Stater Bros 10-Q 2009 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ quarterly report pursuant to section 13 or 15(d)of the securities exchange act of 1934

For the quarterly period ended June 28, 2009

OR

o transition report pursuant to section 13 or 15(d)of the securities exchange act of 1934

For the transition from                    to                    

Commission file number001-13222

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0350671
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

301 S. Tippecanoe Avenue
San Bernardino, California	92408
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code(909) 733-5000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o  Non-accelerated filer þ
(Do not check if a smaller reporting company) Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ.

As of August 11, 2009, there were issued and outstanding
35,152 shares of the registrant’s Class A Common Stock.

STATER BROS. HOLDINGS INC.
June 28, 2009

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 28, 2008 and June 28, 2009 (Unaudited)		3
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 29, 2008 and June 28, 2009		5
	Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 29, 2008 and June 28, 2009		6
	Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 29, 2008 and June 28, 2009		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		26
Item 4.	Controls and Procedures		26
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 1A.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.	Defaults Upon Senior Securities		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Item 5.	Other Information		28
Item 6.	Exhibits		28
SIGNATURES			29
EX-31.1
EX-31.2
EX-32.1

2

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

	Sept. 28,		June 28,
	2008		2009
			(Unaudited)
Current assets
Cash and cash equivalents	$	144,939	$	158,459
Restricted cash		5,621		3,121
Receivables, net of allowance of $840 in 2008 and $751 in 2009		43,888		40,530
Income tax refund receivable		4,636		—
Inventories		230,218		234,471
Prepaid expenses		8,607		9,630
Deferred income taxes		25,684		25,344
Assets held for sale		81,611		79,057
Note receivable, current portion		—		300
Total current assets		545,204		550,912
Property and equipment
Land		95,144		95,070
Buildings and improvements		529,993		555,574
Store fixtures and equipment		378,658		395,269
Property subject to capital leases		9,983		9,983
		1,013,778		1,055,896
Less accumulated depreciation and amortization		353,715		392,934
		660,063		662,962
Deferred income taxes, long-term		29,163		32,187
Deferred debt issuance cost, net		14,478		12,070
Note receivable, less current portion		—		493
Long-term receivable		22,228		22,228
Goodwill		2,894		2,894
Other assets		5,934		5,934
		74,697		75,806
Total assets	$	1,279,964	$	1,289,680

See accompanying notes to unaudited consolidated financial statements.

3

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)
(In thousands, except share amounts)

LIABILITIES AND STOCKHOLDER’S EQUITY

	Sept. 28,			June 28,
	2008			2009
				(Unaudited)
Current liabilities
Accounts payable	$	157,925		$	153,452
Accrued payroll and related expenses		59,560			58,034
Other accrued liabilities		76,637			52,307
Accrued income taxes		—			3,088
Liabilities held for sale		15,984			11,309
Current portion of capital lease obligations		1,148			1,286
Total current liabilities		311,254			279,476
Long-term debt		810,000			810,000
Capital lease obligations, less current portion		5,104			4,121
Long-term portion of self-insurance and other reserves		35,164			39,296
Long-term deferred benefits		66,340			74,616
Other long-term liabilities		11,596			11,861
Total liabilities		1,239,458			1,219,370
Commitment and contingencies
Stockholder’s equity
Common Stock, $.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 0		—			—
Class A Common Stock, $.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 35,152		—			—
Additional paid-in capital		8,939			8,939
Accumulated other comprehensive loss		(5,200	)		(5,200	)
Retained earnings		36,767			66,571
Total stockholder’s equity		40,506			70,310
Total liabilities and stockholder’s equity	$	1,279,964		$	1,289,680

See accompanying notes to unaudited consolidated financial statements.

4

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)

	13 Weeks Ended
	June 29,			June 28,
	2008			2009
Sales	$	932,668		$	928,641
Cost of goods sold		683,447			674,425
Gross profit		249,221			254,216
Operating expenses
Selling, general and administrative expenses		207,853			203,277
Depreciation and amortization		12,996			13,146
Total operating expenses		220,849			216,423
Operating profit		28,372			37,793
Interest income		962			86
Interest expense		(14,904	)		(16,923	)
Other income, net		99			601
Income before income taxes		14,529			21,557
Income taxes		5,350			6,415
Net income	$	9,179		$	15,142
Earnings per average common share outstanding	$	256.61		$	430.76
Average common shares outstanding		35,770			35,152
Shares outstanding at end of period		35,770			35,152

See accompanying notes to unaudited consolidated financial statements.

5

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)

	39 Weeks Ended
	June 29,			June 28,
	2008			2009
Sales	$	2,801,059		$	2,818,890
Cost of goods sold		2,051,131			2,061,986
Gross profit		749,928			756,904
Operating expenses
Selling, general and administrative expenses		620,703			620,593
Depreciation and amortization		39,069			40,058
Total operating expenses		659,772			660,651
Operating profit		90,156			96,253
Interest income		4,975			416
Interest expense		(42,907	)		(51,371	)
Other income, net		2,839			707
Income before income taxes		55,063			46,005
Income taxes		21,602			16,201
Net income	$	33,461		$	29,804
Earnings per average common share outstanding	$	935.45		$	847.86
Average common shares outstanding		35,770			35,152
Shares outstanding at end of period		35,770			35,152

See accompanying notes to unaudited consolidated financial statements.

6

STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

	39 Weeks Ended
	June 29,			June 28,
	2008			2009
Operating activities:
Net income	$	33,461		$	29,804
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		45,779			48,509
Amortization of debt issuance costs		2,399			2,408
Increase in deferred income taxes		(6,354	)		(2,684	)
Gain on disposals of assets		(1,943	)		(572	)
Changes in operating assets and liabilities:
Decrease in restricted cash		2,500			2,500
Increase in receivables		(2,376	)		(3,306	)
Increase in inventories		(18,666	)		(4,253	)
(Increase) decrease in prepaid expenses		673			(1,023	)
Decrease in assets held for sale		3,134			2,554
Decrease in other assets		9			—
Increase (decrease) in accounts payable		644			(4,473	)
Increase (decrease) in accrued income taxes		(4,696	)		7,724
Decrease in other accrued liabilities		(32,036	)		(25,856	)
Decrease in liabilities held for sale		(5,074	)		(4,675	)
Increase in long-term reserves		14,380			12,673
Net cash provided by operating activities		31,834			59,330
Investing activities:
(Increase) decrease in store construction reimbursements		(6,223	)		6,664
Note receivable		—			(793	)
Purchase of property and equipment		(140,108	)		(51,826	)
Proceeds from sale of property and equipment		2,229			990
Net cash used in investing activities		(144,102	)		(44,965	)
Financing activities:
Principal payments on capital lease obligations		(730	)		(845	)
Net cash used in financing activities		(730	)		(845	)
Net increase (decrease) in cash and cash equivalents		(112,998	)		13,520
Cash and cash equivalents at beginning of period		277,059			144,939
Cash and cash equivalents at end of period	$	164,061		$	158,459
Interest paid	$	65,437		$	65,581
Income taxes paid	$	34,550		$	11,175

See accompanying notes to unaudited consolidated financial statements.

7

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 1 — Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirty-nine weeks ended June 28, 2009 are not necessarily indicative of the results that may be expected for the year ending September 27, 2009.

     The consolidated balance sheet at September 28, 2008 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

     For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s report on Form 10-K for the year ended September 28, 2008.

Note 2 — Principles of Consolidation

     The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Stater Bros. Markets (“Markets”) and Stater Bros. Development, Inc. (“Development”) and Markets’ wholly-owned subsidiaries, Super Rx, Inc. (“Super Rx”) and Santee Dairies, Inc. (“Santee”). Santee does business under the name Heartland Farms. All significant inter-company transactions have been eliminated in consolidation.

Note 3 — Reclassifications

     Certain amounts in prior periods have been reclassified to conform to current period financial statement presentation. The reclassifications have been made as substantially all of the assets of Santee have been classified as “Held for Sale” in the current period due to a definitive sales agreement being signed to sell substantially all of the assets of Santee to a non-related third party.

     For the thirteen and thirty-nine week periods ended June 28, 2009, the Company recorded adjustments related to cost of goods sold; selling, general and administrative expenses; income tax expense and certain balance sheet accounts. The corrections resulted in the Company reporting $3.4 million and $2.3 million in additional net income for the thirteen and thirty-nine week periods ended June 28, 2009, respectively. Management and the Audit Committee believe that such amounts are not material to the previously reported financial statements.

Note 4 — Subsequent Events

     The Company has evaluated subsequent events through August 11, 2009, the issuance date of its financial statements. The Company did not have any material subsequent events that need to be disclosed under SFAS No. 165 “Subsequent Events”.

Note 5 — Recent Accounting Pronouncements

     In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R established principles and requirements for how an entity which obtains control of one or more businesses (1) recognizes and measures the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination and (3) determines what information to disclose regarding business combinations. SFAS No. 141R applies prospectively to business combination for which the acquisition date is on or after the beginning of the first annual report period beginning on or after December 15, 2008. SFAS 141R will only affect the Company’s financial condition and results of operations to the extent it has business combinations after the effective date.

8

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 5 — Recent Accounting Pronouncements (contd.)

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. In February 2008, the FASB approved FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP FAS 157-2 did not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 became effective for the Company on September 29, 2008 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually and did not have a material effect on the Company’s consolidated financial statements. The Company will defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company is evaluating the effect on the consolidated financial statements of the implementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. SFAS No. 161 is effective for the Company’s fiscal year beginning September 28, 2009, with early adoption permitted. The Company is currently evaluating the impact of the adoption of SFAS No. 161 on its consolidated financial statements.

Note 6 — Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 7 — Restricted Cash

     Restricted cash represents cash that has been contractually set aside as collateral for certain workers’ compensation and general liability self-insurance reserves. Interest earned on the restricted cash is controlled by the Company and is included in cash and cash equivalents.

Note 8 — Income Taxes

     The Company establishes deferred tax liabilities for anticipated tax timing differences where payment of tax is anticipated. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and the amounts may be adjusted over time as additional information becomes known.

     The Company does not have any material tax positions that meet a less than a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During the thirty-nine weeks ended June 28, 2009, there have been no material changes to the amount of uncertain tax positions.

     The Company recognizes interest and penalties related to income tax deficiencies or assessments by taxing authorities for any underpayment of income taxes separately from income tax expenses as either interest expense or other operating expenses.

     For federal tax purposes, the Company is subject to a review of its fiscal 2006, fiscal 2007 and fiscal 2008 tax returns. The Company is currently under audit for its fiscal 2006 and 2007 state tax returns by the State of California’s Franchise Tax Board (“FTB”). To date, the FTB has only made information document requests related to these tax years. For state tax purposes, the Company is subject to a review of its fiscal 2006 through fiscal 2008 state tax returns.

9

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 9 — Retirement Plans

     The Company has a noncontributory defined benefit pension plan covering substantially all non-union employees. The plan provides for benefits based on an employee’s compensation during the eligibility period while employed with the Company. The Company’s funding policy for this plan is to contribute annually at a rate that is intended to provide sufficient assets to meet future benefit payment requirements. Market value of plan assets is calculated using fair market values as provided by a third-party trustee. The plan’s investments include cash, which earns interest, governmental securities, and corporate bonds and securities, all of which have quoted market values.

The following table provides the components of net periodic pension expense:

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	June 29,			June 28,			June 29,			June 28,
	2008			2009			2008			2009
	(in thousands)						(in thousands)
Expected return on assets	$	(769	)	$	(805	)	$	(2,307	)	$	(2,417	)
Service cost		658			579			1,974			1,739
Interest cost		876			972			2,628			2,917
Amortization of prior service cost		(1	)		(1	)		(2	)		(2	)
Amortization of recognized losses		146			49			438			149
Net pension expense	$	910		$	794		$	2,731		$	2,386
Actuarial assumptions used to determine net pension expense were:
Discount rate		6.25	%		7.50	%		6.25	%		7.50	%
Rate of increase in compensation levels		3.00	%		3.00	%		3.00	%		3.00	%
Expected long-term rate of return on assets		6.50	%		6.50	%		6.50	%		6.50	%

     The Company made approximately $3.3 million of contributions to its noncontributory defined pension plan during the thirty-nine weeks ended June 28, 2009 and the Company expects to contribute an additional $1.1 million during the remainder of fiscal 2009.

10

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 10 — Segment Information

     The Company has three operating segments: Markets, Super Rx and Santee. Markets and Super Rx provide retail grocery, general merchandise and pharmaceutical products to customers through the Company’s supermarkets. Santee processes, packages and distributes milk, fruit drinks and other cultured milk products to Markets and other customers. As Markets and Super Rx have similar customers, regulatory requirements and delivery methods to customers, the Company aggregates Markets and Super Rx into a single reportable segment. Aggregating Markets and Super Rx results in two reportable segments for the Company: Retail and Dairy Manufacturing. Separate disclosures for the Dairy Manufacturing segment have not been made as sales, profits and total assets for this segment are less than 10% of consolidated sales, profits and total assets of the Company. Financial information for the Dairy Manufacturing segment is included in the “all other” category in the following tables.

     The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and thirty-nine week periods ended June 29, 2008:

	Thirteen Weeks							Thirty-Nine Weeks
	Retail		All Other			Total		Retail		All Other			Total
	(in thousands)							(in thousands)
Sales to external customers	$	908,169	$	24,499		$	932,668	$	2,719,826	$	81,233		$	2,801,059
Intersegment sales		—		23,786			23,786		—		76,000			76,000
Operating profit (loss)		28,889		(517	)		28,372		90,306		(150	)		90,156
Net income (loss)		17,636		(8,457	)		9,179		56,056		(22,595	)		33,461

     Net assets as of June 29, 2008 amounted to $1.7 billion for the Retail segment and $(0.4) billion for all other for a total of $1.3 billion in consolidated net assets.

     The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and thirty-nine week periods ended June 28, 2009:

	Thirteen Weeks							Thirty-Nine Weeks
	Retail		All Other			Total		Retail		All Other			Total
	(in thousands)							(in thousands)
Sales to external customers	$	905,597	$	23,044		$	928,641	$	2,742,716	$	76,174		$	2,818,890
Intersegment sales		—		17,684			17,684		—		88,703			88,703
Operating profit		36,555		1,238			37,793		94,741		1,512			96,253
Net income (loss)		24,069		(8,927	)		15,142		58,182		(28,378	)		29,804

     Net assets as of June 28, 2009 amounted to $1.7 billion for the Retail segment and $(0.4) billion for all other for a total of $1.3 billion in consolidated net assets.

11

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 11 — Subsidiary Guarantee

     The Company has $525.0 million of 8.125% Senior Notes due June 15, 2012 and $285.0 million of 7.75% Senior Notes due April 15, 2015 collectively (the “Notes”).

     The Notes are guaranteed by the Company’s subsidiaries Markets and Development, and the Company’s indirect subsidiaries Super Rx and Santee (each a “subsidiary guarantor”, and collectively, the “subsidiary guarantors”). Condensed consolidating financial information with respect to the subsidiary guarantors is not provided because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and there are no subsidiaries of the Company other than the subsidiary guarantors.

Note 12 — Credit Facilities

     Markets’ Credit Facility

     On April 16, 2007, the Company and Markets entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A. (“Bank of America”), as sole and exclusive administrative agent and sole initial lender, consisting of a three-year unsecured revolving credit facility in a principal amount of up to $100 million (the “Credit Facility”), which replaced Markets’ existing credit facility.

     Markets is the borrower under the Credit Facility. The Credit Facility is guaranteed by the Company and all of its existing and future material subsidiaries, including Development and its indirect subsidiaries Super Rx and Santee (subject, in the case of Santee, to termination upon certain specified events). Subject to certain restrictions, the entire amount of the Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and may be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores and workers’ compensation insurance obligations. The availability of the loans and letters of credit is subject to certain borrowing restrictions.

     Loans under the Credit Facility bear interest at a rate based upon either (i) the “Base Rate” (defined as the higher of (a) the federal funds rate plus 0.50% and (b) the rate of interest publicly announced by Bank of America as its “reference rate”), plus 1.00%, or (ii) the “Offshore Rate” (defined as the average British Bankers Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be applied in consecutive periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by Markets, of one, two, three or six months.

     The Credit Facility will cease to be available and will be payable in full on May 31, 2010.

     The Credit Facility requires Markets to meet certain financial tests, including minimum net worth and other tests. The Credit Facility contains covenants which, among other things, limit the ability of Markets and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, and (iii) make restricted payments. The Credit Facility also contains covenants that apply to the Company and its subsidiaries, and the Company is a party to the Credit Facility for purposes of these covenants. These covenants, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, make restricted payments, enter into transactions with affiliates, and make amendments to the Indentures governing the 8.125% Senior Notes and the 7.75% Senior Notes.

12

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 12 — Credit Facilities (contd.)

Santee’s Revolver

     On April 16, 2007, Santee entered into a Second Amended and Restated Business Loan Agreement (Receivables) with Bank of America, as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving line of credit in a principal amount of up to $5.0 million (the “Santee Revolver”), which replaced Santee’s existing revolver. Markets has guaranteed the obligations of Santee under the Santee Revolver. Under the Santee Revolver, Santee may borrow up to $5.0 million, all of which may be used to secure letters of credit. Letters of credit under the Santee Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the Santee Revolver are secured by the receivables of Santee.

     Loans under the Santee Revolver bear interest at a rate based upon either (i) Bank of America’s prime rate plus 0.50%, or (ii) the “LIBOR Rate” (defined as the interest rate at which Bank of America’s Cayman branch would offer U.S. dollar deposits for the applicable interest period to other banks, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. The applicable interest periods for LIBOR rate loans will be between 30 and 180 days.

     The Santee Revolver will cease to be available and will be payable in full on May 31, 2010.

     Under the Santee Revolver, Santee is required to comply with certain financial covenants, which include certain financial ratios.

     As of June 28, 2009, for purposes of both Markets’ Credit Facility and the Santee Revolver with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. However, there can be no assurance that Santee, Markets or the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.

     As of June 28, 2009, between Market’s and Santee’s credit agreements, the Company had $49.8 million of outstanding letters of credit and it had $55.2 million available under the revolving credit facilities.

     The Company had no short-term borrowings outstanding as of June 28, 2009. The Company did not incur any short-term borrowings during the thirty-nine weeks of fiscal 2009.

Note 13 — Litigation Matters

     Various legal actions and claims are pending against the Company in the ordinary course of business. In the opinion of management and its general legal counsel, the ultimate resolution of such pending legal actions and claims will not have a material adverse effect on the Company’s consolidated financial position or its results of operations.

Note 14 — Asset Sale

     On April 9, 2009, Markets signed a definitive sales agreement with subsidiaries of Deans Foods, Inc. to sell substantially all of the assets of Santee (the “Sales Transaction”). The Sales Transaction is currently under review by the U.S. Department of Justice and other governmental entities to determine amongst other things if the sale violates any fair trade laws.

13

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 28, 2009

Note 15 — Fair Value of Financial Instruments

     In April 2009, the FASB issued Staff Position: FSP FAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSB FAS 107-1”), which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This statement is effective for interim and annual reporting periods ending after June 15, 2009. During the quarter ended June 28, 2009, the Company adopted FSP FAS 107-1. The adoption of this standard has resulted in the disclosure of the fair values attributable to our debt instruments within our interim report.

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

     Cash and Cash Equivalents

     The carrying amount approximates fair value because of the short-term maturity of these instruments.

     Receivables

     The carrying amount approximates fair value because of the short-term maturity of these instruments.

     Long-Term Receivable

     Although market quotes for the fair value of the Company’s long-term receivable are not readily available, the Company believes the stated value approximates fair value.

     Note Receivable

     Although market quotes for the fair value of the Company’s note receivable are not readily available, the Company believes the stated value approximates fair value.

     Long-Term Debt and Capital Lease Obligations

     The fair value of the 8.125% Senior Notes and the 7.75% Senior Notes, are based on quoted market prices. Although market quotes for the fair value of the Company’s capitalized lease obligations are not readily available, the Company believes the stated value approximates fair value.

     The estimated fair values of the Company’s financial instruments are as follows:

	As of
	June 28, 2009
	(In thousands)
	Carrying		Fair
	Amount		Value
Cash and cash equivalents	$	158,459	$	158,459
Receivables	$	40,530	$	40,530
Long-term receivable	$	22,228	$	22,228
Note receivable	$	793	$	793
Long-term debt	$	810,000	$	789,901
Capitalized lease obligations	$	5,407	$	5,407

14

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PARTI —FINANCIAL INFORMATION(contd.)

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are based upon our unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. The preparation of the financial statements requires the use of estimates and judgments on the part of management. We base our estimates on our historical experience combined with our understanding of current facts and circumstances. We believe that the following critical accounting policies are the most important to our consolidated financial statement presentation and require the most difficult, subjective and complex judgments on the part of management.

Self-Insurance Reserves

We are primarily self-insured, subject to certain retention levels for workers’ compensation and general liability costs. We are covered by umbrella insurance policies for catastrophic events. We record our self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates we use are based on our historical experiences as well as current facts and circumstances. We use third party actuarial analysis in making our estimates. Actuarial projections and our estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in compensation benefits structure. We discounted our workers’ compensation and general liability insurance reserves at a discount rate of 6.25% for both the thirty-nine week periods ended June 28, 2009 and June 29, 2008. The analysis of self-insurance liability is sensitive to the rate used to discount the anticipated future cash flows for the workers’ compensation and general liability insurance reserves. As of June 28, 2009, if the rate utilized to discount the reserves were increased or decreased by 1.0%, the reserves for self insurance would have been $1.4 million higher or $1.4 million lower.

Employee Benefit Plans

The determination of our obligation and expense for pension benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions are disclosed in Note 9 — Retirement Plans in the accompanying notes to the Unaudited Consolidated Financial Statements contained herein and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation changes. In accordance with U.S. generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in our actual experience or significant changes in the assumptions may materially affect our pension obligations and expense for pension benefits.

For the thirty-nine weeks ended June 28, 2009, the discount rate used to calculate the net periodic pension cost was 7.50%. If the rate used to discount the net periodic pension cost was 6.50%, net periodic pension cost would have been $399,000 higher than the cost calculated at the 7.50% discount rate. If the rate used to calculate the net periodic pension cost was 8.50%, net periodic pension cost would have been $252,000 lower than the cost calculated at the 7.50% discount rate.

15

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES (contd.)

Employee Benefit Plans (contd.)

We also participate in various multi-employer defined contribution retirement plans for all of our employees represented by labor unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements, generally based on the number of hours worked. Pension expenses for these plans are recognized as contributions are funded. While we expect contributions to these plans to continue to increase, the amount of increase or decrease will depend upon the outcome of collective bargaining, actions taken by trustees and the actual return on assets held in these plans. For these reasons, it is not practicable for us to determine the amount by which multi-employer pension contributions will increase or decrease.

Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When such events occur, we compare the carrying amount of the asset to the net undiscounted cash flows expected to result from the use and eventual disposition of the asset. These cash flows are based on our best estimate of future cash flow. If this comparison indicates that there is impairment, we record an impairment loss for the excess of net book value over the fair value of the impaired asset. We estimate the fair value based on the best information available, including prices for similar assets and the results of other valuation techniques. We adjust the value of owned property and equipment associated with closed stores to reflect recoverable values based on our prior history of disposing of similar assets and current economic conditions.

Factors such as changes in economic conditions and changes in operating performance significantly affect our judgments and estimates related to the expected useful lives and cash flows of long-lived assets. Adverse changes in these factors could cause us to recognize a material impairment charge.

Income Taxes

We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related accruals and deferred tax assets and liabilities. Judgment is needed to determine if the recognition threshold is met to recognize the tax position taken or if a liability is needed to record an unrecognized tax liability. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.

Goodwill

We review goodwill for impairment annually or more frequently if impairment indicators arise. Our Retail reporting unit is the only reporting unit that has goodwill. We determine the fair value of the reporting unit by comparing discounted projected cash flows to the carrying value for purposes of identifying impairment. Our evaluation of goodwill impairment requires extensive use of accounting judgment and financial estimates. Use of alternative assumptions such as projected sales and margins and anticipated future cash flows could provide significantly different results. The fair value of estimates could change in the future depending on internal and external factors including control of labor costs, actions of competitors and the effect of future collective bargaining agreements.

16

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES (contd.)

Facility Closing Costs

We provide liabilities related to warehouse and store closures for the present value of the estimated remaining noncancellable lease payments and related ancillary costs after the closing date, net of estimated subtenant income. The lease liabilities for the closed facilities are usually paid over the lease terms.

Advertising Allowances

We receive co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. We perform an analysis of the amount of co-operative advertising allowances received from our vendors compared to the cost of running the corresponding advertisement. Any amount of co-operative funds received in excess of the cost of advertising is recorded as a reduction in cost of goods sold. Determining the amount of advertising costs that corresponds to the co-operative advertising allowances received requires judgment on the part of management.

A significant portion of our advertising expenditures is in the form of twice weekly print advertisements. We distribute our print ads through inserts in local newspapers, in direct mailers and as handouts distributed in our stores. On a monthly basis, we estimate the costs of advertisements related to co-operative advertising allowances by dividing the direct out-of-pocket costs for printing and distributing our print ads by the product of total number of print ad pages run during the month and the number of individual ads in a typical twice weekly advertisement. We deem the dollar amount determined to be the fair value of our advertising costs. We then compare the fair value of our advertising costs to the amount of co-operative advertising we received during the month and we reduce cost of goods sold by the amount of any allowance received in excess of the fair value of our advertising costs.

Gift Cards and Certificates

We recognize a liability when gift cards are sold and recognize sales revenue when the gift cards are used to purchase our products. Gift cards do not have an expiration date and we do not charge any service fees that cause a decrement to customer balances. While we will indefinitely honor all redeemable gift cards presented for payment, we may determine the likelihood of redemption to be remote for unredeemed card balances due to, among other things, long periods of inactivity. In these circumstances, to the extent there is no requirement for remitting card balances to government agencies under unclaimed property laws, gift card balances will be recognized as income using the redemption method.

Significant Accounting Policies

In addition to the critical accounting policies disclosed above, there are certain accounting policies that we have adopted that may differ from policies of other companies within our industry. Such differences in the treatment of these policies may be important to the readers of our report on Form 10-Q and our unaudited consolidated financial statements contained herein. For further information regarding our accounting policies, refer to the significant accounting policies included in the notes to the consolidated financial statements contained herein and in our report on Form 10-K for the year ended September 28, 2008.

OWNERSHIP OF THE COMPANY

La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust holds all of our issued and outstanding capital stock. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of the Company, is the Managing General Partner of La Cadena with the power to vote the shares of our capital stock held by La Cadena on all matters, including with respect to the election of our Board of Directors, and any other matters requiring shareholder approval.

17

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

We are the largest privately owned supermarket chain in Southern California. Our revenues are generated primarily from retail sales through our supermarkets. Our success is a result of our market strategy of offering everyday low prices while providing our customers with friendly and outstanding service on each of their visits to our stores which has been a seventy-three year Stater Bros.’ tradition.

On April 9, 2009, Stater Bros. Markets (“Markets”) signed a definitive sales agreement (the “Sales Agreement”) with subsidiaries of Dean Foods Inc. (“Dean Foods”) to sell substantially all of the assets of Santee Dairies, Inc. (“Santee”), a wholly owned subsidiary of Markets. The sales transaction is currently under review by the U.S. Department of Justice and other governmental entities to determine amongst other things if the sale violates any fair trade laws. We and our legal counsel are of the opinion that the non-intercompany sales of Santee are not material to the overall volume of milk sales within Southern California, the marketing area in which Santee operates, and does not violate any fair trade or other laws. However, no assurances can be made regarding the outcome of the U.S. Department of Justice and other governmental agencies review nor when their review will be concluded. As a result of the Sales Agreement we have reclassed substantially all of the assets of Santee to “Assets Held for Sale”. In connection with the Sales Agreement, we are negotiating a multi-year supply agreement (the “Supply Agreement”) with Dean Foods to supply all of our fluid milk needs. Both the Sales Agreement and Supply Agreement have been and are being negotiated at arms length and the fluid milk prices under the Supply Agreement will approximate market pricing.

During the thirty-nine weeks ended June 28, 2009, we opened two new stores, opened one replacement store and closed one store. We also completed nine major remodels and are engaged in major remodels in eight stores. As of June 28, 2009, we had one new store under construction which we opened on July 22, 2009. We continually evaluate our stores for profitability, strategic positioning, impact of competition and sales growth potential and make store opening, store remodel and store closure decisions based on such evaluations.

In the third quarter of fiscal 2009, our consolidated sales decreased 0.43% compared to the same period of the prior year. Comparison of third quarter sales was affected by the timing of the Easter holiday. Easter fell in the third quarter of fiscal 2009 and in the second quarter of fiscal 2008. Taking into effect the timing of the Easter holiday, we estimated that consolidated sales decreased by 1.12% in the third quarter of fiscal 2009. Our consolidated sales for the thirty-nine weeks ended June 28, 2009, increased 0.64% over the same period in the prior year. For the remainder of fiscal 2009, we anticipate that our sales will continue to grow as we opened a new store on July 22, 2009. We continue to focus on expansion of sales in our existing supermarkets. Our future growth strategy is to continue to construct supermarkets in core market areas and expand or remodel existing supermarkets based upon our review of marketing trends.

Our gross profit margin, as a percentage of sales, in the third quarter of the current year increased when compared to the prior year third quarter. Gross profit margin decreased for the thirty-nine week period from the same period in the prior year because of continued competitive pressure in our marketing area and the continued down turn of the economy. Our marketing area of Southern California continues to be highly competitive and in flux. We anticipate continued competitive pressures from both existing and new “big box” format competitors, from ethnic markets and from our three major competitors, Vons, Albertsons and Ralphs.

During the first quarter of fiscal 2009, we completed the move of our refrigerated operations to our new Distribution Center at the former Norton Air Force base (“Norton”). With the move of our refrigerated operations, all distribution to our stores, other than direct store deliveries, dairy and our bread depot are being performed from Norton.

18

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Sales and Cost of Sales

	Thirteen Weeks Ended						Change
	June 29,			June 28,			2009 to 2008
($ in thousands)	2008			2009			Dollar			%
Sales	$	932,668		$	928,641		$	(4,027	)		(0.43	)%
Gross Profit	$	249,221		$	254,216		$	4,995			2.00	%
as a % of sales		26.72	%		27.38	%

	Thirty-Nine Weeks Ended						Change
	June 29,			June 28,			2009 to 2008
($ in thousands)	2008			2009			Dollar		%
Sales	$	2,801,059		$	2,818,890		$	17,831		0.64	%
Gross Profit	$	749,928		$	756,904		$	6,976		0.93	%
as a % of sales		26.77	%		26.85	%

Sales

The sales decrease for the thirteen weeks of fiscal 2009 over the same periods in fiscal 2008 is primarily the result of a decline in like store sales due to the current economic down turn and to deflation in some of our products we offer for sale including dairy and produce. Quarterly sales are affected by the Easter holiday which fell in the third quarter of fiscal 2009 and in the second quarter of fiscal 2008. After adjusting for the Easter holiday our consolidated sales decreased $10.4 million compared to the prior year. Sales for the thirty-nine week period increased 0.64% or $17.8 million over the thirty-nine weeks of the previous year primarily due to new store openings.

Like Store Sales

We calculate like store sales by comparing year-to-year sales for stores that are opened in both years. For stores that were not opened for the entire previous year periods, we only include the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year. For stores that have been closed, we only include the prior year’s weekly sales that correspond to the weeks the stores were opened in the current year. Replacement store sales and replaced store sales are included in like store sales.

Like store sales are affected by various factors including, but not limited to, inflation and deflation, promotional discounting, customer traffic, buying trends, pricing pressures from competitors and competitive openings and closings.

Comparison between the third quarter of fiscal 2009 and the third quarter of fiscal 2008 is affected by the timing of the Easter holiday. We estimate that the timing of the Easter holiday increased third quarter fiscal 2009 sales by approximately $6.4 million. After taking into consideration the effect of the Easter holiday, like store sales decreased $16.3 million or 1.81% compared to the third quarter of fiscal 2008. Like store sales were also impacted by recent new store openings. We estimate that newly opened stores drew $4.1 million of their third quarter 2009 sales from existing stores.

We have opened three new stores since September 30, 2007. The newly opened stores added approximately $11.9 million of sales to the third quarter of fiscal 2009, $2.7 million of which has been included in like store sales. Since September 30, 2007, we have closed one store, which decreased third quarter fiscal 2009 sales by approximately $3.3 million when compared to third quarter fiscal 2008 sales. Since September 30, 2007, we also opened one replacement store.

19

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Like Store Sales (contd.)

For the thirty-nine week period of fiscal 2009, like store sales increased $2.5 million or 0.09% when compared to the same period in fiscal 2008. While like store sales were positive for the thirty-nine weeks ended June 28, 2009, they were impacted by recent new store openings. We estimate that newly opened stores drew $11.1 million of their thirty-nine week fiscal sales from existing stores.

We have opened three new stores since September 30, 2007. These newly opened stores added approximately $28.5 million of sales to the thirty-nine week period of fiscal 2009, $2.7 million of which has been included in like store sales. Since September 30, 2007, we have closed one store, which decreased the thirty-nine week fiscal 2009 sales by approximately $9.0 million when compared to the same period sales of fiscal 2008. Since September 30, 2007, we also opened one replacement store.

Gross Profit

The increase in gross margin, as a percentage of sales, in the third quarter of 2009 compared to the third quarter of 2008 is due to operational savings realized in our warehouse and transportation operations at our new Distribution Center offset by continued reduction in our product gross margin as we respond to the current economic conditions and competitive pressures. We estimate that our warehouse and transportation cost reduced approximately 1.27%, as a percentage of sales, in the current quarter over the same quarter of the previous year. With the significant competitive activity in our market area and as we and our competitors take steps in these current tough economic times to hold customer base, we anticipate continued pressure on our gross margin in the foreseeable future.

Operating Expenses and Operating Profit

	Thirteen Weeks Ended						Change
	June 29,			June 28,			2009 to 2008
($ in thousands)	2008			2009			Dollar			%
Operating Expenses:
Selling, general and administrative expenses	$	207,853		$	203,277		$	(4,576	)		(2.20	)%
as a % of sales		22.29	%		21.89	%
Depreciation and amortization	$	12,996		$	13,146		$	150			1.15	%
as a % of sales		1.39	%		1.42	%
Operating profit	$	28,372		$	37,793		$	9,421			33.21	%
as a % of sales		3.04	%		4.07	%
	Thirty-Nine Weeks Ended						Change
	June 29,			June 28,			2009 to 2008
($ in thousands)	2008			2009			Dollar			%
Operating Expenses:
Selling, general and administrative expenses	$	620,703		$	620,593		$	(110	)		(0.02	)%
as a % of sales		22.16	%		22.02	%
Depreciation and amortization	$	39,069		$	40,058		$	989			2.53	%
as a % of sales		1.39	%		1.42	%
Operating profit	$	90,156		$	96,253		$	6,097			6.76	%
as a % of sales		3.22	%		3.41	%

20

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Selling, General and Administrative Expenses

The decrease, as a percentage of sales, in selling, general and administrative expenses in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 is due primarily to cost cutting efforts we have been able to make in the current year versus the prior year. We were able to reduce consulting costs by approximately 0.16%, as a percentage of sales, we have seen reductions in supplies expense by approximately 0.10%, as a percentage of sales, as our cost of shopping bags have reduced. We have also seen cost savings in our advertising expenses. In addition, we incurred cost in the third quarter of fiscal 2008 of approximately 0.09%, as a percentage of sales, related to the transition of our dry goods operations to Norton that we did not incur in the current year.

For the thirty-nine week period of fiscal 2009, we have seen reductions in consulting costs of 0.11%, as a percentage of sales, and we had costs that we incurred in the prior year that we did not incur in the current year. In the prior year, we incurred approximately $2.8 million or 0.10%, as a percentage of sales, in the transition of our dry goods operation from our old facility to our new facilities at Norton.

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for the third quarters of fiscal 2009 and fiscal 2008 is $306,000 and $301,000, respectively, and $900,000 and $871,000 for the thirty-nine weeks ended June 28, 2009 and June 29, 2008, respectively.

Depreciation and Amortization

The increase in depreciation and amortization expense in both the thirteen and thirty-nine week periods of fiscal 2009 compared to the same period in fiscal 2008 is due primarily to new store construction, store remodels and other capital expenditures. Included in cost of goods sold is depreciation and amortization of $2.9 million in the third quarter of fiscal 2009 and $4.2 million in the third quarter of 2008, respectively and $11.5 million and $10.8 million for the thirty-nine weeks of fiscal 2009 and 2008, respectively, related to our warehousing and distribution activities and for our dairy production until its assets were classified as “Assets Held for Sale”. The decrease in depreciation and amortization included in cost of goods sold for the third quarter of fiscal 2009 is due to our not depreciating Santee’s assets as they have been classified as “Assets Held for Sale”. The increase in depreciation and amortization included in cost of goods sold in the current thirty-nine week period is primarily attributed to depreciation on our Distribution Center at Norton.

Interest Income

Interest income was $0.1 million and $1.0 million for the third quarters of fiscal 2009 and 2008, respectively, and $0.4 million and $5.0 million for the thirty-nine week periods of fiscal 2009 and 2008, respectively. Interest income has significantly decreased due to lower market rates compared to the previous year. We expect our interest income to continue to be lower in the current fiscal year as market rates continue to be depressed.

Interest Expense

Prior to the effect of capitalized interest, interest expense was $17.1 million for both the third quarter of fiscal 2009 and 2008 and for the thirty-nine week periods of fiscal 2009 and fiscal 2008 was $51.8 million and $51.7 million, respectively. Capitalized interest was $0.1 million and $2.6 million for the third quarter of fiscal 2009 and 2008, respectively, and $0.4 million and $9.2 million for the thirty-nine week periods of fiscal 2009 and 2008, respectively. The decrease in the amount of capitalized interest in both the third quarter and year-to-date periods is due to the completion of construction of our Norton Distribution Center.

21

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Other Income, net

In the first quarter of fiscal 2008, we sold shop buildings and land that we owned at a previous store site in Pomona, California for $1.9 million and recognized a pre-tax gain of $1.7 million. In the second quarter of fiscal 2008, we sold a satellite dairy distribution facility in San Bernardino, California for $1.0 million and recognized a pre-tax gain of $0.6 million. This property was acquired by the State of California to make way for a freeway expansion. In the third quarter of fiscal 2009, we sold a parcel of land under a satellite building of one of our supermarkets for $0.8 million and recognized a pre-tax gain of $0.6 million.

Income Before Income Taxes

Income before income taxes amounted to $21.6 million and $14.5 million for the third quarters of fiscal 2009 and fiscal 2008, respectively, and was $46.0 million and $55.1 million for the thirty-nine week periods of fiscal 2009 and fiscal 2008, respectively.

Income Taxes

Income taxes amounted to $6.4 million and $5.4 million in the third quarters of fiscal 2009 and fiscal 2008, respectively, and $16.2 million and $21.6 million in the thirty-nine week periods of fiscal 2009 and 2008, respectively. Our effective tax rate was 29.8% and 36.8% for the third quarters of fiscal 2009 and 2008, respectively, and was 35.2% and 39.2% for the thirty-nine week periods of fiscal 2009 and 2008, respectively. The change in effective tax rate for the thirteen and thirty-nine week periods ended June 28, 2009 is attributed to a previously unrecognized tax benefit associated with Santee.

Net Income

Net income amounted to $15.1 million and $9.2 million in the third quarters of fiscal 2009 and fiscal 2008, respectively. Net income for the thirty-nine weeks ended June 28, 2009 amounted to $29.8 million compared to $33.5 million for the thirty-nine weeks ended June 29, 2008.

LIQUIDITY AND CAPITAL RESOURCES

We historically fund our daily cash flow requirements through funds provided by operations. We have the ability to borrow under our short-term revolving credit facilities. Markets’ credit agreement, as amended and restated on April 16, 2007, expires in May 2010 and consists of a revolving loan facility for working capital and letters of credit of $100.0 million. The letter of credit facility is maintained pursuant to our workers’ compensation and general liability self-insurance requirements. In addition, Santee’s revolving line of credit includes a credit line of $5.0 million all of which may be used to secure letters of credit. As of June 28, 2009, between Markets’ and Santee’s credit agreements, we had $49.8 million of outstanding letters of credit and we had $55.2 million available under the revolving loan facilities.

We had no short-term borrowings outstanding as of June 28, 2009. We did not incur any short term borrowings under our credit facilities during the thirty-nine weeks of fiscal 2009.

22

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The following table sets forth our contractual cash obligations and commercial commitments as of June 28, 2009.

	Contractual Cash Obligations
	(in thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
8.125% Senior Notes due June 2012
Principal	$	525,000	$	—	$	525,000	$	—	$	—
Interest		127,969		42,656		85,313		—		—
		652,969		42,656		610,313		—		—
7.75% Senior Note due April 2015
Principal		285,000		—		—		—		285,000
Interest		132,526		22,088		44,175		44,175		22,088
		417,526		22,088		44,175		44,175		307,088
Capital lease obligations(1)
Principal		5,430		1,300		2,854		1,276		—
Interest		1,968		809		940		219		—
		7,398		2,109		3,794		1,495		—
Operating leases(1)		368,043		37,697		66,600		53,151		210,595
Total contractual cash obligations	$	1,445,936	$	104,550	$	724,882	$	98,821	$	517,683
	Other Commercial Commitments
	(in thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
Standby letters of credit(2)	$	49,762	$	49,762	$	—	$	—	$	—
Total other commercial commitments	$	49,762	$	49,762	$	—	$	—	$	—

(1)

We lease the majority of our retail stores. We have subleased our old office and dry and refrigerated warehouses located in Colton, California under an initial 15 year term for an amount equal to our lease payments. For purposes of contractual cash obligations shown here, minimum lease payments on this lease are shown without sub-lease offset. Certain of our operating leases provide for minimum annual payments that change over the primary term of the lease. For purposes of contractual cash obligations shown here, contractual step increases or decreases are shown in the period they are due. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.

(2)

Standby letters of credit are committed as security for workers’ compensation obligations. Including approximately $2.9 million under Santee’s Revolver used as security for workers’ compensation obligations. We will retain the workers’ compensation liability of Santee after the sale of Santee’s assets is completed. Outstanding letters of credit expire between September 2009 and February 2010.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $271.4 million at June 28, 2009 and $234.0 million at September 28, 2008, and our current ratios were 1.97:1 and 1.75:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash provided by operating activities for the thirty-nine week periods ended June 28, 2009 and June 29, 2008 was $59.3 million and $31.8 million, respectively. Significant sources of cash provided by operating activities was non-cash depreciation and amortization and increases in long-term reserves for self insurance offset by a decrease in accrued interest payable which is classified in other accrued liabilities.

Other significant uses of cash in the thirty-nine week period ended June 28, 2009 included $48.3 million of capital expenditures during the period for normal new store construction, store remodels and equipment purchases. Historically, new store construction costs, store remodels and equipment expenditures are financed through operating cash flows. In addition, we expended $3.5 million on the Norton Distribution Center.

As of June 28, 2009, based upon our consolidated earnings since June 27, 2004 and the initial amount allowed of $25.0 million under the Credit Facility and the Notes’ Indentures and, after taking into consideration payments previously made, we had the ability and right to pay a restricted payment of up to $33.5 million.

We believe that operating cash flows and current cash reserves will be sufficient to meet our currently identified operating needs and scheduled capital expenditures. However, we may elect to fund some capital expenditures through capital leases, operating leases or debt financing. There can be no assurance that such debt and lease financing will be available to us in the future.

Labor Relations

Our collective bargaining agreements with the UFCW were renewed in March 2007 and extend through March 2011. Our collective bargaining agreement with the International Brotherhood of Teamsters was renewed in September 2005 and expires in September 2010. Santee’s collective bargaining agreement with the International Brotherhood of Teamsters was renewed in July 2007 and expires in February 2012. We believe we have good relations with our employees.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R established principles and requirements for how an entity which obtains control of one or more businesses (1) recognizes and measures the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination and (3) determines what information to disclose regarding business combinations. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual report period beginning on or after December 15, 2008. SFAS 141R will only affect our financial condition and results of operation to the extent we have business combinations after the effective date.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. In February 2008, the FASB approved FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP FAS 157-2 did not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 became effective for us on September 29, 2008 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually and did not have a material effect on our consolidated financial statements. We will defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We are evaluating the effect on the consolidated financial statements of the implementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. SFAS No. 161 is effective for the Company’s fiscal year beginning September 28, 2009, with early adoption permitted. We are currently evaluating the impact of the adoption of SFAS No. 161 on our consolidated financial statements.

CAUTIONARY STATEMENT FOR PURPOSES OF “SAFE HARBOR PROVISIONS” OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained in our filings with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) includes statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of Holdings. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, seasonal and weather fluctuations, labor unrest, expansion and other activities of competitors, changes in federal or state laws and the administration of such laws and the general condition of the economy.

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STATER BROS. HOLDINGS INC.
JUNE 28, 2009

PARTI —FINANCIAL INFORMATION(contd.)

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are subject to interest rate risk on our fixed interest rate debt obligations. Our fixed rate debt obligations are comprised of the 8.125% Senior Notes due June 2012, the 7.75% Senior Notes due April 2015 and capital lease obligations. In general, the fair value of fixed rate debt will increase as the market rate of interest decreases and will decrease as the market rate of interest increases. We have not engaged in any interest rate swap agreements, derivative financial instruments or other type of financial transactions to manage interest rate risk.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 28, 2009. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 28, 2009. There were no material changes in our internal control over financial reporting during the thirteen and thirty-nine week periods ended June 28, 2009.

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STATER BROS. HOLDINGS INC.
JUNE 28, 2009

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Various legal actions and claims are pending against us in the ordinary course of business. In the opinion of management and its general legal counsel, the ultimate resolution of such pending legal actions and claims will not have a material adverse effect on our consolidated financial position or our results of operations.

For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of our Form 10-K for the fiscal year ended September 28, 2008.

Item 1A. RISK FACTORS

Our performance is affected by inflation and deflation. In recent periods, we have experienced increases in transportation costs and the cost of products we sell in our stores. Our costs fluctuate for increases and decreases in commodities such as fuel, plastic and other product categories. As inflation has increased expenses, we have recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

The supermarket industry is a highly competitive industry, which is characterized by low profit margins. Competitive factors typically include the price, quality and variety of products, customer service, and store location and condition. We believe that our competitive strengths include our service departments, everyday low prices, breadth of product selection, high product quality, one-stop shopping convenience, attention to customer service, convenient store locations, a long history of community involvement and established long-term customer base in Southern California.

Given the wide assortment of products we offer, we compete with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug stores, national general merchandisers and discount retailers, membership clubs and warehouse stores. Our primary competitors include Vons, Albertson’s, Ralphs, and a number of independent supermarket operators. We also face competitive pressures from existing and new “big box” format retailers. We expect Vons, Albertson’s and Ralphs to continue to apply pricing and other competitive pressures as they expand the number of their stores in our market area and as they continue to take steps to both maintain and grow their customer counts. We believe our everyday low prices, breadth of product offering, which includes approximately 40,000 items offered for sale in our stores, service departments and long-term customer relationships will assist and complement our ability to compete in this increased competitive environment. We monitor competitive activity and regularly review our marketing and business strategies and periodically adjust them to adapt to changes in our trading area.

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STATER BROS. HOLDINGS INC.
JUNE 28, 2009

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     None

Item 3. DEFAULTS UPON SENIOR SECURITIES

     None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

Item 5. OTHER INFORMATION

     None

Item 6. EXHIBITS

(a)	Exhibits
31.1	Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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STATER BROS. HOLDINGS INC.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 11, 2009	/s/ Jack H. Brown
	Jack H. Brown
	Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
Date: August 11, 2009	/s/ Phillip J. Smith
	Phillip J. Smith
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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