Stater Bros 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ quarterly report pursuant to section13 or15(d) of the securitiesexchange act of 1934

For the quarterly period ended December 25, 2005

OR

o transition report pursuant to section13 or15(d) of the securitiesexchange act of 1934

For the transition fromto

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	(I.R.S. Employer Identification No.)
organization)

21700 Barton Road
Colton, California	92324
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (909) 783-5000

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 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 filero    Accelerated filero    Non-accelerated filer þ

     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 February 8, 2006, there were issued and outstanding
36,895 shares of the registrant’s Class A Common Stock.

STATER BROS. HOLDINGS INC.
December 25, 2005

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 25, 2005 and December 25, 2005 (Unaudited)		3
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 26, 2004 and December 25, 2005		5
	Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 26, 2004 and December 25, 2005		6
	Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		21
Item 4.	Controls and Procedures		21
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 1a.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3.	Defaults Upon Senior Securities		23
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 5.	Other Information		23
Item 6.	Exhibits		23
SIGNATURES			24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

2

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

	Sept. 25,		Dec. 25,
	2005		2005
			(Unaudited)
Current assets
Cash and cash equivalents	$	263,397	$	219,560
Restricted cash		29,000		31,600
Receivables		42,556		45,288
Income tax receivables		2,450		2,098
Inventories		185,302		209,076
Prepaid expenses		8,663		11,203
Deferred income taxes		22,459		21,137
Total current assets		553,827		539,962
Property and equipment
Land		89,518		89,974
Buildings and improvements		297,228		307,234
Store fixtures and equipment		376,239		385,647
Property subject to capital leases		25,903		25,824
		788,888		808,679
Less accumulated depreciation and amortization		320,951		332,626
		467,937		476,053
Deferred debt issuance costs, net		19,011		18,250
Goodwill		2,894		2,894
Deferred income taxes, long-term		5,302		4,857
Other assets		6,398		6,351
		33,605		32,352
Total assets	$	1,055,369	$	1,048,367

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 DEFICIT

	Sept. 25,			Dec. 25,
	2005			2005
				(Unaudited)
Current liabilities
Accounts payable	$	144,298		$	152,938
Accrued payroll and related expenses		59,951			56,106
Other accrued liabilities		71,234			55,001
Current portion of capital lease obligations		1,190			1,226
Total current liabilities		276,673			265,271
Long-term debt		700,000			700,000
Capital lease obligations, less current portion		8,292			7,972
Long-term portion of self-insurance and other reserves		35,442			34,928
Other long-term liabilities		48,357			50,259
Total liabilities		1,068,764			1,058,430
Commitment and Contingencies
Stockholder’s deficit
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 — 38,301		—			—
Additional paid-in capital		9,740			9,740
Retained deficit		(23,135	)		(19,803	)
Total stockholder’s deficit		(13,395	)		(10,063	)
Total liabilities and stockholder’s deficit	$	1,055,369		$	1,048,367

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
	Dec. 26,			Dec. 25,
	2004			2005
Sales	$	839,065		$	867,009
Cost of goods sold		622,056			640,294
Gross profit		217,009			226,715
Operating expenses
Selling, general and administrative expenses		189,160			198,765
Depreciation and amortization		9,449			10,358
Total operating expenses		198,609			209,123
Operating profit		18,400			17,592
Interest income		1,192			2,510
Interest expense		(14,096	)		(14,576	)
Other expenses, net		(115	)		(76	)
Income before income taxes		5,381			5,450
Income taxes		2,118			2,118
Net income	$	3,263		$	3,332
Earnings per share	$	85.19		$	87.00
Average common shares outstanding		38,301			38,301
Shares outstanding at end of period		38,301			38,301

See accompanying notes to unaudited consolidated financial statements.

5

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	13 Weeks Ended
	Dec. 26,			Dec. 25,
	2004			2005
Operating activities:
Net income	$	3,263		$	3,332
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		12,516			13,310
Deferred income taxes		(1,211	)		1,767
Loss on disposals of assets		160			116
Changes in operating assets and liabilities:
Increase in restricted cash		(9,000	)		(2,600	)
Increase in receivables		(6,157	)		(2,732	)
Decrease in income tax receivables		—			352
Increase in inventories		(14,213	)		(23,774	)
Increase in prepaid expenses		(4,311	)		(2,540	)
Decrease in other assets		599			790
Increase (decrease) in accounts payable		(2,033	)		8,640
Increase in accrued income taxes		2,136			—
Decrease in accrued liabilities, long-term portion of self-insurance reserves and other liabilities		(9,542	)		(18,690	)
Net cash used in operating activities		(27,793	)		(22,029	)
Investing activities:
Purchase of property and equipment		(28,584	)		(21,530	)
Proceeds from sale of property and equipment		2			6
Net cash used in investing activities		(28,582	)		(21,524	)
Financing activities:
Principal payments on capital lease obligations		(325	)		(284	)
Net cash used in financing activities		(325	)		(284	)
Net decrease in cash and cash equivalents		(56,700	)		(43,837	)
Cash and cash equivalents at beginning of period		301,947			263,397
Cash and cash equivalents at end of period	$	245,247		$	219,560
Interest paid	$	23,888		$	24,958
Income taxes paid	$	1,265		$	—

See accompanying notes to unaudited consolidated financial statements.

6

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2005

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 thirteen weeks ended December 25, 2005 are not necessarily indicative of the results that may be expected for the year ending September 24, 2006.

     The consolidated balance sheet at September 25, 2005 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 Stater Bros. Holdings Inc.’s (the Company) report on Form 10-K for the year ended September 25, 2005.

Note 2 — Recent Accounting Pronouncements

     In March, 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – an Interpretation of FASB Statement No. 143.” FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective at the end of the Company’s fiscal year ending September 24, 2006. The Company is in the process of evaluating the impact of FIN 47, but the impact is not expected to have a material effect on the Company’s consolidated financial statements.

Note 3 — 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 4 — Restricted Cash

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

Note 5 — 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.

7

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 25, 2005

Note 5 — Retirement Plans (contd.)

Net periodic pension cost included the following components:

	13 Weeks Ended
	Dec. 26,			Dec. 25,
	2004			2005
	(in thousands)
Service cost — benefits earned during the period	$	603		$	716
Interest cost on projected benefit obligation		695			738
Actual return on assets		(385	)		(425	)
Net amortization and deferral		(1	)		—
Recognized gains or losses		192			262
Prior service cost recognized		—			(1	)
Net periodic pension cost	$	1,104		$	1,290
Assumptions used for accounting were:
Discount rate		6.00	%		5.50	%
Rate of increase in compensation levels		4.00	%		3.00	%
Expected long-term rate of return on assets		5.00	%		5.00	%

Note 6 — Subsidiary Guarantee

     The Company has $525.0 million of 8.125% Senior Notes due June 15, 2012 and $175.0 million of Floating Rate Senior Notes due June 15, 2010 collectively (“the Notes”).

     The Notes are guaranteed by the Company’s subsidiaries Stater Bros. Markets, Inc. (“Markets”) and Stater Bros. Development, Inc. (“Development”) and the Company’s indirect subsidiaries Super Rx, Inc. (“Super Rx”) and Santee Dairies, Inc. (“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 then the subsidiary guarantors.

8

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 25, 2005

Note 7 — Corporate Office and Distribution Facilities

     Markets has commenced development of new corporate office and distribution facilities on approximately 160 acres of real property located on the former Norton Air Force Base (“NAFB”) in the City of San Bernardino, California. Markets entered into an Owner Participation Agreement with the Inland Valley Development Agency, a joint powers agency (“IVDA”), which is the entity responsible for the redevelopment of NAFB, to acquire approximately 144 acres of the project property owned by IVDA which transaction closed on January 6, 2006. Of the 160 acre project site, 16 acres were privately owned. The Agreement with IVDA requires Markets to acquire the parcels not owned by IVDA, to relocate all tenants and other business owners occupying buildings on the project property, to construct and complete the corporate office and distribution facilities and to obtain all City of San Bernardino building permits and entitlements required for construction of the project. Four of the private parcels consisting of approximately 13.8 acres have been acquired and, in December 2005, Markets entered into an agreement to acquire the remaining privately held parcel consisting of approximately 2.2 acres which transaction will close in February of 2006. Markets also entered into an agreement with Hillwood/San Bernardino LLC (“Hillwood”), the master developer of NAFB, to share costs associated with the infrastructure improvements including water, sewer, streets and utilities, which will be required by the City of San Bernardino for the project. Subsequent to December 25, 2005, Markets secured its commitment with Hillwood for infrastructure improvements by posting a letter of credit in the amount of $8.0 million.

     The NAFB site will be used to relocate and consolidate Markets’ corporate office and all distribution facilities to a single integrated facility from the 13 distribution buildings at 7 different locations in 4 cities currently in use. This site is located within eight miles of the main distribution facility in Colton, California so there will be no change in the average distance between the new facility and Markets’ retail supermarkets. The facility will consist of approximately 2.0 million square feet and will include Markets’ corporate office, training facilities, truck maintenance and other support facilities required for consolidation of all of its Southern California office, distribution and maintenance operations. The new distribution facility will increase square footage and storage capacity from an existing 1.7 million square feet with a storage capacity of approximately 4.1 million cubic feet to 2.0 million square feet with a storage capacity of approximately 6.7 million cubic feet and the facility will be designed to allow for future expansion that would provide total square footage of 2.3 million square feet with a storage capacity of approximately 8.4 million cubic feet. The projected increase in cubic foot storage capacity of 63.4% under the initial build-out and the increase of 104.9% with the future expansion will result primarily from the new facilities’ clear height being higher than the Company’s existing facilities. Taking into account the increased construction costs, including labor, raw materials, steel, concrete and asphalt, the projected net cost of the facility is approximately $250 million. Construction of the facility will be in three components: 1 — corporate office; 2 — dry goods warehouse; and 3 — perishable warehouse. Acquisition of the project property from IVDA was completed in January of 2006 and construction of the first component is planned to commence in April of 2006 with completion in April of 2007; construction of the second component is planned to commence in April of 2006 with completion in April of 2007; and construction of the third component is planned to commence in August of 2006 with completion in January of 2008.

9

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 25, 2005

Note 8 — Subsequent Events

As of December 25, 2005, based upon the Company’s consolidated earnings since June 27, 2004 and the initial amount allowed of $25.0 million, the Company had the ability under the Credit Facility and Note Indenture to pay a restricted payment of up to $46.1 million. Subsequent to the first quarter, on January 30, 2006, the Company redeemed and retired 1,406 shares of its Class A Common Stock for $18,750,000. The redemption was for shares held by The Moseley Family Revocable Trust.

10

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

PART I—FINANCIAL INFORMATION (contd.)

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

CRITICAL ACCOUNTING POLICIES

The Company’s discussion and analysis of financial condition and results of operations are based upon the Company’s 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. The Company based its estimates on the Company’s historical experience combined with management’s understanding of current facts and circumstances. The Company believes that the following critical accounting policies are the most important to the Company’s consolidated financial statement presentation and require the most difficult, subjective and complex judgments on the part of management.

Self-Insurance Reserves

The Company is primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. The Company is covered by umbrella insurance policies for catastrophic events. The Company records its self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates used by management are based on the Company’s historical experiences as well as current facts and circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial projections and the Company’s 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. In recent years, the Company and employers within the State of California as a whole have seen significant increases in the severity of workers’ compensation claims. While the Company has factored these increases into its estimates of ultimate loss, no assurance can be given that future events will not require a change in these estimates. The Company discounted its workers’ compensation, automobile and general liability insurance reserves at a discount rate of 5.5%. The analysis of self-insurance liability is sensitive to the rate used to discount the anticipated future cash flows for the workers’ compensation, automobile and general liability insurance reserves. As of December 25, 2005, if a rate of 4.5% was used to discount the reserves, the reserves for self-insurance would have been $1.3 million higher than the reserves calculated at a 5.5% discount rate. If a rate of 6.5% was used at December 25, 2005 to discount the reserves, the reserves for self-insurance would be $1.3 million lower than the reserves calculated at a 5.5% discount rate.

Goodwill

The Company reviews goodwill for impairment annually on a reporting unit level or more frequently if impairment indicators arise. The Company’s Retail reporting unit is the only reporting unit that has goodwill. The Company determines the fair value of the reporting unit by utilizing a discounted projected cash flows compared to its carrying value of the reporting unit for purposes of identifying impairment. The Company’s 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.

11

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

CRITICAL ACCOUNTING POLICIES (contd.)

Advertising Allowances

The Company receives co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. The Company performs an analysis of the amount of co-operative advertising allowances received from its vendors compared to the cost of running the corresponding advertisement. 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 the Company’s advertising expenditures is in the form of twice weekly print advertisements. The Company distributes its print ads through inserts in local newspapers, in direct mailers and as handouts distributed in its stores. On a monthly basis, management estimates the cost of advertisements related to co-operative advertising allowances by dividing the direct out-of-pocket costs for printing and distributing its 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. The dollar amount determined is deemed to be the fair value of advertising costs. The fair value of advertising costs is then compared to the amount of co-operative advertising allowances received during the month and any allowances received in excess of cost are recorded as a reduction in cost of goods sold.

Employee Benefit Plans

The determination of the Company’s obligation and expense for pension benefits is dependent, in part, on the Company’s selection of certain assumptions used by its actuaries in calculating these amounts. These assumptions are disclosed in Note 5 in the accompanying notes to the unaudited consolidated financial statements 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 the Company’s assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While the Company believes its assumptions are appropriate, significant differences in the Company’s actual experience or significant changes in the assumptions may materially affect the Company’s pension obligations and expense for pension benefits.

For first quarter of fiscal 2006, the discount rate used to calculate the net periodic pension cost was 5.5%. If the rate used to discount the net periodic pension cost were 4.5%, net periodic pension cost would have been $231,000 higher than the cost calculated at a 5.5% discount rate. If the rate used to calculate the net periodic pension cost was 6.5%, net periodic pension cost would have been $194,000 lower than the cost calculated at the 5.5% discount rate.

The Company also participates in various multi-employer defined benefit retirement plans for substantially all employees represented by unions. The Company is 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 the Company expects contributions to these plans to continue to increase as they have in recent years, 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 to determine the amount by which multi-employer pension contributions will increase or decrease.

12

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

Significant Accounting Policies

In addition to the critical accounting policies disclosed above, there are certain accounting policies that the Company has adopted that may differ from policies of other companies within the same industry. Such differences in the treatment of these policies may be important to the readers of the Company’s report on Form 10-Q and the Company’s unaudited consolidated financial statements contained herein. For further information regarding the Company’s accounting policies, refer to the significant accounting policies included in the notes to the consolidated financial statements contained herein and in the Company’s report on Form 10-K for the year ended September 25, 2005.

OWNERSHIP OF THE COMPANY

La Cadena Investments (“La Cadena”) is the sole stockholder of the Company and holds all of the shares of the Company’s Class A Common Stock. La Cadena is a California General Partnership whose general partners include the Jack H. Brown Revocable Trust. Mr. Jack H. Brown is the Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Brown’s Trust has the majority interest in La Cadena and Mr. Brown is the Managing General Partner with the power to vote the shares of the Company owned by La Cadena on all matters.

RESULTS OF OPERATIONS

The following table sets forth certain income statement components expressed as a percent of sales for the thirteen weeks ended December 26, 2004 and December 25, 2005.

	Thirteen Weeks
	2005			2006
Sales		100.00	%		100.00	%
Gross profit		25.86			26.15
Operating expenses:
Selling, general and administrative expenses		22.54			22.93
Depreciation and amortization		1.13			1.19
Operating profit		2.19			2.03
Interest income		0.14			0.29
Interest expense		(1.68	)		(1.68	)
Other expenses, net		(0.01	)		(0.01	)
Income before income taxes		0.64	%		0.63	%

13

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

RESULTS OF OPERATIONS (contd.)

Like store sales are calculated 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, only the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year are used. For stores that have been closed, only prior year sales that correspond to the week the stores were opened in the current year are used.

Sales for the thirteen weeks ended December 25, 2005, the first quarter of fiscal 2006, increased $27.9 million or 3.33% and amounted to $867.0 million compared to $839.1 million for the same period in the prior year. Sales for Santee decreased $826,000 in the current fiscal quarter over the prior year quarter. Pharmacy sales, which were not present in the first quarter of fiscal 2005, added $4.2 million to consolidated sales. Like store sales increased $2.3 million or 0.28% over the prior year. Sales excluded from the like store sales calculation for a store that was opened during the first quarter of fiscal 2005 was $3.7 million. Four new stores were opened since the first quarter of fiscal 2005 and they increased sales for the thirteen weeks ended December 25, 2005 by $21.1 million. The closure of a store in West Covina, California in September 2005 decreased fiscal 2006 sales by approximately $2.5 million when compared to the prior year.

Gross profit for the thirteen weeks ended December 25, 2005, amounted to $226.7 million or 26.15% of sales compared to $217.0 million or 25.86% of sales in the same period of the prior year. Gross profit, as a percentage of sales, in the current year compared to the prior year increased 0.29%. In fiscal 2006, warehouse and transportation costs were 3.49% of sales compared to 3.63% of sales in fiscal 2005. Fiscal 2006 cost of goods sold includes the costs of discounting turkeys for the Thanksgiving holiday that in the previous year would be capitalized and then amortized throughout the year to advertising expense. Fiscal 2005 was not adjusted for the correction as the effect was not material. Fiscal 2005 gross profit would have been reduced by 0.25%, as a percentage of sales, if turkey discounting costs were classified as cost of goods sold in the prior year. Fiscal 2006 gross profit, after the effect of turkey discounting and warehouse and transportation costs, increased 0.40%, as a percentage of sales, compared to the prior year. This increase is attributed in part to the easing of competitive pricing pressures in the current year versus the same period in the prior year.

Operating expenses include selling, general and administrative expenses, and depreciation and amortization. For the thirteen weeks ended December 25, 2005, selling, general and administrative expenses amounted to $198.8 million or 22.93% of sales compared to $189.2 million or 22.54% of sales for the thirteen weeks ended December 25, 2004.

The increase in selling, general and administrative expenses, as a percentage of sales, for the thirteen week period of the current year compared to the prior year included an increase in net labor related costs of 0.32%, as a percentage of sales, in fiscal 2006 over fiscal 2005 and an increase of 0.07%, as a percentage of sales, of advertising costs in fiscal 2006 over fiscal 2005. Electricity costs decreased 0.09%, as a percentage of sales, in fiscal 2006 compared to fiscal 2005; however, electricity costs are expected to rise for the remainder of the current fiscal year due to announced rate increases by the utility company servicing most of the Company’s stores.

The amount of salaries, wages and administrative costs associated with the purchase of the Company’s products included in selling, general and administrative expenses for the fiscal first quarters of fiscal 2006 and fiscal 2005 is $230,000 and $297,000, respectively.

14

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

RESULTS OF OPERATIONS (contd.)

Depreciation and amortization expenses amounted to $10.4 million for the thirteen weeks ended December 25, 2005 and $9.4 million for the thirteen weeks ended December 26, 2004. The increase in depreciation and amortization expense in fiscal 2006 was primarily due to an increase in fixed assets. Included in cost of goods sold is $2.9 million and $3.1 million of depreciation in the both first quarter of fiscal 2006 and fiscal 2005, respectively, related to dairy production and warehousing and distribution activities.

Interest expense amounted to $14.6 million for the first quarter of 2006 compared to $14.1 million for the first quarter of 2005. The increase in interest expense is due primarily to changes in the interest rate of the Company’s Floating Rate Senior Notes due 2010.

Income before income taxes amounted to $5.5 million in the first quarter of 2006 and $5.4 million for the first quarter of 2005.

Net income for the first quarter of fiscal 2006 and the first quarter of fiscal 2005 amounted to $3.3.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has funded its daily cash flow requirements through funds provided by operations and through borrowings from short-term revolving credit facilities. The Company’s credit agreement, as amended and restated on June 17, 2004, expires in May 2007 and consists of a revolving loan facility for working capital and letters of credit of $75.0 million. As of December 25, 2005, the Company had $46.9 million of outstanding letters of credit and had $28.1 million available under the revolving loan facility. The letter of credit facility is maintained pursuant to the Company’s workers’ compensation and general liability self-insurance requirements.

Santee’s revolving line of credit includes a credit line of $5.0 million of all of which may be used to secure letters of credit. As of December 25, 2005, Santee had $2.1 million of outstanding letters of credit in support of workers’ compensation liabilities and had $2.9 million available under the revolving loan facility. Santee’s revolving line of credit expires in May 2007.

The Company had no short-term borrowings outstanding as of December 25, 2005 and did not incur short-term borrowings during the quarterly period.

15

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 the Company’s contractual cash obligations and commercial commitments as of December 25, 2005.

			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		277,265		42,656		85,313		85,313		63,983
		802,265		42,656		85,313		85,313		588,983
Floating Rate Senior Notes due June 2010 (1)
Principal	$	175,000	$	—	$	—	$	175,000	$	—
Interest		63,825		14,179		28,397		21,249		—
		238,825		14,179		28,397		196,249		—
Capital lease obligations(2)
Principal	$	9,198	$	1,226	$	1,991	$	2,581	$	3,400
Interest		6,072		1,360		2,271		1,608		833
		15,270		2,586		4,262		4,189		4,233
Operating leases(2)		272,805		36,768		59,475		37,104		139,458
Total contractual cash obligations	$	1,329,165	$	96,189	$	177,447	$	322,855	$	732,674
			Other Commercial Commitments
	(in thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
Standby letters of credit(3)	$	49,040	$	49,040	$	—	$	—	$	—
Total other commercial commitments	$	49,040	$	49,040	$	—	$	—	$	—

⁽¹⁾ Interest on the Floating Rate Notes is based on the Three-month LIBOR plus 3.50% and is set quarterly based on the Three-month LIBOR rate for the second London Banking Day preceding each interest period. The floating interest rate at December 25, 2005 was 7.99%.

Notes continued on next page

16

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Contractual Cash Obligations (contd.)

(2)	The Company leases the majority of its retail stores, offices, warehouses and distribution facilities. 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.
(3)	Standby letters of credit are committed as security for workers’ compensation obligations. Outstanding letters of credit expire between December 2005 and October 2006.

Working capital amounted to $274.7 million at December 25, 2005 and $277.2 million at September 25, 2005, and the Company’s current ratio was 2.04:1, and 2.00:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

Net cash used in operating activities for the thirteen weeks ended December 25, 2005 was $22.0 million compared to $27.8 million used for the thirteen weeks ended December 26, 2004. Significant uses of cash from operating activities in fiscal 2006 included increases in inventories which are typical during the first quarter of the year to support holiday season sales levels, decreases in accrued liabilities due to the timing of the semi-annual interest payments on the Company’s 8.125% Senior Notes in mid-December and payments under the phantom stock plan to eligible participants who elected a one-time payment of up to 50% of the stated value of their units under the plan. A significant source of cash from operations in fiscal 2006 was an increase in accounts payable which resulted from the increase in inventory levels.

Other significant uses of cash included $16.7 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, $4.8 million was expended on the Company’s new corporate office and distribution facilities, which are being funded by cash allocated from the proceeds from the issuance of the 8.125% Senior Notes and Floating Rate Senior Notes. Management estimates that remaining fiscal 2006 expenditures for the new corporate office and distribution facilities will be $68.8 million, which is expected to be funded from cash on hand.

Management believes that operating cash flows and current cash reserves will be sufficient to meet the Company’s currently identified operating needs and scheduled capital expenditures. However, management may elect to fund some capital expenditures through operating leases or debt financing. There can be no assurance that such debt and lease financing will be available to the Company in the future.

17

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities

On June 17, 2004, the Company entered into an amended and restated credit facility (the “Credit Facility”) with Bank of America N.A. (“Bank of America”) as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving credit facility in a principal amount of up to $75.0 million, with the right to increase, under certain circumstances, the size of the Credit Facility to an aggregate principal amount of $100.0 million. 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 will be used for certain working capital, capital expenditures and other corporate purposes. Letters of credit under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores, construction of the new distribution facilities and workers’ compensation insurance obligations. The availability of the loans and letters of credit are subject to certain borrowing restrictions.

The Credit Facility is guaranteed by the Company and all of its existing and future material subsidiaries, including Development and the Company’s indirect subsidiaries Super Rx and Santee (subject, in the case of Santee, to termination upon certain specified events).

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, 2007. Notwithstanding such maturity date, at any time prior thereto Markets shall be entitled to request the issuance of standby letters of credit having a term which is up to one year following such maturity date, and commercial letters of credit having a term which is up to six months following such maturity date. Loans under the Credit Facility must be repaid for a period of ten consecutive days semi-annually.

Loans under the Credit Facility may be repaid and re-borrowed. The loans under the Credit Facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments under the Credit Facility may be reduced by Markets. Markets will be required to pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of credit facility, payable quarterly in arrears. Outstanding letters of credit under the credit facility are subject to a fee of 1.25% per annum on the face amount of such letters of credit, payable quarterly in arrears. Markets will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of credit facility.

18

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

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 Indenture governing the 8.125% Senior Notes due June 15, 2012 and the Floating Rate Senior Notes due June 15, 2010.

The Credit Facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults; invalidity of any guaranty; and change of control.

In November 2004, Santee entered into a revolving line of credit with Bank of America (“the Revolver”). Under the 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 Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the Revolver are secured by the receivables of Santee. The Revolver is scheduled to expire on May 31, 2007.

Advances under the Revolver bear interest at Bank of America’s prime rate plus 0.5% with interest due monthly or, if elected by Santee, at the Interbank Offered Rate plus 1.75%. The outstanding undrawn portion of the letters of credit is subject to an annual commitment fee of 1.25%.

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

As of December 25, 2005, for purposes of the credit facilities with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. The Company is also subject to certain covenants associated with its 8.125% Senior Notes due 2012 and its Floating Rate Senior Notes due 2010. As of December 25, 2005, the Company was in compliance with all such 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.

Labor Relations

The Company’s collective bargaining agreements with the UFCW were renewed in February 2004 and expire in March 2007. The Company’s 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 March 2004 and expires in March 2007. Management believes it has good relations with its employees.

19

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

RECENT ACCOUNTING PRONOUNCEMENTS

In March, 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations — an Interpretation of FASB Statement No. 143.” FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective at the end of the Company’s fiscal year ending September 24, 2006. The Company is in the process of evaluating the impact of FIN 47, but the impact is not expected to have a material effect on the Company’s 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 the Company’s 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 the Company) 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 the Company. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, seasonal and weather fluctuations, 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.

20

STATER BROS. HOLDINGS INC.
DECEMBER 25, 2005

PARTI —FINANCIAL INFORMATION(contd.)

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is subject to interest rate risk on its Floating Rate Senior Notes due June 2010. The Company’s interest expense on the Floating Rate Senior Notes due June 2010 will increase as interest rates rise and will decrease as interest rates decline. Interest on the Floating Rate Senior Notes due June 2010 is based upon the Three-month LIBOR plus 3.50%. As of December 25, 2005, the floating interest rate was 7.99%. In addition, the Company is subject to interest rate risk on its fixed interest rate debt obligations. The Company’s fixed rate debt obligations are comprised of the 8.125% Senior Notes due June 2012 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. The Company has not engaged in any interest swap agreements, derivative financial instruments or other type of financial transactions to manage interest rate risk.

Item 4. CONTROLS AND PROCEDURES

As of the quarter ended December 25, 2005, the Company carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that those controls and procedures were effective in making known to them, on a timely basis, the material information needed for the preparation of this Report on Form 10-Q. During the quarter ended December 25, 2005, there were no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect the internal control over financial reporting since the date of their evaluation, nor did they find any significant deficiencies or material weaknesses that would have required corrective actions to be taken.

21

STATER BROS. HOLDINGS INC.
DECEMBER 25, 2005

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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.

For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of the Company’s Form 10-K for the fiscal year ended September 25, 2005.

Item 1a.RISK FACTORS

The Company’s performance is affected by inflation. In recent years the impact of inflation on the operations of the Company has been moderate. As inflation has increased expenses, the Company has 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 the Company to become more cost efficient as its ability to recover increases in expenses through price increases is diminished. The future results of operations of the Company will depend upon the ability of the Company to adapt to the current economic environment as well as the current competitive conditions.

The Company conducts business in one industry segment, the operation of retail food supermarkets, which offer for sale to the public most merchandise typically found in supermarkets. The Company operates in the highly competitive supermarket 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. The Company believes that its competitive strengths include its specialty services, 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, established long-term customer base in the Inland Empire (consisting of San Bernardino and Riverside counties) and a growing customer awareness in the counties of Orange, San Diego and Los Angeles.

Given the wide assortment of products it offers, the Company competes 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. The Company’s primary competitors include Vons, Albertson’s, Ralphs, and a number of independent supermarket operators. The Company, and its competitors, face increased competitive pressures with the entry in its geographic market area of Wal-Mart’s Supercenter format stores. Wal-Mart currently has four Supercenters and a number of Wal-Mart discount locations and Sam’s Clubs within the Company’s marketing area selling a variety of grocery products. The Company expects Wal-Mart to open more of their Supercenter format stores in the Company’s market area. In addition, the Company expects Von’s, Albertson’s and Ralphs to continue to apply pricing and other competitive pressures as they expand the number of their stores in the Company’s market area and as they continue to take steps to both maintain and grow their customer counts. The Company believes that its everyday low prices, breadth of product offering, specialty service department and long-term customer relationships will help it withstand the increased competitive environment. The Company monitors competitive activity and Senior Management regularly reviews the Company’s marketing and business strategy and periodically adjusts them to adapt to changes in the Company’s primary trading area.

22

STATER BROS. HOLDINGS INC.
DECEMBER 25, 2005

PART II — OTHER INFORMATION (contd.)

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 to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

23

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: February 8, 2006	/s/     Jack H. Brown
	Jack H. Brown
	Chairman of the Board, President,
	and Chief Executive Officer
	(Principal Executive Officer)
Date: February 8, 2006	/s/      Phillip J. Smith
	Phillip J. Smith
	Senior Vice President
	and Chief Financial Officer
	(Principal Financial Officer)

24