 1998, reaching

4.5 million households. Customers can order by calling

1-800-26-SEARS, the most frequently called number in

Canada, or by fax or over the Internet. Sears has 1,900

catalogue order pick up locations across the country. The

catalogue offers a department store selection of over

50,000 products and services.

TheMany Sides of SEARS

outside

Glance

S E A R SH O M E C E N T R A L

ÒA houseful of services from the

Company you trust.ÓSears offers the broadest range of home repair,

maintenance and renovation services of any

retailer in Canada at 1-800-4-MY-HOME. Sears

opened its first Sears HomeCentral showroom in

Toronto with a second scheduled for 1999. 30

new Sears Floor Covering Centres will be opened

in 1999 with plans for 150 within 5 years.

S E A R S C A R D With more than 8 million cardholders, this is the

largest single issue credit card in Canada. More than 75% of Canadian

households have a Sears Card.

S E A R S C LU B With more than 7 million members, this is the most

broadly based customer rewards program in Canada. More than 65% of

Canadian households are Sears Club members.

S E A R S T R AV E L This is one of the largest travel agencies in

Canada, a trusted source for Canadian travellers.

S E A R S S P E C I A LT Y S E R V I C E S With everything

from hair cutting to driver training, Sears has the largest selection of licensed

partners of any retailer in Canada.

S E A R S C O N N E C T P H O N E P R O G R A MSears has become the number one reseller of long distance services

in Canada.

S E A R S offers Sears Card holders various types of life and property

insurance underwritten by well-known insurance companies, as well as

Sears AutoAssist Club. The Sears Card can also be used with select partner

companies such as Shell and Choice Hotels to earn Sears Club points.

and More...

I N T E R N E T ÒOnly Sears has an existing, nationwidefulfillment infrastructure to service this electronic channel.ÓSears Internet site delivers a unique selection of

information, answers, products and services. Over 500

products are on sale, or you can order from the catalogue

on-line. Customers can buy services such as travel, flowers,

phone plans, register for wedding or baby gifts and even

take a virtual tour of a Sears furniture store.

S E A R SB R A N D C E N T R A L ÒThe major appliance brands you want from theCompany you can rely on .ÓSears sells more major appliances than any other retailer in

Canada. With the addition of Maytag in 1998, Sears is the

only retailer in the nation to offer all of the top brands in

major appliances, including Sears Kenmore, CanadaÕs largest

selling brand. Sears selection is backed by the largest parts

and service operation in Canada with 2400 technicians.

2 S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8

8 Circle of ConfidenceUnderstanding how Sears anticipates and meets the manyneeds of its customers

12 Innovation Drives the BrandUnique ways Sears gets closer to the customer

18 Answering the CallIncreased catalogue sales driven by new innovations

16 A Houseful of Services1-800-4-MY-HOMEHome improvements and repairs all with one call

1410142022

23 FINANCIAL INFORMATION 1998

24 Eleven Year Summary

25 ManagementÕs Discussion and Analysis

35 Quarterly Results and Common ShareMarket Information

36 Statement of ManagementResponsibility and AuditorsÕ Report

37 Consolidated Statements of Financial Position

38 Consolidated Statements of Earnings

38 Consolidated Statements of Retained Earnings

39 Consolidated Statements of Changes in Financial Position

40 Notes to Consolidated FinancialStatements

CORPORATE INFORMATION50 Corporate Governance

51 Directors and Officers

52 Corporate Information

CONTENTS

ChairmanÕs Message

Great Things in Store

SEARSÉFor the Whole Home

Navigating a New Retail Landscape

A Spirit of Community

Sears is CanadaÕs largest single full-line retailer of general merchandise and home-related services, withfull-line department and specialty stores nationwide, complemented by the countryÕs only full-linegeneral merchandise catalogue. The Company emphasizes quality and service in appealing to a broadcross-section of Canadian consumers.

The CompanyÕs vision is to be CanadaÕs most successful retailer by providing its customers withtotal shopping satisfaction, its associates with opportunities to grow and contribute, and its shareholders withsuperior returns on their investment.

S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8

3S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8

Financial Highlights

For the 52 weeks ended January 2, 1999 and the 53 weeks ended January 3, 1998 1998 1997

Results for the year (in millions)

Total revenues $ 4,967 $ 4,584

Interest expense 86 86

Earnings before income taxes 269 215

Income tax expense 123 99

Net earnings 146 116

Year end position (in millions)

Working capital $ 898 $ 971

Total assets 3,198 3,007

Shareholders’ equity 1,164 1,042

Per share of capital stock (in dollars)

Net earnings $ 1.38 $ 1.10

Dividends declared 0.24 0.24

Shareholders’ equity 10.98 9.84

1998

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200088 89 90 91 92 93 94 95 96 97 98

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-15088 89 90 91 92 93 94 95 96 97 98

Total Revenues

($ millions) ($ millions) ($ millions)

Earnings (Loss)(Before Unusual items

and Income Taxes)

ShareholdersÕEquity

1998 4 S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8

1998 was another outstanding year for our Company in every respect. Despite a general softening in the

Canadian economy in the latter half of the year, Sears Canada produced its second consecutive year of

record revenues and earnings and continued to gain substantial market share from our competitors.

Total revenues in 1998 increased by $383 million. On a comparable week basis, merchandising revenues

increased by 10.4% on top of the 14.7% gain achieved in 1997. Over the past two years, total revenues have

increased by more than $1 billion dollars.

Earnings have also improved dramatically. In 1998, earnings increased by 25% to $1.38 per share. This

also represents the highest earnings ever achieved in our 46 year history in Canada.

Needless to say, we are all very pleased with our progress in transforming Sears Canada into a Great

Place to Shop, a Great Place to Work and a Great Place to Invest.

Letter to ourshareholdersPaul Walters, Chairman and Chief Executive Officer

with Richard Hosein, Donna Wallace-Harmon and Christina Altomarefrom Sears Scarborough, Ontario department store


As always, the dedication of our more than 41,000

associates is at the core of our success and we are extremely

proud and appreciative of their commitment to place cus-

tomer satisfaction as their top priority in everything they do.

Our associates have truly accomplished a great deal in

1998. We have continued to implement our aggressive plan

to create a brand new Sears through extensive renovations of

our full-line store sales channel.

In 1998, we completed major renovations to our

department stores in Laval, Brossard and Anjou, Quebec;

Scarborough, Hamilton, (Limeridge Mall) and Barrie,

Ontario; Calgary (Chinook Centre) Alberta; Richmond, and

Nanaimo, British Columbia. In addition, we refurbished on

a smaller scale 11 other full-line stores across Canada.

We continued to expand our significant share of the

furniture and major appliance segment of the market and

in 1998 opened 12 new free-standing stores to bring our

total to 20.

In rural Canada, we are expanding our dealer store

presence and, in 1998, we added 14 more stores to this

growing channel, bringing our total to 93 stores. In ad-

dition, we added 146 new catalogue order pick-up locations

to our network of 1,900 locations throughout Canada.

In a continued effort to accommodate the needs of the

do-it-for-me home maintenance and repair market, we

launched Sears HomeCentral, “one number for a houseful

of services” (1-800-4-MY-HOME), and our latest initiative,

Sears Floor Covering Centres, scheduled to begin opening

early this year. We also launched our biggest Wish Book and

catalogue contest ever; continued to enhance the benefits of

using the Sears Card; and delivered state-of-the-art gift

registry kiosks to all our department stores.

We added the Maytag brand of major appliances to our

already impressive selection of brands at all of our department

stores, furniture and appliance stores, dealer stores and national

catalogues, positioning Sears as the only retailer in the country

to offer all of the top brands in major appliances.

We made significant progress in growing our apparel

business in 1998. The “Softer Side of Sears” enjoyed double

digit revenue growth representing considerable market share

gains, particularly in women’s and children’s apparel.

And finally, all Sears associates deserve a pat on the back

for their outstanding commitment to supporting children’s

charities in their respective communities through Sears

“Young Futures” Program. Their efforts have contributed to

the more than $2 million dollars donated to provide children

with essential resources.

As we approach the new millennium, the consumer

market will be increasingly diverse and fragmented in terms

of ethnicity, tastes, motivations and needs. Our challenge

continues to be to micro-market to a more educated

consumer who is short on time, is technologically savvy,

demands quality and value and craves convenience.

Our unique combination of assets and strengths

positions us extremely well to respond to these consumer

trends. Our many channels of merchandise and service

distribution are key to building and strengthening the

customer relationship.

The influence of technology will mean the rapid

expansion of E-Commerce, with an increasing number

of goods for sale in an exciting on-line shopping

environment. In addition to being a direct link to and

from customers, the Internet will be a vital vehicle for

communicating our Company’s ethics, standards and

community commitment.

Technology will also be used in-store to create easy

access to time savers such as gift registries or specialty

services such as home decor computer programs, which

produce take-home pictures of furniture in different fabrics

or colours. Technology will allow for the ultimate in

targeted marketing. It will enable relationship marketing

that provides merchandise offerings that are specific to

each unique customer segment and provide a concise


Letter to ourshareholders continued

measurement of cost, offering and response. Customer

information and our use of technology will, we believe,

represent one of Sears most valuable sources of

competitive advantage in the future.

As we enter this last year of the 20th century we are

confident that our future at Sears Canada looks very

bright indeed. While the past two years represent

substantial progress for our Company on all fronts, we

recognize that the road to success will always be “under

construction”. While we are proud of our achievements,

we realize that we must rededicate ourselves each and

every year to providing you, our shareholder, with the

return on your investment that you expect and deserve.

I would like to express my gratitude and extend my

congratulations to Mr. J. R. (Jim) Clifford, President and

Chief Operating Officer, Sears Canada, who on November

9th was appointed to the position of President and Chief

Operating Officer, Full-Line Stores, Sears, Roebuck and Co.

Jim, during his five year tenure at Sears Canada, made

an important contribution to the success of our business

and we all wish him well in his new assignment at Sears,

Roebuck and Co. Jim will continue to serve on Sears

Canada’s Board of Directors.

All of us at Sears offer our heartiest congratulations to

C. Richard Sharpe, former Chairman of the Board and

Chief Executive Officer of Sears Canada, who was appointed

a member of the Order of Canada in 1998 for his out-

standing achievements in public services and other fields.

This is a well-deserved honour.

P. S. Walters

Chairman & Chief Executive Officer

Progress in1998

on 5 KeyImperatives


Key Imperative:Increase Merchandising Revenues at 2x theMarket Growth Rate

Grow Merchandising Earnings Before Interest andIncome Taxes (EBIT) to 5% of revenues

Increase Shareholder Value

Protect and Grow Credit Business

Create Winning Organization

Accomplishments:¥ Merchandising revenues increased by 10.4% on a

comparable week basis. The market is estimated tohave grown 4.5% in 1998.*

¥ Merchandising EBIT % increased from 3.4% in 1997 to4.2% this year, an improvement of 80 basis points.

¥ Earnings increased to $146.4 million, a 25.7% increase¥ Return on shareholdersÕ equity increased to 13.3%

from 11.7% in 1997.

¥ Total service charge revenues increased by 3.8% on acomparable week basis.

¥ The number of active customer accounts increased to3.9 million.

¥ Significant investment was made in new credit systems.

¥ Performance improvement in all key areas tracked:associate satisfaction, customer loyalty and financialmeasures.

* The market is defined as total retail sales as measured by Statistics Canada, lessfood stores, auto dealers, misc. other stores

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ÒAnticipating and meetingthe many needs of ourcustomers in more uniqueways than anyone else. ItÕsthe defining difference thatsets Sears apart today, and tomorrow.Ó

Paul Walters,

Chairman and Chief Executive Officer

A


Òservice isan ongoingpriorityÓ

M A X I M I Z I N G E V E R Y C U S T O M E R C O N TA C T“Service is an ongoing priority,” explains Ethel Taylor, Vice-

President, Full-Line Stores, “because as our service improves,

our customers’ expectations rise as well. We must

continuously improve and enhance our levels of service at

each point of contact with the customer.”

Great improvements in customer service were achieved

in 1998, as evidenced by Sears consistently scoring above

other major department stores in over 20,000 service

excellence mystery shops. “Service excellence ratings

increased to an impressive average 90%,” explains Taylor.

“We also saw improvements in every area of associate

satisfaction as we focused on supporting the people who face

and talk with our customers every day.”

Sears has achieved, and will continue to achieve,

operational excellence thanks to its thousands of sales

associates who work to ensure Sears earns the confidence and

trust of its customers every day, and in every way. To show

its appreciation, the Company launched a “Customer

Service Pays Off Contest” in 1998, awarding almost

$40,000 in prizes to associates in recognition of outstanding

customer service.

A Ô F U L L - L I N E Õ B R A N DThe momentum of record growth continued unabated in

1998 as Sears focused on developing lifetime customer

relationships, making it even easier and more convenient for

customers to shop with Sears. It was also a year in which

Sears extended its relationship with its customers into more

aspects of their lives.

Sears accomplished this by moving full steam ahead to

fulfill its vision to be a Great Place to Shop, Work and

Invest. At the heart of this commitment was the Company’s

strategy to be a ‘full-line’ brand by continuing to grow in

existing and new areas of the business. What does this mean

to the consumer?

Paul Walters, Chairman and Chief Executive Officer

explains: “Sears moved forward in the development of our

infrastructure to ‘Do it all for our customers’. While others

were refocusing and eliminating whole categories of

products, only Sears remained committed to being a full-

line department store.

In 1998, Sears offered the most places to shop: from

department stores to home services, to off-mall stores, to our

catalogue and the Internet. By creating synergy among these

sales channels, we were able to offer more products, more

selection, style, services and value. Our goal is to have more

of our customers shopping from more of our sales channels.

This unique approach in the Canadian retailing industry

helped us to continue to expand and grow the relationship

with our customers.”

GG R O W T H W A S I N FA S H I O N I N 1 9 9 8Sears $550 million, multi-year mall-based department

store revitalization program continued in 1998, with major

capital investment retrofits in 9 major department stores

in Nanaimo and Richmond, British Columbia; Calgary,

Alberta; Barrie, Scarborough and Hamilton, Ontario; and

Laval, Anjou and Brossard, Quebec; with limited retrofits in

11 other stores across Canada. These changes included new

flooring and fixtures, shopping boulevards with more

inviting, wider aisles and more true-to-life lighting. How

effective has this process been?

“The strategy of freeing up space by transferring

furniture into our furniture and appliance stores continues

to be highly successful,” says Ed Matier, Vice-President,

Apparel. “It resulted in an additional 219,000 square feet of

selling space which we used to further bolster our apparel

and soft home selection in virtually every category and

entrench Sears in the minds of customers as a fashion

apparel retailer. We also positioned national brand offerings

as being complementary to our exclusive private label

collections such as Jessica, Two Roads, R&R and Nevada,

which offer designer looks at reasonable prices. Product

development for our private label fashions is a key priority

for us and we have designers on staff creating the right look

for our customers.”

Sears continued in 1998 with its award winning “Softer

Side of Sears” advertising campaign, designed to highlight

Sears growing strength in fashion with the Company’s core

customers – Canadian women aged 25 to 54. The “Softer”

and “Many Sides” of Sears campaign is part of a fully

integrated marketing strategy to establish Sears as the most

compelling brand in retailing.

10

FA M O U S N A M E S . FA M O U S B R A N D S .Craftsman maintained its dominant position in the

marketplace as the number one selling brand in

lawnmowers, tractors and snowblowers. “We launched a new

line of Craftsman compressor and air tools for the serious

do-it-yourselfer and are in the process of redesigning our

Craftsman tools with more ergonomically friendly handles”

says Ashley Whicher, Vice-President of Craftsman and

Leisure and Automotive. Sears broadened its exclusive line of

Diehard batteries in 1998 with the launch of Diehard Silver.

Martha Stewart Everyday Colors™ paint became

available at Sears in Canada in 1998, featuring 256 colours.

96 unique colour combination cards, developed by Martha

herself, take the stress out of making the right decision about

which colours work best together. Sears introduced a new

Easy Living One Coat paint line, and now offers 2,000

colour choices. The Company also announced it would open

“Nevada Bob’s” upscale golf shops in 8 of its retail stores in

1999, with plans to broaden distribution in the future.

These are just a few of the ways that Sears, by offering

more selection and value, became more relevant to its

customers in every aspect of their lives.

S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8

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GREATTHINGSIN STORE

ÒSears renovations haveimproved store layouts anddesign and revitalized ourability to offer a greaterselection of fashions, brandnames and value for ourcustomers.Ó

Rick Sorby,

Executive Vice-President, Marketing

Brand


IÒBuilding on the unique ways we getcloser to the customer to distributemore products and services has beena key element in successfullyreinventing Sears brand image.Ó

Bill Turner,

Executive Vice-President, Merchandise & Logistics

nnovation drives the


A L I F E T I M E O F C H O I C E SIn 1998 Sears continued the momentum of establishing

itself as a unique retailer in the marketplace, building on its

core strengths and expanding the way the Company goes to

market to make its customers’ lives easier. How did Sears

focus on building lifelong relationships with its customers to

accomplish this?

“Only Sears can evolve a brand strategy that allows us to

offer customers so much choice and deliver it in so many

ways,” says Paul Walters, Chairman and Chief Executive

Officer. “By taking advantage of the synergistic interaction

between our unique sales channels, Sears is taking another

step forward in improving lifelong relationships with our

customers.”

“A perfect example is major appliances,” says Stew

MacLeod, Vice-President, Home and Appliances.

“Customers can choose from the Sears Brand Central

selection at our department stores in major centres, at free-

standing furniture and appliance stores; at dealer stores in

smaller towns or from the comfort of their home 24 hours a

day through our catalogues or Internet site. And Sears can

have it delivered, installed, financed and serviced. We’re

there for our customers, every way they want us to be.”

A P P L I A N C E A L L I A N C ESears was the only department store that saw growth in

the major appliance segment, continuing its number one

position in market share. Sears still dominates with its

exclusive Kenmore brand, Canada’s number one selling

brand of major appliances. In 1998, as part of the

Company’s brand equity focus, Sears added the Maytag

brand to its Sears Brand Central selection and became the

only retailer in the country to offer all of the top brands in

major appliances.

C O N N E C T I N G W I T H C U S T O M E R SAnother sales channel Sears uses to connect with its

customers is its national network of authorized dealer stores,

operated under independent local ownership and offering

hometown service. These stores, 25% of which were

enlarged in 1998, provide full catalogue service plus a large

selection of appliances, electronics and floor-care and lawn

and garden power products. A new format, which features

furniture, was piloted in Penticton, British Columbia in

November, 1998. Sears added 14 new dealer stores in 1998

to bring the total to 93. The target is 110 by the end of

1999. “These stores allow us to put our merchandise

closer to where our customers live and give them a new

opportunity to buy from us,” says Ajit Khanna, Vice-

President, Off-Mall Sales.

“We also opened a new format of outlet stores with

80,000 square feet, offering a wide selection of merchandise,

including in-season clearance merchandise in a brighter,

more attractive shopping environment focused on value and

quick service,” explains Khanna. “These new stores are

located in Vancouver, Calgary, Brampton and London.”

BuildingLifelong Relationships


Sears...for the whole home

TT H E R I G H T S T O R E F O R F U R N I T U R ESears strategy to transfer furniture from its mall-based

department stores to massive, free-standing furniture and

appliance stores offering triple the department store selection,

has been a resounding success. Twelve more of these new

stores were opened in 1998, bringing the total to 20, 12 of

which also feature the exclusive Sears Brand Central selection

of major appliances. While furniture was moved out of

nearby Sears mall-based department stores, the decision to

sell Sears incomparable selection of appliances in both its

mall-based department stores as well as the free-standing

furniture stores has resulted in even greater market share. As

a result, the 10 new stores planned for 1999 will include

Sears Brand Central appliances. Sears has also announced

plans to renovate and expand its existing furniture-only

stores in Mississauga and Kitchener, Ontario to include

appliances. How does this strategy improve a customer’s

shopping experience and build lifelong relationships?

“These stores are offering more of what our customers

have told us they want from us…all in one easy-to-shop

location,” explains Bob Rigg, General Sales Manager for

furniture and appliance stores. “We have one of the largest

selections of furniture and custom upholstery in Canada,

displayed in co-ordinated settings where you can actually

buy all the decor items presented, supported by trained

consultants. In our Brand Central area, we are showcasing

our ability to provide custom-designed kitchens through

Sears HomeCentral renovation service. From cupboards to

flooring, counters to lighting, it completes the service circle

for the customer.”

M O R E T O C O M E H O M E F O RWhole Home is the brand umbrella for the home fashion

side of Sears, and represents the most extensive selection of

co-ordinated furniture and home decor products in Canada

today. “The Whole Home program is Sears way of making it

easy for customers to put together a look for their home that

they’ll love for years to come,” says Heather Mercer, Whole

Home Fashion Director. “We expanded the Whole Home

brand product selection in all our stores and catalogues in

1998 and introduced “Casual Classics”, the first of our

seasonal co-ordinated collections. It features over 100

colour-matched products for every room of the home…from

dishes to bedding, to towels to candles, curtains and

furniture…it all co-ordinates so it’s easy for customers

who don’t have a lot of time to shop to achieve a great

look. Some customers love it so much, they buy the

whole package.”

A major new multi-media advertising campaign for

Whole Home invites customers to ‘get comfortable’.

E V E N Y O U R O F F I C E G E T SC O M F O R TA B L E Sears launched a new venture in 1998 intended to increase

its market share of Canada’s growing office furniture

business. Targeting the “SOHO” market – small office/home

office, Sears launched a national Whole Home Office

Furniture catalogue. A broad range of home and

commercial-grade office furniture is also offered in select

furniture stores, with plans to expand in 1999.


ÒSears offers our customersan easier way to make their

house a homeÉfrominspiring, affordable and co-ordinated product for every

room to our unique furnitureand appliance stores.Ó

Brent Hollister,

Executive Vice-President,

Sales and Service

Furniture store customers

benefit from specially trained

decor specialists and a new

computer system that can

create photos of thousands of

custom upholstery options.


A Houseful of Services

fashions. By bringing all these

services together, Sears is

confident that it will capture

an increasing share of this $15

billion industry.

The first Sears

HomeCentral showroom was

opened as part of the Markham,

Ontario furniture and appliance

store, featuring kitchen and bath vignettes, floor and

window coverings, custom windows and doors and a gas

fireplace shop. Following the success of this opening, Sears

has announced a second showroom scheduled to open in

1999 in its newly expanded furniture and appliance store in

Mississauga, Ontario.

A D D I N G F LO O R S PA C ETo further extend its leadership role in the home

improvement service business, Sears HomeCentral will open

30 new “Sears Floor Covering Centres” in 1999. “Sears will

select independently owned and operated floor covering

dealers to work with Sears under this new name,” says

Moore. “These stores will maintain their independence,

but will benefit from Sears volume buying power, group

marketing programs and Sears guarantee of satisfaction.

We plan to have 150 floor covering centres open within the

next 5 years, greatly expanding our offering of hard floor

coverings such as ceramics, laminates, vinyl and hardwood.”

A A Q U E S T I O N O F T R U S TSears has offered the broadest

range of home services of any

retailer in Canada for more than

25 years. In 1998, a new

solution was introduced for

easing the anxiety homeowners

experience when faced with

repairs, maintenance or

renovations. The Company

maximized its unique infrastructure to bring together all

of its capabilities and services under one name, Sears

HomeCentral, available through one easy number. How

does this new HomeCentral service make it easier than ever

for customers to come home to Sears?

“Sears continues to leverage its brand equity into new

areas because of inherent consumer trust in the Sears brand,”

explains Larry Moore, Vice-President, Service Sales. “We

now help customers through one easy number and a service

they trust 24 hours a day, seven days a week: 1-800-4-MY-

HOME or 1-877-LE-FOYER in Quebec. Services include

the repair of appliances, heating and cooling services,

exterior and interior home improvements, carpet cleaning,

parts and much more. These services are supported by

Canada’s largest service and repair fleet, with over 2,400

licensed technicians and access to over 3 million parts”.

Sears HomeCentral is also targeting the “do-it-for-me”

homeowner, offering everything from roofing to doors and

windows, to custom installed carpeting and window

ÒWe know that consumers trust Sears. If we can offer more of the products and

services they are looking for,backed by an unconditional

guarantee, our customers willshop with us more often and

for more of their needs.Ó

Larry Moore,

Vice-President, Home Service Sales

1-800-


Products and Services¥ appliance repair

service on mostmajor brands

¥ awnings¥ custom broadloom¥ carpet cleaning¥ central air

conditioning¥ chain link fencing¥ custom drapery

and blinds¥ duct cleaning¥ entry doors¥ electronic air

cleaners¥ flooring

¥ furnaces¥ garage

doors/openers¥ gas fireplaces/stoves¥ interior/exterior

shutters¥ kitchen

cabinets/refacing¥ lawn care¥ shingle roofing¥ siding¥ soffit/fascia/

eavestrough¥ upholstery cleaning¥ windows¥ parts

ME-4-MY-H

C Answeringthe all

ÒSears catalogue allows us to be a full-line departmentstore wherever and however a customer wants to shopwith us, by phone; in our department, dealer and furniturestores; and even on-line.Ó

Scott Marshall, Vice-President, Catalogue Sales


C A N A D AÕ S C ATA LO G U E Sears catalogue business enjoyed a record year, increasing the number of active

customers to almost 4 million, a growth of over 300,000 customers from the previous

year. Sears produced 19 different catalogues in 1998, bringing its department store

selection and more to over 4.5 million households in communities across Canada.

A key Sears strategy that continued to evolve in 1998 was to leverage the added

depth and breadth of selection in the catalogue to propel sales in the Company’s

retail environment. How has this improved the ease with which customers can shop

with Sears?

Scott Marshall, Vice-President, Catalogue Sales, explains: “Sears catalogue is the

only full-line general merchandise catalogue in Canada. Our continued strong growth

is the result of the transformation of our catalogue marketing offers and the improved

convenience and service of our field agency network. As our marketing offers have

created more demand, our field organization has responded with service innovations

such as Shop by Phone in our retail flyers, which gives customers an alternative to

shopping in person. We also forged greater synergy between our retail operations and

catalogue shopping network with expanded service catalogue “stores” in our renovated

At a record 1000 pages,

Sears 45th anniversary

Christmas Wish Book was its

biggest Wish Book ever, with

over 50% more gift ideas.

Sears biggest customer

contest ever also awarded

over 9,200 prizes totaling

more than $1.5 million.


department stores and new catalogue desks in our furniture and appliance stores.

Extensive training and new technology now allows us to input customers’ catalogue

orders at any register in our retail stores. As a result of these innovations, we can use

catalogue inventory to connect with our retail customers in two ways: we can offer

them a vastly expanded selection of sizes and styles; and we have the opportunity to

introduce them to the advantages of catalogue shopping.”

As a new service, kiosks for easy access to Sears Request, our computerized gift

registry service, were installed in all department stores, linking catalogue and retail

inventories and information.

W E W R O T E T H E B O O K O N S E R V I C E Technological advancement continues to help Sears provide better service while reduc-

ing costs. In fact, customer satisfaction levels are higher than ever. A record 22 million

catalogue order calls came through 1-800-26-SEARS, Canada’s most frequently called

number. Cost of order processing was reduced and cycle time decreased.

127 new catalogue agents were added in 1998, exceeding expansion plans. This

brings the network of catalogue selling locations to 1,900. New fixturing and signing

programs are providing a consistent image for Sears in these locations.

Sears state of the art

1.4 million square foot

catalogue distribution

Centre is one of the

largest in Canada.

www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.s

shoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon-lineshoppingon


ConvenienceNavigating a New Retail Landscape

ÒWe want to give customers whatthey want, when they want it andbe there for them 24 hours a day.The Internet is the opportunity tobring all Sears can offer togetherlike never before.Ó

Rick Brown, Vice-President Strategic Planning

Save

tim

e.

T R A N S F O R M I N G I N F O R M AT I O N I N T O S A L E SSears continued to develop its presence on

the Internet, the new retail landscape that

provides an unprecedented opportunity for the

Company. It is here on the Internet where Sears, with

Canada’s only fully established national catalogue order

fulfillment and billing system, has the unique advantage of

being able to offer its customers access to its entire depth

and breadth of merchandise and services. How will the

Internet better link Sears with its customers?

“Sears strategy for growth is to provide for as many

aspects of the consumer’s life as possible and to make each

interaction uncomplicated, effortless and satisfying,” says

Bruce Clarkson, General Manager, Relationship Marketing.

“The Internet is the ultimate synergistic opportunity, the

one place where the entire Company can come together for

our customers.”

Sears launched its website in 1996, and offers its

customers a unique information and service source, e-mail

communication and merchandise. It presently offers more

than 500 products for purchase through electronic

commerce, as well as on-line catalogue ordering of its

thousands of catalogue offerings. Customers can buy travel,

flowers, phone plans, take a virtual tour of a Sears furniture

store, and the list is expanding every day.

Save

mon

ey

¥ visits to Sears website increased 539% to 500,000+

visitors in 1998

¥ sales increased446% in 1998

¥ similar growth isprojected for 1999

ears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca www.sears.ca

lineshoppingo

L I N K T O T H E F U T U R E“It is becoming clearer to Sears how

powerful the Internet can be for providing

information that in turn can generate sales,” explains

John Pullam, National Manager, Electronic Commerce. “We

believe the Internet is an important source of sales for Sears

and an unprecedented interface that will link us with our

customers and their lives like never before.”

T H E R E L AT I O N S H I P C A R DIn 1998, 62% of the Company’s transactions

were completed on the Sears Card, and Sears

Club membership reached 7 million.

Enhancements to the Sears Card made in 1998 provide

even more advantages to our cardholders. SearsConnect

customers can now make long distance calls anywhere in

Canada, 24 hours a day, for only 10 cents a minute, and

earn Sears Club points as an added benefit.

Initiatives to add new alliances resulted in announce-

ments that Beaver, Penny, Payless and Turbo service stations

would now join Shell Canada in accepting the Sears Card

for transactions. And Canada’s largest lodging chain,

Choice Hotels, became the newest partner to accept the

Sears Card.

“The Sears Card has been a big hit at these new venues,”

says Ray Bird, Senior Vice-President, Credit. “We continue

to offer our customers more choices and locations to use

their Sears Card and more opportunities to collect Sears

Club points.”

S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8 21

open 24 hourswww.sears.cashoppingon-line

AY O U N G F U T U R E S“Sears Canada recognizes the need to support caring

programs which focus on the well-being of our children,”

says Paul Walters, Chairman and Chief Executive Officer.

“Sears “Young Futures” Program, is dedicated to helping

selected groups within the communities where our

customers and associates live. Importantly, we also

encourage others to contribute their funds and time to

this worthy cause.”

Sears contributed over $2 million in cash and in-kind

merchandise to hundreds of community charities and major

national charitable campaigns focusing on programs that

provide the basics to children. Additionally, Sears helped

raise funds for local charities through a number of national

programs such as “Help Us Help Kids,” a program where

customers were asked to round up their purchase totals and

Sears would match the donation; and over $100,000 was

raised through the sale of Ho Ho Beans, an adorable bean

bag snowman sold across Canada.

R E A D I N G T H E F U T U R E Sears believes its focused charitable

giving strategy can have a significant

impact. For the fourth year in a

row, Sears presented the Ben

Wicks’ Born to Read program to

children in grades 1 to 3 across

Canada. Teachers gave 2 million

kids “Born to Read and Cook”

booklets to take home to be read with their parents. Our

focus on computer literacy for children was moved ahead by

our ongoing commitment to Computers for Schools, a

program through which Sears helped place over 100,000

recycled computers in schools across the country. Once

again, Sears donated the latest volume of the Dictionary of

Canadian Biography to over 3200 schools. The Company

also sponsored the Sears Ontario Drama Festival, the largest

student drama festival in North America, now in its

53rd season.

We are very proud of the donations made by our

associates. Last year, our Employee Charitable Fund

Campaign raised close to $1 million for employee-

designated charities. Many associates volunteered a

considerable amount of their time to various causes, like

Margie Schuett, who capped several years of volunteer

activity being selected Chef de Mission Team Canada 1998,

competing at the XVI Commonwealth Games in Malaysia.

Sears also sponsors major national events, selected

because they represent what is relevant to our customers.

Sears sponsored the first open skating event in Canada, the

Sears Figure Skating Open ‘98. In Quebec, “Les Spectacles

Sears” sponsored concerts by Brian Adams and a musical

production, Stomp. Our support of the Raptors and

Grizzlies, with their NBA “Stay in School” message, focuses

on what children can aspire to. The Sears Model’s Club is

another national program which encourages youth to present

themselves with confidence and develops their self-esteem.

ÒIn appreciation of our valuedrelationship with our customers, Sears isdedicated to supporting relevantinitiatives in the communities we serve.Ó

John Menchella, National Director, Strategic Marketing

A SPIRIT

OFCOMMUNITY



Sears

MD&A and

Financial Highlights

1998 Financial Information

In 1998 Sears continued to create value for our shareholders.

Investment in strategic growth initiatives contributed to increases

in revenues, earnings, and the return on shareholdersÕ equity.

Sears believes these investments, as well as the effective

management of expenses, will continue to contribute to the

achievement of our key imperatives, and generate value for

our shareholders.

John T. Butcher

Senior Vice-President and Chief Financial Officer


1994 1993 1992 1991 1990 1989 1988

$ 4,066 $4,032 $4,042 $ 4,169 $4,642 $ 4,621 $4,37767 69 70 56 55 48 47

88 15 (101) (31) 70 186 175 (5) (5) (46) (8) (31) 0 0

83 10 (147) (39) 39 186 175 38 6 (56) (10) 19 83 82 45 4 (91) (29) 21 106 96 23 23 21 20 20 21 21 60 37 55 235 204 116 118

$1,324 $1,101 $ 909 $1,090 $1,877 $1,784 $1,496 559 563 628 693 665 807 747 800 813 941 997 803 665 572

2,949 2,746 2,796 3,069 3,581 3,512 3,1031,016 888 885 1,112 1,486 1,451 1,177 1,032 947 1,063 1,245 1,362 1,185 964

867 845 863 900 948 970 883

$ 0.47 $ 0.05 $ (1.04) $ (0.34) $ 0.25 $ 1.23 $ 1.11 0.24 0.24 0.24 0.24 0.24 0.24 0.24 9.13 8.90 9.10 10.67 11.25 11.26 10.27

5.2 0.5 (10.3) (3.1) 2.2 11.4 11.2 2.0 2.0 2.1 2.4 2.3 2.1 2.0 1.1 0.1 (2.2) (0.7) 0.5 2.3 2.2

59/41 58/42 59/41 61/39 67/33 66/34 65/352.0 0.3 (3.6) (0.9) 0.8 4.0 4.0

110 110 109 106 97 92 84 0 0 0 0 0 0 0

11 12 13 15 18 17 16 4 0 0 0 0 0 0

1,542 1,483 1,579 1,701 1,701 1,708 1,726

Eleven Year Summary1

Fiscal Year 1998 1997 1996 1995Results for the Year (in millions)

Total revenues $ 4,967 $ 4,584 $ 3,956 $ 3,918 Depreciation 96 78 78 74 Earnings (loss) before unusual

items and income taxes 269 215 70 43 Unusual items gain (loss) 0 0 (45) (21)Earnings (loss) before

income taxes 269 215 25 22 Income taxes (recovery) 123 99 16 10 Net earnings (loss) 146 116 9 12 Dividends declared 25 25 23 23 Capital expenditures 142 160 63 76

Year End Position (in millions)

Accounts receivable $ 1,100 $ 1,225 $ 1,033 $ 926 Inventories 739 640 491 507 Net capital assets 868 825 744 763 Total assets 3,198 3,007 2,734 2,554 Working capital 898 971 741 661 Long-term obligations 681 836 634 662 Shareholders’ equity 1,164 1,042 949 856

Per Share of Capital Stock (in dollars)

Net earnings (loss) $ 1.38 $ 1.10 $ 0.09 $ 0.13 Dividends declared 0.24 0.24 0.24 0.24 Shareholders’ equity 10.98 9.84 8.98 9.02

Financial RatiosReturn on average

shareholders’ equity (%) 13.3 11.7 1.0 1.4 Current ratio 1.7 1.9 1.7 1.7 Return on total revenues (%) 2.9 2.5 0.2 0.3 Debt/Equity ratio 42/58 45/55 46/54 48/52Pre-tax margin (%) 5.4 4.7 0.6 0.6

Number of Selling Units Full-line department stores 109 110 110 110 Furniture stores 20 8 4 1 Outlet stores 12 8 9 10 Dealer stores 93 79 60 19 Catalogue selling locations 1,898 1,752 1,746 1,623

1 Certain amounts have been restated to reflect accounting changes related to the consolidation of the Company’s proportionate share of the assets, liabilities, revenues and expenses of real estatejoint ventures as recommended by the Canadian Institute of Chartered Accountants. The change in policy, effective in 1995, has been applied retroactively.

S E A R S C A N A D A


ManagementÕs Discussion & Analysis

Sears is Canada’s largest single full-line retailer of general

merchandise and home-related services, with full-line department

and specialty stores, as well as catalogue selling locations across

Canada. The Company emphasizes quality, value, and service in

appealing to a broad cross-section of Canadian consumers.

The Company’s vision is to be Canada’s most successful

retailer by providing customers with total shopping satisfaction,

associates with opportunities for career advancement and personal

growth, and shareholders with superior returns on their

investment.

OVERVIEW OF CONSOLIDATED RESULTSFor purposes of this discussion, “Sears” or “the Company” refers

to Sears Canada Inc. and its subsidiaries together with the

Company’s proportionate share of the assets, liabilities, revenues

and expenses of joint venture interests in shopping centres.

The 1998 fiscal year refers to the 52 week period ended

January 2, 1999 and comparatively, the 1997 fiscal year refers to

the 53 week period ended January 3, 1998.

The following table summarizes the Company’s operating

results for 1998 and 1997.

(in millions, except per share amounts) 1998 1997

Total revenues $ 4,966.6 $ 4,583.5

Earnings before interest

and income taxes 354.3 301.3

Interest expense 85.6 86.1

Earnings before income taxes 268.7 215.2

Income taxes 122.3 98.7

Net earnings $ 146.4 $ 116.5

Earnings per share $ 1.38 $ 1.10

Total revenues increased in 1998 by $383.1 million or 8.4% over

1997 due primarily to strong growth in merchandising revenues.

Fiscal 1997 contained 53 weeks. On a comparable 52 week basis,

total revenues increased by 9.7% in 1998.

In 1998, Sears continued to implement its strategic growth

initiatives which contributed to increased revenues. The

Company’s strategy for growth is directed at meeting the needs of

its target customer, and involves increased investment in

inventories, fixed assets and marketing. In 1998, Sears continued

to expand and enhance the range of products and services it offers

to its customers. During the year, the Company completed

renovations to 20 full-line department stores, and opened 12 new

Sears Furniture Stores (ten of which feature major appliances),

four outlet stores, and 14 dealer stores.

The Company’s earnings before income taxes were $268.7

million in 1998, a 24.9% increase over 1997 earnings of $215.2

million. Operational expenses and investments in inventory and

capital assets were all effectively managed, contributing to a

substantial increase in net earnings.

Number of Associates1998 1997

Full-time associates 10,073 9,221

Part-time associates 31,508 29,324

Total associates 41,581 38,545

The total number of associates increased by 7.9% in 1998, due

primarily to growth in the Company’s merchandising operations.

SEGMENTED BUSINESS ANALYSISThe Company’s operations can be grouped into three major

businesses: merchandising, credit, and real estate joint venture

operations.

MERCHANDISING OPERATIONSThe merchandising business segment includes Sears full-line

department store and catalogue operations, in addition to Sears

Furniture Stores, dealer stores, outlet stores, and Sears

HomeCentral.



ManagementÕs Discussion & Analysis continued

Merchandising Operations(in millions) 1998 1997

Revenues $ 4,595.1 $ 4,210.6

Earnings before interest and

income taxes $ 193.7 $ 141.7

Capital employed $ 735.4 $ 553.6

Merchandising Operating AnalysisMerchandising revenues were $4.6 billion in 1998, an increase of

9.1% over 1997. On a comparable week basis, merchandising

revenues increased 10.4%. All regions experienced increases in

revenues in 1998.

Merchandising Revenues by Region% of % of Total

(in millions) 1998 Total Households1

Atlantic $ 447.6 9.7 7.8

Quebec 943.1 20.5 26.1

Ontario 1,858.0 40.4 36.3

Prairies 820.3 17.9 16.4

BC/Yukon/NWT 526.1 11.5 13.4

Total $ 4,595.1 100.0 100.0

1 Total Households is based on Statistics Canada, 1996 Census.

Number of Selling UnitsAs at January 2, 1999

BC

Yukon

Atlantic Que. Ont. Prairies NWT Total

Full-Line 11 25 42 19 12 109

Furniture 0 4 13 1 2 20

Outlet 1 1 7 2 1 12

Dealer 18 9 24 17 25 93

Catalogue 326 470 518 423 161 1,898

Full-Line Department Stores Ð 109 department stores ranging in

size from 24,500 square feet to 162,000 square feet.

Furniture Stores Ð stores ranging in size from 35,000 square feet

to 58,000 square feet, featuring an expanded selection of

furniture, decorator rugs and, in 12 stores, major appliances.

Outlet Stores Ð selling returned and surplus merchandise in

stores ranging in size from 24,000 square feet to 109,000

square feet.

Dealer Stores Ð independent, locally operated stores serving

smaller population centres, selling home appliances and

electronics, as well as lawn and garden furniture, and garden and

snow removal equipment.

Catalogue Selling Locations Ð consist of 1,678 independent

catalogue agent locations, plus catalogue pick-up locations within

Sears full-line stores, outlet stores, dealer stores, and selected Sears

Furniture Stores.

In 1998, the Company closed its full-line department store

in Markham, Ontario, and converted the store into a Sears

Furniture Store and a fashion outlet store. In addition, the

Company opened 11 new Sears Furniture Stores (nine of which

offer major appliances), three outlet stores, and 14 dealer stores.

Merchandising Gross Floor Area(square feet – in millions) 1998 1997

Full-Line 13.4 13.6

Furniture 0.8 0.3

Outlet 0.9 0.6

Total 15.1 14.5

Merchandise service centres:

Active 7.1 6.8

Subleased or dormant 1.4 1.9

Total merchandise service centres 8.5 8.7

Merchandise service centres include two catalogue order

fulfillment facilities and five service centres supporting national

merchandising operations.



Recent Merchandising Initiatives• During the year, 20 full-line department stores were renovated.

Major renovations were made to nine stores: Laval, Anjou and

Brossard, Quebec; Scarborough Town Centre, Hamilton

Limeridge, and Barrie, Ontario; Richmond and Nanaimo,

British Columbia; and Calgary Chinook, Alberta. The

renovations to these stores, featuring major upgrades to store

presentation such as fixtures and lighting, were modeled after

the nine full-line department stores renovated in the Greater

Toronto Area in 1997. During the renovations this year, Sears

was able to reclaim more than 118,000 square feet of selling

space by eliminating surplus stockroom and office space. This

additional selling space was used to present an expanded

assortment of fashion apparel, cosmetics, accessories, and

home fashions.

• In December, 1998, Sears announced that it plans to open a

new full-line department store in Abbotsford, British Columbia

in the Fall of 1999.

• In November, 1998, Sears announced the launch of Nevada

Bob’s golf shops in eight full-line stores in 1999 on a test basis.

The golf shops, which will be staffed by Nevada Bob’s sales

professionals and feature a broad-range of national brands in

golf equipment, accessories, and apparel, will be opened in

stores with one location in each of Toronto, Hamilton, and

St. Catharines, Ontario; two locations in Quebec City,

Quebec; and three locations in Edmonton, Alberta. This

strategic alliance demonstrates Sears commitment to expand

and enhance the shopping experience for Sears customers.

• Sears Request, a new state-of-the-art gift registry kiosk

designed to enhance the existing Special Occasions Gift

Registry which was launched in 1996, was rolled-out to all

full-line stores during 1998. Conveniently located in the

housewares department, these kiosks allow customers to scan

personalized announcement cards mailed to them on behalf

of a registrant in order to receive an up-to-date list of the gift

items registered. Any purchase made using this system will

be instantly removed from the list of gifts requested to

eliminate duplication.

• To maximize synergies between the catalogue and full-line sales

channels, and to allow department store customers access to

the catalogue’s expanded selection of styles and specialty sizes,

Sears installed a software program called COMET on all full-

line point-of-sale terminals in 1998. This software allows

associates in a full-line store to order catalogue items for a

customer directly at any cash register in the store. The associate

can also offer the customer the option of home delivery, or

arrange for the item to be picked up at the catalogue agent or

full-line store location most convenient to the customer.

• During the year, the Company continued to enhance its

assortment of national brands. Sears added a broad selection of

Maytag appliances in October, including Maytag’s full line of

washers, dryers, and dishwashers, to Sears Brand Central

selection in all Sears full-line stores, Sears Furniture Stores

featuring major appliances, its national catalogues, and to more

than 85 dealer stores. Sears also introduced Martha Stewart

Everyday Colors™, a colour coordinated line of interior latex

paint. Sears has combined these brands with its strong private

label offerings, such as Kenmore appliances, and Easy Living

Paint, in order to provide customers with a broad range of

products from which to choose when furnishing and

decorating their homes.

• This year, Sears consolidated the repair and home improvement

services it offers under the banner Sears HomeCentral,

1-800-4-MY-HOME, or 1-877-LE-FOYER in Quebec.

“Do-it-for-me” homeowners nationwide can now call this toll-

free number 24 hours a day, seven days a week for a wide

variety of services including appliance repairs, parts, heating

and cooling services, carpet cleaning, and exterior and interior

home improvements. By bringing all of these services together

under the Sears HomeCentral banner, Sears is able to offer

customers a more convenient way to shop for home repairs

and improvements.


• In October, 1998, Sears announced the launch of Sears Floor

Covering Centres, with plans to introduce 30 stores in 1999.

Sears will license existing independent floor coverings dealers to

operate Sears Floor Covering Centres, allowing dealers to

benefit from Sears volume buying and group marketing

programs. These stores, which will continue to be

independently owned and operated, will feature wall-to-wall

carpeting, in addition to a large selection of hard floor

coverings such as hardwood, laminates, ceramics, and vinyl.

The introduction of Sears Floor Covering Centres is part of

Sears plan to expand the products and services offered under its

Sears HomeCentral banner.

• During the year, Sears opened 12 new Sears Furniture Stores

(ten of which offer major appliances), with four new locations

in Quebec, two in British Columbia, one in Alberta, and five

in Ontario. The Sears Furniture Stores which feature

appliances, carry the Sears Brand Central selection of major

appliances, in addition to a broad selection of furniture,

decorator rugs and accent decor items. The new Sears furniture

and appliance store located in Markham, Ontario also features

the first Sears HomeCentral showroom, offering a wide range

of home products and services such as floor and window

coverings, model kitchens, gas fireplaces, and bathroom

renovations. The Company plans to open ten new combination

furniture and appliance stores in 1999. In addition, the

Company plans to relocate the Sears Furniture Stores in

Kitchener and Mississauga, Ontario, to larger premises in

1999. Sears Brand Central appliances will be added to both

locations, and a Sears HomeCentral showroom will be featured

in the Mississauga location.

• Sears continued to expand its dealer store program in 1998

adding 14 new locations, bringing the total number of dealer

stores to 93. The Company plans to open an additional 17

dealer stores in 1999. In November, 1998, Sears announced

that its dealer store in Penticton, British Columbia, would be

the first dealer store to offer furniture. This initiative will allow

Sears to measure the responsiveness of consumers in smaller

communities to an expanded selection of merchandise which

includes furniture. Sears plans to test the addition of furniture

to several dealer store locations in 1999.

• In 1998, Sears opened four new format outlet stores in London

and Brampton, Ontario; Calgary, Alberta; and Vancouver,

British Columbia. The new outlet stores are designed to feature

brighter lighting, wider aisles, and expanded display space.

Sears outlet stores feature a wide assortment of value-priced

catalogue and full-line store surplus, as well as in-season

clearance merchandise.

• Sears continued to develop its presence on the Internet during

the year. Sears launched its bilingual website, www.sears.ca in

1998 which offers customers more than 500 products for

purchase through the website, as well as on-line catalogue

ordering. Customers can also purchase services such as travel

and floral delivery at the site. In 1998 Sears website received

over 500,000 visitors. The Company views electronic

commerce as an important new retailing medium, and plans

to continue to enhance its Internet offerings in 1999.

CREDIT OPERATIONSSears credit operations finance and manage customer charge

account receivables generated from the sale of goods and services

charged on the Sears Card.

(in millions) 1998 1997

Total service charge revenues $ 371.3 $ 364.8

Less: SCRT2 share of revenues (65.4) (54.2)

Net service charge revenues 305.9 310.6


income taxes $ 126.7 $ 127.5

Capital employed $ 1,020.3 $ 1,090.8

2 Refer to the section entitled “Securitization of Charge Account Receivables” on page 31.

Credit operations contributed $126.7 million to the Company’s

1998 consolidated earnings before interest and income taxes,

compared to $127.5 million in fiscal 1997.



Total service charge revenues earned on customer charge

account receivables increased by $6.5 million or 1.8% in 1998.

Fiscal 1997 contained 53 weeks. On a comparable 52 week basis,

total service charge revenues increased by 3.8%. Through its

securitization program, the Company securitizes customer charge

account receivables in order to obtain a more favourable cost of

funding. The cost of this funding is deducted from the total

service charge revenues earned on the portfolio. (Refer to the

section entitled “Securitization of Charge Account Receivables”

on page 31.)

Charge Account Receivables Analysis(in millions – except average outstanding account balance per customer) 1998 1997

Active customer accounts 3.9 3.8

Average outstanding balance per

customer account at year end $ 441 $ 439

Charge account receivables written-off

during the year (net of recoveries) $ 44.4 $ 46.4

Net write-offs as a percentage of the monthly average amounts

outstanding were 2.9% in 1998 compared to 3.2% in 1997

and 3.4% in 1996. This write-off rate continues to be at the

low end of industry norms. The Company maintains a low

write-off rate through continued innovation of its portfolio

management strategies.

Since October, 1993, Sears has been accepting third party

credit cards in addition to the Sears Card. 1998 was the first full

year debit cards were accepted in all of the Company’s full-line

stores, Sears Furniture Stores, and outlet stores. The chart below

details the trend in method of payment.

1998 1997 1996

Sears Card 62% 64% 66

Third Party Credit Cards 13 13 11

Cash & Debit Cards 25 23 23

Total 100% 100% 100

The percentage charged to third party cards remained constant at

13%. The share of non-credit sales increased to 25% from 23%

last year, with debit card usage accounting for 5% of total sales.

Recent Credit InitiativesThe following initiatives have been directed at increasing usage of

the Sears Card.

• In May, 1998, Sears formed an alliance with Choice Hotels

Canada Inc. to offer Sears Card holders the option of using

their Sears Card to pay for accommodation at more than 200

Clarion, Quality, Comfort, Sleep, Econo Lodge, MainStay

Suites, and Rodeway locations across Canada. Sears Card

holders can also guarantee reservations through Choice Hotels’

toll-free reservations hotline. Sears will continue to seek out

opportunities to form strategic alliances with companies that

will be chosen based on their fit with Sears objectives and the

potential benefits to Sears Card holders.

• Sears launched SearsConnect in 1998, which combines the

existing Sears PhonePlan with a new flat rate long distance

calling plan, Sears EasyTalk. Sears EasyTalk allows members to

call anywhere in Canada at any time of day for a flat rate of 10

cents a minute. All long distance calls made by SearsConnect

members earn Sears Club points.

• During the year, Sears initiated projects to install new software

applications which reduce the approval time for new Sears

Card applications, facilitate the management of lines of credit

and credit risk, and allow Sears the opportunity to expand

strategic alliance initiatives.

REAL ESTATE JOINT VENTURE OPERATIONSAs at January 2, 1999, the Company held joint venture interests

in 19 shopping centres, 17 of which contain a Sears store. The

Company has 15% to 50% interests in these joint ventures.

Accordingly, the Company carries its proportionate share of the

assets, liabilities, revenues and expenses of these joint ventures on

its books.



%

%



Real Estate Joint Venture Operations(in millions) 1998 1997

Revenues3 $ 65.6 $ 62.3


income taxes $ 33.9 $ 32.1

Capital employed $ 252.5 $ 245.7

3 Excluded from revenues is the Company’s proportionate share of rental revenuesearned from full-line stores of Sears Canada Inc. of $3.7 million ($3.7 million – 1997).

The market value of Sears interest in these properties is estimated

to be approximately $417 million ($400 million – 1997). It is

the Company’s policy to have one-third of the properties

independently appraised each year, while the appraisals of the

remaining two-thirds are reviewed and updated by management.

Sears portion of the debt of these properties is $227.1 million

($229.8 million – 1997).

OVERVIEW OF THE CONSOLIDATEDSTATEMENTS OF FINANCIAL POSITIONAssets(in millions) 1998 1997

Cash $ 190.4 $ 68.3

Accounts receivable 1,100.4 1,224.6

Inventories 738.7 640.3

Net capital assets 867.6 825.1

Other assets 300.9 249.0

Total assets $ 3,198.0 $ 3,007.3

Total assets increased by $190.7 million or 6.3% in 1998.

In 1998, cash increased by $122.1 million primarily due to

proceeds of $156.6 million received from the securitization of

charge account receivables on December 16, 1998.

Accounts receivable decreased by $124.2 million or 10.1%

in 1998 as a result of an increase in the amount of receivables

securitized.

Accounts Receivable(in millions) 1998 1997

Charge account receivables $ 1,682.5 $ 1,655.7

Less amount securitized (1,087.5) (965.6)

Net charge account receivables 595.0 690.1

Deferred receivables 544.5 497.4

Less amount securitized (83.2) (24.4)

Net deferred receivables 461.3 473.0

Other receivables 44.1 61.5

Total accounts receivable $ 1,100.4 $ 1,224.6

Deferred receivables represent credit sales not yet billed to

customers’ accounts. These credit sales are billed to the customers’

accounts at the end of an interest-free deferral period.

Inventories increased by $98.4 million in support of the

Company’s revenue growth initiatives.

Net capital assets increased by $42.5 million. Capital

expenditures totaled $142.2 million in 1998, of which

approximately $79.2 million was spent on full-line department

store renovations and the opening of 12 new Sears Furniture

Stores. Depreciation expense for the year was $95.5 million.

Liabilities(in millions) 1998 1997

Accounts payable and

accrued liabilities $ 995.8 $ 878.6

Long-term obligations due within

one year 163.4 11.6

Long-term obligations 680.5 836.1

Other liabilities 194.0 238.6

Total liabilities $ 2,033.7 $ 1,964.9

Total liabilities increased by $68.8 million or 3.5% in 1998.

Accounts payable increased by $123.2 million in 1998

primarily to finance the growth in inventories.

Including amounts due within one year, long-term

obligations decreased by $3.8 million from $847.7 million to

$843.9 million. In 1999, $150.0 million of 11.0% unsecured

debentures will mature.


LiquidityAs at January 2, 1999, the ratio of current assets to current

liabilities was 1.7:1 compared to 1.9:1 at the end of 1997.

Working capital was $898.5 million as at January 2, 1999,

compared to $971.1 million as at January 3, 1998. The decrease

in working capital is primarily attributable to increases in the

amount of charge account receivables securitized and long-term

obligations due within one year. The increase in inventories is

offset by an increase in accounts payable.

FINANCING ACTIVITIESThe Company has the flexibility to raise funds through bank

borrowings, by issuing equity and corporate debt securities, and

through the securitization of charge account receivables.

In 1998, the Company carried out the following significant

financing activities:

• On December 23, 1998, Sears filed a shelf prospectus with

securities commissions in Canada that qualifies the issuance of

up to $500 million in medium-term notes (debt with a term to

maturity in excess of one year) over the next two years.

• During 1998, long-term financing for new capital projects

of real estate joint ventures was obtained in the amount of

$3.4 million. In addition, $15.5 million of joint venture debt

matured in 1998, of which $9.4 million was refinanced.

Securitization of Charge Account ReceivablesSears Acceptance Company Inc. (“Acceptance”), a wholly owned

subsidiary of Sears, purchases all Sears Card charge account

receivables (including deferred receivables) generated by

merchandise and service sales. Through the Company’s

securitization program, Acceptance sells undivided co-ownership

interests in the charge account receivables (excluding deferred

receivables) to Sears Canada Receivables Trust (Trust 1) and Sears

Canada Receivables Trust – 1992 (Trust 2). In addition,

Acceptance sells undivided co-ownership interests in its portfolio

of charge account receivables (including deferred receivables) to

Sears Canada Receivables Trust – 1996 (Trust 3). Trust 1, Trust 2

and Trust 3 are collectively referred to as SCRT.

As the equity units of these trusts are held by independent

parties, the assets and liabilities of SCRT are not reflected in the

Company’s consolidated financial statements. The cost to the

Company of the securitization program is reflected as a reduction

in the Company’s share of Sears Card service charge revenues.

SCRT is an important financing vehicle which is able to

obtain favourable interest rates because of its structure and the

high quality of the portfolio of charge account receivables backing

its debt. Securitization provides the Company with a diversified

source of funds for the operation of its business.

Trust 1 Ð Trust 1, which was established in 1991, issues short-

term commercial paper to finance the purchase of undivided co-

ownership interests in charge account receivables (excluding

deferred receivables).

Trust 2 Ð Trust 2, which was established in 1993, issues long-

term senior and subordinated debentures to finance the purchase

of undivided co-ownership interests in charge account receivables

(excluding deferred receivables).

Trust 3 Ð Trust 3, which was established in 1996, finances the

purchase of undivided co-ownership interests in Acceptance’s

portfolio of charge account receivables (including deferred

receivables) through drawdowns under revolving senior and

subordinated note facilities.

Summary of Debt RatingsCBRS DBRS

Sears Canada Inc.

Unsecured debentures B++ (High) BBB

SCRT

Commercial paper (Trust 1)4 A-1+ R-1 (High)

Senior debentures (Trust 2)4 A++ AAA

Subordinated debentures (Trust 2) A A (High)

Senior notes (Trust 3)4 A++ AAA

Subordinated notes (Trust 3) A+ A

4 Highest rating assigned by CBRS Inc. (CBRS) and Dominion Bond RatingService Limited (DBRS) for this debt category.


S E A R S C A N A D AS E A R S C A N A D A

Summary of SCRT Obligations(in millions) 1998 1997

Commercial paper $ 487.3 $ 374.8

Senior debt:

6.50%, due December 16, 1998 - 150.0

5.34%, due December 16, 2003 150.0 -

8.95%, due June 1, 2004 175.0 175.0

Floating rate, due April 1, 2001 150.0 150.0

Floating rate, due June 30, 2006 122.7 43.1

597.7 518.1

Subordinated debt:

7.67% to 9.18%, due 1998 to 2004 3.9 7.2

Floating rate, due 1998 to 2004 31.0 13.7

Floating rate, due June 30, 2006 1.3 0.4

36.2 21.3

Accrued liabilities 5.2 3.5

Trust units (floating rate, due

1998 to 2006) 44.3 72.3

Total SCRT obligations $ 1,170.7 $ 990.0

Capital StructureThe chart below highlights the improving trend in the debt to

equity ratio, due primarily to the contribution of net earnings

in 1998.

% of % of

(in millions) 1998 Total 1997 Total

Long-term debt due

within one year $ 163.4 8.1 $ 11.6 0.6

Long-term debt 680.5 33.9 836.1 44.2

Total debt 843.9 42.0 847.7 44.8

Shareholders’ equity 1,164.3 58.0 1,042.4 55.2

Total capital $2,008.2 100.0 $1,890.1 100.0

Analysis of Funding Costs The following table summarizes the Company’s total funding

costs including the cost of the securitization program:


Interest Costs

Total debt at end of year $ 843.9 $ 847.7

Average debt for year 845.5 758.4

Interest on long-term debt $ 78.6 $ 74.5

Other interest (net)5 7.0 11.6

Interest expense $ 85.6 $ 86.1

Average rate of debt6 10.2% 11.2

Securitization Costs

Amount securitized at end of year $ 1,170.7 $ 990.0

Average amount securitized for year 1,056.9 1,019.6

Cost of funding 65.4 54.2

Average rate of securitized funding6 6.2% 5.2

Total Funding

Total funding at the end of year $ 2,014.6 $ 1,837.7

Total average funding for year 1,902.4 1,778.0

Total funding costs for year 151.0 140.3

Average rate of total funding6 8.0% 7.8

5 Other interest includes $8.9 million in 1998 ($13.2 million – 1997) for payment ofthe interest rate differential on floating-to-fixed interest rate swaps.

6 1997 calculation based on 365 day year rather than fiscal period of 53 weeks.

Total funding costs for 1998 increased by $10.7 million due

primarily to higher average funding levels and higher interest

rates applicable to floating rate funding outstanding in SCRT.

CAPITAL EXPENDITURESThe Company expects to commit approximately $235 million for

capital expenditures in 1999, compared to capital expenditures of

$142.2 million in 1998. Planned expenditures for 1999 include

$103.0 million for full-line store enhancements and new

combination Sears furniture and appliance stores. The balance of

the capital expenditures will be spent primarily on information

technology, logistics and real estate operations.



%

%

%

ANALYSIS OF TOTAL TAXESTotal taxes increased by $34.0 million in 1998. Income taxes

increased $23.6 million, commensurate with the increase in

earnings before income taxes.


Provincial capital tax $ 7.1 $ 6.7

Property tax 52.3 45.7

Payroll taxes7 72.0 68.6

Total taxes expensed in cost of

merchandise sold, operating,

administrative and selling expense 131.4 121.0

Corporate income tax 116.9 93.9

Large corporations tax 5.4 4.8


Total taxes $ 253.7 $ 219.7

7 Represents contributions to the Canada and Quebec Pension Plans, Employment Insurance, health care levies and WCB premiums.

RISKS AND UNCERTAINTIESThe key elements of the Company’s strategy for minimizing risk

are as follows:

Interest RatesSCRT has financed purchases of undivided co-ownership

interests in the portfolio of charge account receivables with the

issuance of short-term commercial paper, as well as debt and trust

units, some of which are subject to floating interest rates. To

reduce the risk associated with fluctuating interest rates, floating-

to-fixed interest rate swap transactions in the notional amount of

$350 million ($200 million - 1997) have been utilized. This

brings the Company’s fixed-to-floating funding ratio, including

securitized funding, to 66/34, which is within its target ratios.

Foreign ExchangeThe Company’s foreign exchange risk is limited to currency

fluctuations between the Canadian and U.S. dollar. The

Company’s forecast for its total requirement of foreign funds in

1999 is approximately U.S. $300 million. From time to time the

Company uses forward contracts to fix the exchange rate on a

portion of its expected requirement for U.S. dollars. As at January

2, 1999, there were no foreign exchange contracts outstanding.

Concentration of Credit RiskThe Company’s exposure to credit risk relates mainly to customer

account receivables. Sears Card customers are a large and diverse

group. The average balance per customer at year end was $441.

Leases Twenty-two of Sears 109 full-line stores are Company-owned and

two of the 20 Sears Furniture Stores are Company-owned, with

the balance held under long-term leases which include favourable

renewal options. As a result, the Company’s full-line store rental

expense is expected to remain stable.

Merchandise SourcesA major aim of the merchandise procurement process is to ensure

that Sears, together with its merchandise sources, fulfills its

promises and obligations to its customers. Sears will continue to

work with its merchandise sources to ensure that they share this

commitment.

Sears shops the world market to provide its customers with

the best value for their dollar. The Company purchases consumer

goods from approximately 2,700 sources, most of which are

Canadian. As a result, Sears is confident in its ability to continue

providing consumers with high quality merchandise at

competitive prices.

Year 2000The Year 2000 poses a significant global challenge. Date

dependent systems and processes that use two digits to represent

the year must be adapted in order to avoid risk of error with the

turn of the century.





Sears has been preparing to meet the Year 2000 challenge for

the past four years, as the Company is a significant user of

current technologies. The Company makes extensive use of

technology to interact with third parties, primarily suppliers and

customers, for increased efficiency and productivity. In January,

1997, the Company established a cross-functional team to oversee

and manage the Sears Year 2000 Project.

The first phase of the project, which included identifying

and evaluating the Company’s systems and applications for Year

2000 capability, determining necessary modifications and

replacements, and initiating communication with third parties,

including merchandise and non-merchandise suppliers, was

completed in the second quarter of 1997.

The project is continuing to progress in accordance with the

project schedule. As of December 31, 1998, remedial action and

Year 2000 testing have been completed for 96% of all application

programs. The schedule for 1999 includes completion of the Year

2000 testing for the remaining applications and programs as well

as continued testing to maintain a Year 2000 ready application

portfolio and environment.

In September 1998, a cross-functional sub-committee was

formed to review Sears Business Continuity Plans and to address

any Year 2000 specific issues or situations, including alternative

sourcing and identifying actions to be taken if a critical system or

service provider were not yet Year 2000 ready. This process is

scheduled for completion by the end of the third quarter of 1999.

Sears continues to conduct an aggressive communication

campaign with third parties with whom it has a business

relationship, including both merchandise and non-merchandise

suppliers. This includes having met with over 300 key suppliers

in 1998 to specifically address the Year 2000 issue. This program

of meeting with key suppliers to communicate and assess risk will

continue through 1999. There can be no guarantee that the

systems, services, or supplies provided by other companies on

which Sears relies will be Year 2000 ready on a timely basis, or

that another company’s failure to be Year 2000 ready may not

have an adverse effect on Sears. The impact will depend on the

Year 2000 readiness of other parties, including financial

institutions, government agencies, transportation entities,

telephone communication companies, utilities, and vendors.

However, based on Sears program of assessment and actions taken

to mitigate the risk to Sears, management believes that the Year

2000 issue will not have a material adverse impact on Sears future

results of operation or financial condition, although there can be

no absolute assurance that this will be the case.

To date, approximately $20 million has been spent on

personnel and contractors. These costs are expensed as incurred.

The total estimated cost for the Year 2000 Project is

approximately $28 million.

Sears continues to participate with the Retail Council of

Canada and other retailers to increase awareness of the Year 2000

issue. In addition, Sears was an active member of the Industry

Canada Year 2000 Task Force, providing input and guidance on

common issues and opportunities facing the industry as a whole.

Competitive and Economic EnvironmentSears believes that the general economic environment will remain

positive in 1999, although growth may occur at a slower pace

than in 1998. The retail market remains highly competitive. Sears

is well positioned to take advantage of emerging trends in

retailing, including those in the areas of specialty stores and

services, as well as electronic commerce.

Sears is optimistic that consumer confidence will remain

stable in 1999 due to expected increases in employment levels

and personal disposable income, as well as continued low

inflation and interest rates.

OutlookSears continues to position itself to capture a larger share of

consumer spending through its aggressive program of store

renovations and enhanced merchandise assortment and

presentation.

The Company also continues to evaluate new and innovative

methods of retailing. By meeting customers’ needs in terms of

merchandise selection, pricing, and the total shopping experience,

Sears anticipates growth in revenues and profits into the future.



Quarterly Results Unaudited

(in millions, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter*

1998 1997 1998 1997 1998 1997 1998 1997

Total revenues $ 1,008.8 $ 875.1 $ 1,154.4 $ 1,054.3 $ 1,170.5 $ 1,065.5 $ 1,632.9 $ 1,588.6

Earnings (loss) before

income taxes $ 15.6 $ (2.6) $ 55.4 $ 42.3 $ 45.0 $ 37.1 $ 152.7 $ 138.4

Net earnings (loss) $ 7.5 $ (2.8) $ 29.9 $ 22.8 $ 24.1 $ 19.4 $ 84.9 $ 77.1

Earnings (loss) per share $ 0.07 $ (0.03) $ 0.28 $ 0.22 $ 0.23 $ 0.18 $ 0.80 $ 0.73

* The Fourth Quarter contained 13 weeks in 1998 and 14 weeks in 1997.

Common Share Market Information*

First Quarter Second Quarter Third Quarter Fourth Quarter

1998 1997 1998 1997 1998 1997 1998 1997

High $ 25.75 $ 13.95 $ 27.75 $ 20.00 $ 29.00 $ 25.20 $ 22.05 $ 25.75

Low $ 19.00 $ 10.00 $ 24.40 $ 12.50 $ 16.90 $ 18.25 $ 16.00 $ 19.00

Close $ 24.40 $ 13.35 $ 27.70 $ 18.40 $ 16.90 $ 25.00 $ 18.00 $ 19.80

Avg. daily trading volume 122,559 229,870 63,010 295,137 174,352 127,992 73,591 189,641

* The Toronto Stock Exchange



Statement of Management Responsibility

Management is responsible for the accuracy, integrity and objectivity of the financial information contained in this Annual Report. The

consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and include

certain amounts that are based on estimates and judgements. Financial information used elsewhere in the Annual Report is consistent

with that in the financial statements.

Management has developed, maintains and supports an extensive program of internal audits that provides reasonable assurance that

financial records are reliable and that assets are safeguarded.

The Board of Directors, through the activities of its Audit and Corporate Governance Committee, ensures that management fulfills its

responsibilities for financial reporting and internal control. The Audit and Corporate Governance Committee, the majority of whom are

outside directors, meets periodically with the financial officers of the Company, the internal auditors and external auditors to discuss

audit activities, internal accounting controls and financial reporting matters. The Board of Directors, on the recommendation of the

Audit and Corporate Governance Committee, has approved all of the information contained in the Annual Report.

The Company’s external auditors, Deloitte & Touche LLP, have conducted audits of the financial records of the Company in accordance

with generally accepted auditing standards. Their report is as follows.

Senior Vice-President and Chairman of the Board and

Chief Financial Officer Chief Executive Officer

AuditorsÕ Report to the Shareholders of Sears Canada Inc.We have audited the consolidated statements of financial position of Sears Canada Inc. as at January 2, 1999 and January 3, 1998 and

the consolidated statements of earnings, retained earnings and changes in financial position for the 52 weeks and 53 weeks then ended.

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 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 2, 1999 and January 3, 1998 and the results of its operations and the changes in its financial position for the 52 weeks and 53

weeks then ended in accordance with generally accepted accounting principles.

Deloitte & Touche LLP Toronto, Ontario

Chartered Accountants February 8, 1999


Consolidated Statements of Financial Position

As at January 2, 1999 and January 3, 1998 (in millions) 1998 1997

AssetsCurrent Assets

Cash and short-term investments $ 190.4 $ 68.3

Charge account receivables (Note 2) 595.0 690.1

Other receivables (Note 3) 505.4 534.5

Inventories 738.7 640.3

Prepaid expenses and other assets 57.4 48.9

Future income tax assets (Note 4) 61.6 41.9

2,148.5 2,024.0

Investments and Other Assets (Note 5) 50.9 22.8

Net Capital Assets (Note 6) 867.6 825.1

Deferred Charges (Note 7) 131.0 135.4

$ 3,198.0 $ 3,007.3

LiabilitiesCurrent Liabilities

Accounts payable $ 683.4 $ 560.2

Accrued liabilities 312.4 318.4

Income and other taxes payable 90.8 162.7

Principal payments on long-term obligations

due within one year (Note 9) 163.4 11.6

1,250.0 1,052.9

Long-term Obligations (Note 9) 680.5 836.1

Future Income Tax Liabilities (Note 4) 103.2 75.9

2,033.7 1,964.9

ShareholdersÕ EquityCapital Stock (Note 10) 451.8 450.9

Retained Earnings 712.5 591.5

1,164.3 1,042.4

$ 3,198.0 $ 3,007.3

Approved by the Board:

P.S. Walters J.M. Tory

Director Director


Consolidated Statements of Earnings


(in millions, except per share amounts) For the 52 weeks ended For the 53 weeks ended

January 2, 1999 January 3, 1998

Total revenues $ 4,966.6 $ 4,583.5

Deduct:

Cost of merchandise sold, operating,

administrative and selling expenses 4,516.8 4,204.1

Depreciation 95.5 78.1

Interest 85.6 86.1

4,697.9 4,368.3

Earnings before income taxes 268.7 215.2

Income taxes (Note 4)

Current 114.7 105.0

Future 7.6 (6.3)

122.3 98.7

Net earnings $ 146.4 $ 116.5

Earnings per share $ 1.38 $ 1.10

Consolidated Statements of Retained Earnings

(in millions) For the 52 weeks ended For the 53 weeks ended


Opening balance $ 591.5 $ 500.4

Net earnings 146.4 116.5

737.9 616.9

Dividends declared 25.4 25.4

Closing balance $ 712.5 $ 591.5

Consolidated Statements of Changes in Financial Position

(in millions) For the 52 weeks ended For the 53 weeks ended


Cash Generated From (Used For) Operations

Net earnings $ 146.4 $ 116.5

Non-cash items included in net earnings, principally depreciation 111.7 88.9

Funds from operations 258.1 205.4

Changes in working capital (Note 11) (34.0) (106.5)

224.1 98.9

Cash Generated From (Used For) Investment Activities

Purchases of capital assets (142.2) (160.4)

Proceeds from sale of capital assets 6.9 1.1

Charge account receivables 95.1 (82.8)

Deferred charges (5.4) (1.9)

Investments and other assets (28.1) 6.8

(73.7) (237.2)

Cash Generated From (Used For) Financing Activities

Issue of long-term obligations 7.8 134.9

Repayment of long-term obligations (11.6) (104.6)

Net proceeds from issue of capital stock 0.9 2.6

(2.9) 32.9

Cash (Used For) Dividends (25.4) (25.4)

Increase (decrease) in cash and short-term investments at end of year 122.1 (130.8)

Cash and short-term investments at beginning of year 68.3 199.1

Cash and short-term investments at end of year $ 190.4 $ 68.3



1. SUMMARY OF ACCOUNTING POLICIESPrinciples of ConsolidationThe consolidated financial statements include the accounts of

Sears Canada Inc. and its subsidiaries together with its propor-

tionate share of the assets, liabilities, revenues and expenses of real

estate joint ventures (“the Company”).

Fiscal YearThe fiscal year of the Company consists of a 52 or 53 week

period ending on the Saturday closest to December 31. The 1998

fiscal year for the consolidated statements presented is the 52

weeks ended January 2, 1999 and the comparable period is the

53 weeks ended January 3, 1998.

InventoriesInventories are valued at the lower of cost or net

realizable value. Cost is determined for retail store inventories by

the retail inventory method and for catalogue order and

miscellaneous inventories by the average cost method, based on

individual items.

Prepaid Advertising ExpenseCatalogue production costs are deferred and amortized over the

life of each catalogue on the basis of the estimated sales from

that catalogue.

Deferred ReceivablesDeferred receivables are charge account receivables that have not

yet been billed to the customers’ accounts. Service charges are not

accrued on these accounts over the deferral period which

generally ranges from six to 13 months.

Capital AssetsCapital assets are stated at cost. Depreciation and amortization

provisions are generally computed by the straight-line method

based on estimated useful lives of two to ten years for equipment

and fixtures, and of ten to 40 years for buildings and

improvements.

The Company’s proportionate share of buildings held in

joint ventures is generally depreciated by the sinking fund

method over 20 to 40 years.

The Company capitalizes interest charges for major

construction projects and depreciates these charges over the life of

the related assets.

Deferred ChargesThe cumulative excess of contributions to the Company’s pension

plan over the amounts expensed is included in deferred charges.

Debt issuance costs are deferred and amortized by the

straight-line method to the due dates of the respective debt issues.

Securitization set up costs are amortized on a straight-line basis

over a maximum of five years.

Consulting fees for major projects are amortized by the

straight-line method over the period of future benefit ranging

from three to five years.

Certain other costs are deferred and amortized by the

straight-line method over the remaining life of the related asset.

Adoption of New Accounting Standard for Income TaxesDuring the year, the Company elected early adoption of the new

Recommendations of the Canadian Institute of Chartered

Accountants relating to the accounting for income taxes. Under

this new accounting policy, applied retroactively, future income

taxes reflect the tax effect of differences between the book and tax

basis of assets and liabilities. Previously, deferred income taxes

reflected the tax effect of revenue and expense items reported for

accounting purposes in periods different than for tax purposes.

The Company elected not to restate prior years’ financial

statements as it determined that the adoption of this standard

does not have a material impact on the Company’s financial

position or results of operations in the current or preceding years.

Foreign Currency TranslationObligations payable in U.S. dollars are translated at the exchange

rate in effect at the balance sheet date or at the rates fixed by

forward exchange contracts.


Notes to Consolidated Financial Statements



Transactions in foreign currencies are translated into

Canadian dollars at the rate in effect on the date of the

transaction.

PensionsThe Company maintains a defined benefit, final average

pension plan which covers substantially all of its regular full-

time associates as well as some of its part-time associates. The

plan provides pensions based on length of service and final

average earnings.

Current service costs under the Company’s pension plan are

charged to operations as they accrue. The excess of the market

value of pension fund assets over the actuarial present value of

the accrued pension obligations as at January 1, 1986 and any

surpluses or deficits arising since that date, are amortized over the

expected average remaining service life of the associate group

covered by the plan. Actuarial valuations are calculated using the

projected benefit method pro-rated on services, based on

management’s best estimate of the effect of future events

(Refer to Note 8).

The Company provides life insurance, medical and dental

benefits to eligible retired associates. These benefits are accrued in

the year that an associate retires. The accumulated obligation as at

January 1, 1989, for previously retired associates, was amortized

over 10 years beginning January 1, 1989.

EstimatesThe preparation of the Company’s financial statements, in

accordance with generally accepted accounting principles,

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.

Earnings per ShareEarnings per share is calculated based on the weighted average

number of shares outstanding during the fiscal year.

2. CHARGE ACCOUNT RECEIVABLESDetails of charge account receivables are as follows:


Charge account receivables $ 1,682.5 $ 1,655.7

Less: amounts securitized (1,087.5) (965.6)

Net charge account receivables $ 595.0 $ 690.1

3. OTHER RECEIVABLESOther receivables consist of the following:


Deferred receivables $ 544.5 $ 497.4

Less: amounts securitized (83.2) (24.4)

Net deferred receivables 461.3 473.0

Miscellaneous receivables 44.1 61.5

Total $ 505.4 $ 534.5

4. FUTURE INCOME TAXESThe tax effects of the significant components of temporary

differences giving rise to the Company’s net income tax assets and

liabilities are as follows:

1998 1997

Long- Long-

(in millions) Current Term Current Term

Future income tax assets:

Non-deductible

accruals $ 61.6 $ - $ 41.9 $ -

Total $ 61.6 $ - $ 41.9 $ -

Future income tax liabilities:

Depreciable capital

assets $ - $ 49.8 $ - $ 47.4

Deductible prepaid

expenses - 45.2 - 27.4

Other - 8.2 - 1.1

Total $ - $ 103.2 $ - $ 75.9



The average combined federal and provincial statutory income

tax rate, excluding Large Corporations Tax, applicable to the

Company was 43.4% for 1998 and 43.5% for 1997.

A reconciliation of income taxes at the average statutory tax

rate to the actual income taxes is as follows:


Earnings before income taxes $ 268.7 $ 215.2

Income taxes at average

statutory tax rate 116.6 93.6

Increase (decrease) in

income taxes resulting from:

Non-taxable portion of capital gains (0.3) (0.1)

Non-deductible items 0.6 0.4

Large Corporations Tax 5.4 4.8

Income taxes $ 122.3 $ 98.7

Effective tax rate 45.5% 45.9

5. INVESTMENTS AND OTHER ASSETS(in millions) 1998 1997

Unsecured debentures $ 44.1 $ 20.1

Subordinated loans 6.8 2.2

Other - 0.5

Total $ 50.9 $ 22.8

Unsecured debentures, which represent investments made by the

Company in the independent trusts referred to in Note 15, in the

amount of $14.1 million, $6.0 million and $24.0 million are due

in 2010, 2011 and 2013 respectively. Subordinated loans, which

represent loans to one of the independent trusts, are due in 2006.

All bear interest at floating rates.

6. NET CAPITAL ASSETSCapital assets are summarized as follows:


Land $ 64.3 $ 68.1

Buildings and improvements 592.7 561.3

– held by joint ventures 274.9 266.6

Equipment and fixtures 788.5 694.7

Gross capital assets 1,720.4 1,590.7

Accumulated depreciation

Buildings and improvements 301.7 276.6

– held by joint ventures 47.9 41.5

Equipment and fixtures 503.2 447.5

Total accumulated depreciation 852.8 765.6

Net capital assets $ 867.6 $ 825.1

The carrying values of land and buildings are evaluated by

management on an on-going basis as to their net recoverable

amounts. This is a function of their average remaining useful

lives, market valuations, cash flows, and capitalization rate

models. Situations giving rise to a shortfall in the net recoverable

amounts are assessed as either temporary or permanent declines

in the carrying values; permanent declines are adjusted.

Management does not foresee adjustments in the near term.

7. DEFERRED CHARGES(in millions) 1998 1997

Excess of pension contributions over

amounts expensed, including

contributions for post-retirement

benefits of $2.1 million

($3.1 million – 1997) $ 99.1 $ 107.5

Deferred consulting fees 4.4 0.7

Tenant allowances for proportionate

interests in joint ventures 10.6 9.4

Debt issuance and securitization

set up costs 5.1 6.2

Other deferred charges 11.8 11.6

Total deferred charges $ 131.0 $ 135.4

Notes to Consolidated Financial Statements continued

%



8. PENSION PLANSelected financial information relating to the Company’s pension

plan is summarized as follows:


Pension plan assets at market value $ 1,200.7 $ 1,137.8

Present value of accrued

pension obligations $ 734.1 $ 697.1

9. LONG-TERM OBLIGATIONS(in millions) 1998 1997

Unsecured debentures:

11.00% due May 18, 1999 $ 150.0 $ 150.0

11.70% due July 10, 2000 100.0 100.0

8.25% due December 11, 2000 125.0 125.0

7.80% due March 1, 2001 100.0 100.0

6.55% due November 5, 2007 125.0 125.0

Proportionate share of long-term debt

of joint ventures with a weighted average

interest rate of 9.1% due 1999 to 2013 227.1 229.8

Capital lease obligations:

interest rates from 8.0 % to 17.0% 16.8 17.9

843.9 847.7

Less principal payments due within one

year included in current liabilities 163.4 11.6

Total long-term obligations $ 680.5 $ 836.1

The Company’s proportionate share of the long-term debt of

joint ventures is secured by the shopping malls owned by the

joint ventures and, in some cases, guaranteed by the Company.

The Company’s total principal payments due within one

year include $12.4 million ($10.5 million – 1997) of the

proportionate share of the current debt obligations of

joint ventures.

Interest on long-term debt amounted to $78.6 million

($74.5 million – 1997).

Principal PaymentsFor fiscal years subsequent to the fiscal year ended January 2,

1999, principal payments required on the Company’s total long-

term obligations are as follows:

(in millions)

1999 $ 163.4

2000 253.1

2001 134.2

2002 33.3

2003 6.8

Subsequent years 253.1

Total debt outstanding $ 843.9

Significant Financing TransactionsOn February 26, 1997, the outstanding 9.25% unsecured

debentures of Sears Canada Inc. in the amount of $100.0 million

matured.

On November 5, 1997, Sears Canada Inc. issued $125.0

million of 6.55% unsecured debentures, due November 5, 2007.

During 1997, long-term financing for new capital projects of

real estate joint ventures was obtained in the amount of $9.9

million. In addition, $81.8 million of joint venture debt matured

in 1997, of which $78.5 million was refinanced.

On December 23, 1998, Sears filed a shelf prospectus with

securities commissions in Canada that qualifies the issuance of up

to $500 million in medium-term notes (debt with a term to

maturity in excess of one year) over the next two years.

During 1998, long-term financing for new capital projects of

real estate joint ventures was obtained in the amount of $3.4

million. In addition, $15.5 million of joint venture debt matured

in 1998, of which $9.4 million was refinanced.



10. CAPITAL STOCKAn unlimited number of common shares are authorized. Changes

in the number of outstanding common shares and their stated

values since December 29, 1996 are as follows:

1998 1997

Stated Stated

Number value Number value

of shares (millions) of shares (millions)

Beginning

Balance 105,959,504 $ 450.9 105,610,910 $ 448.3

Issued

pursuant

to stock

options 124,460 0.9 348,594 2.6

Ending

Balance 106,083,964 $ 451.8 105,959,504 $ 450.9

Details of stock option transactions under the Employees Stock

Plan, including Special Incentive Awards, as at January 2, 1999,

are set out below. Special Incentive Awards of options and shares

are awarded to Senior Officers of the Company on a conditional

basis, subject to achievement of specified performance criteria,

within specified vesting periods. In 1998, 140,000 shares were

awarded as Special Incentive Awards, 40,000 of which are subject

to Plan amendment and obtaining requisite approvals. No shares

were issued during the year under Special Incentive Awards.

Options granted Option Expiry Options Options

and accepted price date exercised outstanding

175,975 $ 5.69 Feb. 1998 170,325 -

142,150 $ 7.53 Feb. 1999 110,575 31,575

195,200 $ 7.49 Feb. 2000 144,542 50,658

232,301 $ 5.58 Feb. 2001 182,483 49,818

275,730 $ 5.58 Feb. 2006 70,605 205,125

60,000 $ 9.72 Nov. 2006 - 60,000

286,750 $ 10.65 Jan. 2007 23,006 263,744

30,000 $ 10.82 Feb. 2007 10,000 20,000

306,870 $ 19.63 Jan. 2008 - 306,870

26,000 $ 24.73 Apr. 2008 - 26,000

Special Incentive Award Options

170,000 $ 22.75 Feb. 2008 - 170,000

825,000 $ 28.75 Jul. 2008 - 825,000

Options to purchase up to 342,870 common shares have

been authorized to be granted under the Employees Stock Plan

in 1999.

In April, 1998, the Company established the Directors’

Stock Option Plan to grant stock options to Directors who are

not Executive Officers of the Company or Sears, Roebuck and

Co. In 1998, 9,000 stock options were granted to six Directors at

an option price of $25.98. The options expire in April, 2008. No

options were exercised during the year.

The Company is authorized to issue an unlimited number of

non-voting, redeemable and retractable Class 1 Preferred Shares

in one or more series. As at January 2, 1999, the only shares

outstanding were the common shares of the Company.




11. CHANGES IN WORKING CAPITALThe cash generated from (used for) working capital is made up of

changes in the following accounts:


Other receivables $ 29.1 $ (108.8)

Future income tax assets - (1.9)

Inventories (98.4) (149.2)

Prepaid expenses and other assets (10.0) (2.4)

Accounts payable 123.2 87.3

Accrued liabilities (6.0) (6.5)

Income and other taxes payable (71.9) 75.0

Cash generated from

(used for) working capital $ (34.0) $ (106.5)

12. COMMITMENTSMinimum 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 2, 1999 are as follows:

Capital Operating

(in millions) leases leases

1999 $ 2.7 $ 69.9

2000 2.7 66.3

2001 2.7 61.1

2002 2.7 56.9

2003 2.7 53.0

Subsequent years 14.3 453.9

Minimum lease payments $ 27.8 $ 761.1

Less imputed interest 11.0

Total capital lease obligations $ 16.8

Total rentals charged to earnings under all operating leases for the

year ended January 2, 1999 amounted to $80.8 million ($79.4

million – 1997).

13. SEGMENTED INFORMATIONThe Company has three reportable operating segments:

merchandising, credit, and real estate joint venture operations.

• The merchandising segment includes the Company’s full-line

department stores, specialty stores, catalogue operations, and

home services.

• The credit segment finances and manages customer charge

account receivables generated from the sale of goods and

services charged on the Sears credit card.

• The real estate joint venture segment consists of the Company’s

joint venture interests in shopping centres, most of which

contain a Sears store.

The reportable segments have been determined on the basis on

which management measures performance and makes decisions

on allocations of resources. The accounting policies of the

segments are the same as those described in the Summary of

Accounting Policies. During the preparation of the internal

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. The Company does not allocate interest expense or income

taxes to segments.



Segmented Statements of Earnings for the 52 weeks ended January 2, 1999 and the 53 weeks ended January 3, 1998


Real Estate Real Estate

Joint Joint

Mdse. Credit Ventures2 Total Mdse. Credit Ventures Total

Total revenues1 $ 4,595.1 $ 305.9 $ 65.6 $ 4,966.6 $ 4,210.6 $ 310.6 $ 62.3 $ 4,583.5

Segment operating profit 193.7 126.7 33.9 354.3 141.7 127.5 32.1 301.3

Interest expense 85.6 86.1


Net earnings $ 146.4 $ 116.5

Segmented Statements of Financial Position as at January 2, 1999 and January 3, 1998


Real Estate Real Estate

Joint Joint

Mdse. Credit Ventures Total Mdse. Credit Ventures Total

Assets

Cash $ 186.7 $ - $ 3.7 $ 190.4 $ 64.9 $ - $ 3.4 $ 68.3

Total receivables 68.9 1,024.3 7.2 1,100.4 90.9 1,130.3 3.4 1,224.6

Inventories 738.7 - - 738.7 640.3 - - 640.3

Net capital assets 609.2 - 258.4 867.6 568.4 - 256.7 825.1

Other 283.2 9.8 7.9 300.9 230.5 14.0 4.5 249.0

Total assets $ 1,886.7 $ 1,034.1 $ 277.2 $ 3,198.0 $ 1,595.0 $ 1,144.3 $ 268.0 $ 3,007.3

Liabilities

Accounts payable $ 677.2 $ 0.1 $ 6.1 $ 683.4 $ 555.2 $ - $ 5.0 $ 560.2

Accrued liabilities 287.7 21.3 3.4 312.4 294.5 21.8 2.1 318.4

Other 186.4 (7.6) 15.2 194.0 191.7 31.7 15.2 238.6

Total liabilities excluding debt $ 1,151.3 $ 13.8 $ 24.7 $ 1,189.8 $ 1,041.4 $ 53.5 $ 22.3 $ 1,117.2

Capital employed $ 735.4 $ 1,020.3 $ 252.5 $ 2,008.2 $ 553.6 $ 1,090.8 $ 245.7 $ 1,890.1

Capital expenditures $ 133.5 $ - $ 8.7 $ 142.2 $ 147.3 $ - $ 13.1 $ 160.4

Depreciation and amortization $ 89.5 $ - $ 6.0 $ 95.5 $ 72.6 $ - $ 5.5 $ 78.1

1 The real estate joint venture revenues are net of $3.7 million ($3.7 million – 1997) representing the elimination of rental revenues earned from Sears full-line stores. Rental expense of the realestate joint venture segment has been decreased by the same amount having no effect on segment operating profit.

2 The real estate joint ventures had cash generated from operations of $12.3 million ($8.7 million – 1997), cash used for investment activities of $9.5 million ($13.9 million – 1997), and cash used for financing activities of $2.5 million (cash generated from financing activities of $6.8 million – 1997).




14. RELATED PARTY TRANSACTIONSSears, Roebuck and Co. is the beneficial holder of the majority of

the outstanding common shares of Sears Canada Inc., holding

approximately 55% of the common shares of the Company.

During the year, Sears, Roebuck and Co. charged the

Company $5.4 million ($5.5 million – 1997) in the ordinary

course of business for shared merchandise purchasing services.

These amounts are included in the cost of merchandise sold,

operating, administrative, and selling expenses.

Sears, Roebuck and Co. charged the Company $12.5 million

($18.4 million – 1997) and the Company charged Sears,

Roebuck and Co. $5.4 million ($4.6 million – 1997) for other

reimbursements. These reimbursements were primarily in respect

of customer cross-border purchases made on the Sears Card, and

the Sears, Roebuck and Co. charge card, as well as software and

support services.

There were no significant commitments, receivables or

payables between the companies at the end of 1998 or 1997.

15. FINANCIAL INSTRUMENTSIn 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 and

controls are in place to prevent and detect these activities. The

financial instruments do not require the payment of premiums or

cash margins prior to settlement. These financial instruments can

be summarized as follows:

Foreign Exchange RiskFrom time to time the Company enters into foreign exchange

contracts to reduce the foreign exchange risk with respect to U.S.

dollar denominated goods purchased for resale. There were no

such contracts outstanding at the end of 1998 or 1997.

Securitization of Charge Account ReceivablesSecuritization is an important financial vehicle which provides the

Company with access to funds at a low cost. Sears Acceptance

Company Inc. (“Acceptance”), a wholly owned subsidiary of the

Company, purchases all Sears Card charge account receivables

(including deferred receivables) generated by merchandise and

service sales. Acceptance sells undivided co-ownership interests in

its portfolio of charge account receivables and deferred receivables

to independent trusts. Acceptance retains the income generated

by the undivided co-ownership interests sold to the trusts in

excess of the trusts’ stipulated share of service charge revenues

(Refer to Notes 2 and 3).

Interest Rate RiskTo manage the Company’s exposure to interest rate risks, the

Company has entered into interest rate swap contracts with

Schedule “A” Banks. Neither the notional principal amounts nor

the current replacement value of these financial instruments are

carried on the consolidated balance sheet.

As at January 2, 1999, the Company had three interest rate

swap contracts in place to reduce the risk associated with variable

interest rates associated with the floating rate debt issued by the

trusts. For the year ended January 2, 1999, a net interest

differential of $8.9 million ($13.2 million – 1997) was paid on

the floating-to-fixed interest rate swap contracts and was recorded

as an increase of interest expense of the Company.

Credit RiskThe Company’s exposure to concentration of credit risk is

limited. Accounts receivable are primarily from Sears Card

customers, a large and diverse group.



Interest Rate Sensitivity PositionInterest rate risk reflects the sensitivity of the Company’s financial

condition to movements in interest rates.

The table below identifies the Company’s financial assets and

liabilities which are sensitive to interest rate movements and those

which are non-interest rate sensitive. Financial assets and

liabilities which do not bear interest or bear interest at fixed rates

are classified as non-interest rate sensitive.


Non- Non-

Interest Interest Interest Interest

Sensitive Sensitive Sensitive Sensitive

Cash net of

bank advances

and short-

term notes $ 190.4 $ - $ 68.3 $ -

Investments

and other assets 50.9 - 22.8 -

Total

receivables - 1,100.4 - 1,224.6

Long-term

obligations

(including current

portion)3 (182.5) (661.4) (33.7) (814.0)

Net balance

sheet interest

rate sensitivity

position $ 58.8 $ 439.0 $ 57.4 $ 410.6

3 Interest sensitive portion includes long-term prime-rate based debt and current portion of long-term debt due to be renegotiated.

In addition to the net balance sheet interest rate sensitivity

position, the Company is also affected by interest rate sensitive

debt outstanding in the trusts. Any change in short-term interest

rates will impact floating rate debt and debt with maturities of

less than one year held by the trusts, which totaled $841.7

million at January 2, 1999 ($811.1 million at January 3, 1998).

An increase in the cost of this off-balance sheet debt will result

in a decrease in the Company’s share of service charge revenues.

This interest rate exposure is offset, in part, by interest rate swap

contracts held by the Company in the notional amount of $350

million ($200 million – 1997).

Fair Value of Financial InstrumentsThe estimated fair values of financial instruments as at January 2,

1999 and January 3, 1998 are based on relevant market prices

and information available at that time. As a significant number of

the Company’s assets and liabilities, including inventory and

capital assets, do not meet the definition of financial instruments,

the fair value estimates below do not reflect the fair value of the

Company as a whole.

Carrying value approximates fair value for financial

instruments which are short-term in nature. These include cash

and short-term investments, charge account receivables, other

receivables, prepaid expenses and other assets, bank advances and

short-term notes, accounts payable, income and other taxes

payable, and principal payments on long-term obligations due

within one year. For financial instruments which are long-term in

nature, fair value estimates are as follows:





Carrying or Carrying or

Notional Fair Notional Fair

Amount Value Amount Value

Financial Assets and Liabilities

Investments and

other assets $ 50.9 $ 50.9 $ 22.8 $ 22.8

Long-term

obligations $ 680.5 $ 713.6 $ 836.1 $ 895.7


Carrying Fair Carrying Fair

or Value or Value

Notional Premium/ Notional Premium/

Amount (Discount) Amount (Discount)

Off-Balance Sheet Interest Rate Swaps

9.40%, expiring

April 1999 $ 100.0 $ (2.1) $ 100.0 $ (6.4)

4.95%, expiring

April 2001 150.0 - - -

9.54%, expiring

April 2002 100.0 (14.4) 100.0 (16.5)

$ 350.0 $ (16.5) $ 200.0 $ (22.9)

The fair value of investments and other assets and long-term

obligations was estimated based on quoted market prices, when

available, or discounted cash flows using discount rates based on

market interest rates and the Company’s credit rating. As long-

term debt coupon rates are higher than current market interest

rates, the fair value of the Company’s long-term debt exceeds its

carrying value.

The fair value of the interest rate swap contracts was

estimated by referring to the appropriate yield curves with

matching terms of maturity. A fair value discount reflects the

estimated amount that the Company would pay to terminate the

contracts at the reporting date.

16. UNCERTAINTY DUE TO THE YEAR 2000 ISSUEThe Year 2000 Issue arises because many computerized systems

use two digits rather than four to identify a year. Date sensitive

systems may recognize the year 2000 as 1900 or some other date,

resulting in errors when information using year 2000 dates is

processed. In addition, similar problems may arise in some

systems which use certain dates in 1999 to represent something

other than a date. The effects of the Year 2000 Issue may be

experienced before, on, or after January 1, 2000, and, if not

addressed, the impact on operations and financial reporting may

range from minor errors to significant systems failure which

could affect an entity’s ability to conduct normal business

operations. While the Company is addressing the Year 2000

Issue, it is not possible to be certain that all aspects of the Year

2000 Issue affecting the entity, including those related to the

efforts of customers, suppliers, or other third parties, will be

fully resolved.


S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 850 S e a r s C a n a d a A n n u a l R e p o r t 1 9 9 8

Corporate Governance

The Corporation, the Board of Directors and management are

committed to maintain high standards of corporate governance.

The Board believes that effective corporate governance practices

are essential to the well-being of the Corporation, to improve

corporate performance and to the best interests of shareholders.

The Board of Directors is responsible to oversee the business and

affairs of the Corporation and to act with a view to the best

interests of the Corporation, providing guidance and direction to

the management of the Corporation in order to attain corporate

objectives and maximize shareholder value. The Board carries out

its stewardship functions directly and through its Committees.

The Board of Directors and the Audit and Corporate

Governance, Compensation and Nominating Committees of the

Board are each responsible for certain corporate governance

functions in accordance with their respective mandates. The

Audit and Corporate Governance Committee is responsible

for monitoring and guiding the corporate governance approach

and practices of the Corporation. This Committee is satisfied

that the Corporation is in substantial conformance with the

recommended practices of The Toronto Stock Exchange and

the Montreal Exchange.

The Directors are elected annually by the shareholders.

The Board is currently composed of ten Directors. The

Corporation’s significant shareholder, Sears, Roebuck and Co.,

beneficially holds approximately 55% of the common shares of

the Corporation. Two of the Directors are executive officers of

Sears, Roebuck and Co. and seven Directors (or approximately

70% of the total number of Directors) are independent of the

Corporation and its affiliates. The Board’s composition fairly

reflects the investment in the Corporation by minority

shareholders and the independence of the Board from

management.

The Board has five regularly scheduled meetings each year with

additional meetings held as required. The Board has the

opportunity to meet in camera (without management present) at

each meeting. In 1998, there were five meetings of the Board,

three meetings of the Audit and Corporate Governance

Committee, three meetings of the Compensation Committee and

four meetings of the Nominating Committee. Attendance of the

Directors at these meetings has regularly exceeded 90%.

The Corporation has designed the Directors’ compensation to

align the Directors’ interests with corporate performance and the

return to shareholders. Independent Directors receive an annual

equity grant of common shares and stock options under plans

established by the Corporation. In addition to equity

compensation, independent Directors receive a $18,000 annual

cash retainer for serving on the Board. The Chairs of the Board

Committees receive an additional annual retainer of $3,000. No

fees are paid for attendance at Board or Committee meetings.

A more detailed Statement of Corporate Governance Practices is

contained in the Management Proxy Circular of the Corporation,

dated March 4, 1999, a copy of which may be obtained from the

Secretary. The Directors of the Corporation, their principal

occupation and their Committee appointments are listed on page

51 of this Report.


Directors and Officers (as at January 2, 1999)

Board of DirectorsJalynn H. Bennett ◆

President, Jalynn H. Bennett and Associates Ltd.

Micheline Bouchard

Chairman of the Board, President and Chief Executive

Officer, Motorola Canada Limited

James R. Clifford

President and Chief Operating Officer, Full-Line Stores,

Sears, Roebuck and Co.

William A. Dimma ◆ ●

Corporate Director

Jeanne E. Lougheed ■

Corporate Director

Arthur C. Martinez ■

Chairman of the Board, President and Chief Executive Officer,


James W. Moir, Jr. ●

Corporate Director

Alfred Powis ■ ◆ ●

Corporate Director

James M. Tory ■ ◆

Partner, Tory Tory DesLauriers & Binnington,

Barristers & Solicitors

Paul S. Walters ■ ●

Chairman of the Board and Chief Executive Officer,

Sears Canada Inc.

Committees■ Compensation ◆ Audit and Corporate Governance ● Nominating

Paul S. Walters is an ex officio member of the Nominating Committee.

Honorary DirectorsJames W. Button

Former Senior Executive Vice President of Merchandising,


C. Richard Sharpe

Former Chairman of the Board and Chief Executive Officer,

Sears Canada Inc.

Off icersPaul S. Walters

Chairman of the Board and Chief Executive Officer

H. Ray Bird

Senior Vice-President, Credit

John T. Butcher

Senior Vice-President and Chief Financial Officer

Barbara L. Duffy

Senior Vice-President, Human Resources

Brent V. Hollister

Executive Vice-President, Sales and Service

John D. Smith

Senior Vice-President and Chief Information Officer

Richard W. Sorby

Executive Vice-President, Marketing

William R. Turner

Executive Vice-President, Merchandising and Logistics

Rudolph R. Vezér

Senior Vice-President, Secretary and General Counsel


Head OfficeSears Canada Inc.222 Jarvis StreetToronto, OntarioCanada M5B 2B8

Transfer Agent and RegistrarCIBC Mellon Trust CompanyToronto, OntarioMontreal, Quebec

Answerline: (416) 643-5500 or 1-800-387-0825

Internet Address: www.cibcmellon.ca (website) or [email protected] (e-mail)

ListingsThe Montreal ExchangeThe Toronto Stock Exchange

Trading SymbolSCC

Annual and Special MeetingThe Annual and Special Meeting of Shareholders of Sears Canada Inc. will be held on Monday, April 19, 1999at 10:00 a.m. in the Burton-Wood AuditoriumMain Floor222 Jarvis StreetToronto, Ontario, Canada

�dition fran�aise du Rapport annuelOn peut se procurer lÕ�dition fran�aise de ce rapport en �crivant au:S/703, Relations publiquesSears Canada Inc.222 Jarvis StreetToronto, OntarioCanada M5B 2B8

Pour de plus amples renseignements au sujet de la Soci�t�, veuillez �crire au Service des relationspubliques, ou composer le (416) 941-4425

For More InformationAdditional copies of the Annual Report can be obtainedthrough the Public Affairs Department at the Head Office ofSears Canada Inc.

For more information about the Company, write to Public Affairs, or call (416) 941-4425

Internet Address: www.sears.ca (website) or enquiries:[email protected]

Produced by Sears Canada Inc.Public Affairs

Design by Compendium Design International Inc.

Printed in Canada by Kempenfelt Graphics Group Inc.

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 owner.

Corporate Information


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at aD E PA R T M E N T S T O R E S ÒSears is now the only full-line department store in Canada.ÓSears has 109 full-line department stores across the country,

with the 110th store slated to open in Abbotsford, B.C. in

1999. 29 stores have been retrofitted to reflect Sears

refreshing new look with a vastly expanded apparel and

home fashion selection.

S E A R SO U T L E T S TO R E S

ÒSears quality at outlet prices.Ó

Sears has 12 outlet stores. 4 stores were opened

in 1998 featuring a new format with 80,000

sq. ft. The outlet stores offer a wide selection of

merchandise, including in-season clearance.

D E A L E R S T O R E S ÒThe national resources of Sears and personal service

from your neighbour.ÓDealer stores are independently owned and

operated, and offer full catalogue services, a

large selection of appliances, lawn and garden

products and electronics. 14 dealer stores were

opened in 1998 to bring the total to 93. Plans

are to open another 17 dealer stores in 1999.

F U R N I T U R E & A P P L I A N C E S T O R E S ÒOffering one of the largest selections of furniture in Canada.ÓSears sells more furniture than any other single retailer in Canada.

Sears has 20 free-standing furniture stores with 10 more planned

for 1999. 12 of these stores offer both furniture and appliances.

These stores present triple the selection of furniture offered in

Sears traditional department stores, with the added advantage of

specially trained home decor consultants.

C ATA LO G U E ÒThe only full-line general merchandise catalogue in Canada.ÓSears published 19 different catalogues in 1998, reaching

4.5 million households. Customers can order by calling

1-800-26-SEARS, the most frequently called number in

Canada, or by fax or over the Internet. Sears has 1,900

catalogue order pick up locations across the country. The

catalogue offers a department store selection of over

50,000 products and services.

TheMany Sides of SEARS

outside

the many sidesof searsat a -...

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