Stater Bros 10-Q 2006 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 25, 2006

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 number 001-13222

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 filerþ.

     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 9, 2006, there were issued and outstanding
36,895 shares of the registrant’s Class A Common Stock.

STATER BROS. HOLDINGS INC.
June 25, 2006

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 25, 2005 and June 25, 2006 (Unaudited)		3
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 26, 2005 and June 25, 2006		5
	Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 26, 2005 and June 25, 2006		6
	Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 26, 2005 and June 25, 2006		7
	Consolidated Statements of Stockholder’s Deficit as of September 25, 2005 and June 25, 2006 (Unaudited)		8
	Notes to Consolidated Financial Statements (Unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		24
Item 4.	Controls and Procedures		24
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3.	Defaults Upon Senior Securities		26
Item 4.	Submission of Matters to a Vote of Security Holders		26
Item 5.	Other Information		26
Item 6.	Exhibits		26
SIGNATURES			27
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,		June 25,
	2005		2006
			(Unaudited)
Current assets
Cash and cash equivalents	$	263,397	$	194,472
Restricted cash		29,000		24,121
Receivables		42,556		41,433
Income tax receivables		2,450		5,072
Inventories		185,302		203,559
Prepaid expenses		8,663		8,923
Deferred income taxes		22,459		21,638
Total current assets		553,827		499,218
Property and equipment
Land		89,518		104,251
Buildings and improvements		297,228		333,296
Store fixtures and equipment		376,239		394,855
Property subject to capital leases		25,903		25,836
		788,888		858,238
Less accumulated depreciation and amortization		320,951		351,812
		467,937		506,426
Deferred debt issuance costs, net		19,011		16,727
Goodwill		2,894		2,894
Deferred income taxes, long-term		5,302		8,817
Other assets		6,398		6,301
		33,605		34,739
Total assets	$	1,055,369	$	1,040,383

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,			June 25,
	2005			2006
				(Unaudited)
Current liabilities
Accounts payable	$	144,298		$	156,004
Accrued payroll and related expenses		59,951			52,773
Other accrued liabilities		69,249			47,928
Current portion of capital lease obligations		1,190			1,136
Total current liabilities		274,688			257,841
Long-term debt		700,000			700,000
Capital lease obligations, less current portion		8,292			7,524
Long-term portion of self-insurance reserves		37,427			37,703
Long-term deferred benefits		44,312			50,619
Other long-term liabilities		4,045			3,591
Total liabilities		1,068,764			1,057,278
Commitments 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 in 2005; 36,895 in 2006		—			—
Additional paid-in capital		9,740			9,382
Retained deficit		(23,135	)		(26,277	)
Total stockholder’s deficit		(13,395	)		(16,895	)
Total liabilities and stockholder’s deficit	$	1,055,369		$	1,040,383

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 26,			June 25,
	2005			2006
Sales	$	840,430		$	885,948
Cost of goods sold		608,835			656,248
Gross profit		231,595			229,700
Operating expenses
Selling, general and administrative expenses		196,380			193,451
Depreciation and amortization		10,090			11,898
Total operating expenses		206,470			205,349
Operating profit		25,125			24,351
Interest income		1,864			2,627
Interest expense		(14,530	)		(14,731	)
Other expenses, net		(282	)		(702	)
Income before income taxes		12,177			11,545
Income taxes		4,901			5,803
Net income	$	7,276		$	5,742
Earnings per share	$	189.97		$	155.63
Average common shares outstanding		38,301			36,895
Shares outstanding at end of period		38,301			36,895

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 26,			June 25,
	2005			2006
Sales	$	2,522,347		$	2,616,502
Cost of goods sold		1,855,501			1,927,575
Gross profit		666,846			688,927
Operating expenses
Selling, general and administrative expenses		574,876			590,227
Depreciation and amortization		29,187			33,315
Total operating expenses		604,063			623,542
Operating profit		62,783			65,385
Interest income		4,525			7,515
Interest expense		(43,204	)		(44,271	)
Other expenses, net		(581	)		(1,395	)
Income before income taxes		23,523			27,234
Income taxes		9,384			11,984
Net income	$	14,139		$	15,250
Earnings per share	$	369.15		$	406.14
Average common shares outstanding		38,301			37,549
Shares outstanding at end of period		38,301			36,895

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 26,			June 25,
	2005			2006
Operating activities:
Net income	$	14,139		$	15,250
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		38,373			42,141
Deferred income taxes		(5,504	)		(2,694	)
Loss on disposals of assets		719			1,770
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash		(9,000	)		4,879
Decrease in receivables		2,384			1,123
Increase in income tax receivables		(141	)		(2,622	)
Increase in inventories		(2,955	)		(18,257	)
(Increase) decrease in prepaid expenses		219			(260	)
Decrease in other assets		2,057			2,352
Increase (decrease) in accounts payable		(5,238	)		11,706
Decrease in other accrued liabilities		(4,845	)		(28,223	)
Increase in long-term reserves and liabilities		4,539			5,853
Net cash provided by operating activities		34,747			33,018
Investing activities:
Purchase of property and equipment		(82,270	)		(83,026	)
Proceeds from sale of property and equipment		37			648
Net cash used in investing activities		(82,233	)		(82,378	)
Financing activities:
Principal payments on capital lease obligations		(960	)		(815	)
Stock redemption		—			(18,750	)
Net cash used in financing activities		(960	)		(19,565	)
Net decrease in cash and cash equivalents		(48,446	)		(68,925	)
Cash and cash equivalents at beginning of period		301,947			263,397
Cash and cash equivalents at end of period	$	253,501		$	194,472
Interest paid	$	51,550		$	54,269
Income taxes paid	$	15,165		$	17,300

See accompanying notes to unaudited consolidated financial statements.

7

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT

(Unaudited)

(In thousands)

			Class A		Additional
	Common		Common		Paid-in			Retained
	Stock		Stock		Capital			Deficit			Total
Balances at September 25, 2005	$	—	$	—	$	9,740		$	(23,135	)	$	(13,395	)
Net income for 39 weeks ended June 25, 2006		—		—		—			15,250			15,250
Stock redemption						(358	)		(18,392	)		(18,750	)
Balances at June 25, 2006	$	—	$	—	$	9,382		$	(26,277	)	$	(16,895	)

See accompanying notes to unaudited consolidated financial statements.

8

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 25, 2006

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. Certain reclassifications, none of which affected net income or retained deficit, have been made to prior period amounts to conform to the current period financial statement presentation. Operating results for the thirteen and thirty-nine weeks ended June 25, 2006 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 has evaluated the impact of FIN 47 and has determined that its implementation will not have a material effect on the Company’s consolidated financial statements.

     In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 requires that a tax position meet a “more-likely-than-not” recognition threshold for the benefit of an uncertain tax position to be recognized in the financial statements, based on the technical merits of the position. Additionally, FIN 48 provides guidance on derecognition, measurement, classification, interest and penalties, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48 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.

9

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 25, 2006

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. Interest earned on the restricted cash is controlled by the Company and is included in cash and cash equivalents. During the third quarter of 2006, the amount of restricted cash needed as collateral for certain workers’ compensation and general liability self-insurance reserves was reduced by $4.9 million. In addition, $2.0 million, which in the previous quarters of fiscal 2006 was held in an escrow account for land purchases, was released.

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.

     Net periodic pension cost included the following components:

	13 Weeks Ended						39 Weeks Ended
	June 26,			June 25,			June 26,			June 25,
	2005			2006			2005			2006
	(in thousands)						(in thousands)
Service cost — benefits earned during the period	$	603		$	715		$	1,810		$	2,147
Interest cost on projected benefit obligation		695			738			2,086			2,215
Actual return on assets		(388	)		(425	)		(1,167	)		(1,275	)
Recognized gains or losses		192			262			576			785
Prior service cost recognized		(1	)		(1	)		(2	)		(2	)
Net periodic pension cost	$	1,101		$	1,289		$	3,303		$	3,870
Assumptions used for accounting were:
Discount rate		6.00	%		5.50	%		6.00	%		5.50	%
Rate of increase in compensation levels		4.00	%		3.00	%		4.00	%		3.00	%
Expected long-term rate of return on assets		5.00	%		5.00	%		5.00	%		5.00	%

10

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 25, 2006

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.

Note 7 — Stock Redemption

     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 (the “Moseley Trust”). As of June 25, 2006, based upon the Company’s consolidated earnings since June 27, 2004 and the initial amount allowed of $25.0 million under the Credit Facility and the Notes’ indenture, the Company, after taking into consideration the January 30, 2006 payment to the Moseley Trust, had the ability and right to pay a restricted payment of up to $30.4 million.

     Subsequent to the end of the third quarter, as a result of a $5.0 million dividend declared on July 24, 2006 and paid on July 25, 2006 to La Cadena Investments, the sole shareholder of the Company, the Company’s ability to pay a restricted payment was reduced to $25.4 million.

Note 8 — Phantom Stock Plan

     During the second quarter of fiscal 2006, 85,000 additional units were awarded. Vesting and appreciation of the units awarded, as well as the vesting and appreciation of previously awarded units, are included in selling, general and administrative expenses.

11

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 25, 2006

Note 9 — 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 all of the privately owned property within the project site; to relocate all tenants and other business owners occupying buildings on the project site; 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 facilities. Markets has successfully completed acquisition of all of the privately owned parcels within the project site. 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. Markets has 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 $295 million. Construction of the facility will be in three components: 1 — corporate offices and satellite buildings; 2 — dry goods warehouse; and 3 — perishable warehouse. Acquisition of the project property from IVDA was completed in January of 2006 and rough grading and site work on the project property commenced in February of 2006. Construction of the first component is planned to commence in September of 2006 with completion in September of 2007; construction of the second component is planned to commence in September of 2006 with completion in November of 2007; and construction of the third component is planned to commence in December of 2006 with completion in July of 2008.

12

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 liabilities 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 and laws. While the Company has evaluated these factors 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 liabilities 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 June 25, 2006, if a rate of 4.5% was used to discount the reserves, the reserves for self-insurance would have been $1.0 million higher than the reserves calculated at a 5.5% discount rate. If a rate of 6.5% was used at June 25, 2006 to discount the reserves, the reserves for self-insurance would have been $1.0 million lower than the reserves calculated at a 5.5% discount rate.

Goodwill

The Company reviews goodwill for impairment on a reporting unit level annually 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 and other operating costs, actions of competitors and the effect of future collective bargaining agreements.

13

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 costs of running the corresponding advertisements. Co-operative funds received in excess of the costs 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 costs 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 costs 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 – Retirement Plans 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 third 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 was 4.5%, net periodic pension cost would have been $693,000 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 $583,000 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.

14

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 consolidated financial statements (unaudited) 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 and thirty-nine weeks ended June 26, 2005 and June 25, 2006.

	Thirteen Weeks						Thirty-nine Weeks
	2005			2006			2005			2006
Sales		100.00	%		100.00	%		100.00	%		100.00	%
Gross profit		27.56			25.93			26.44			26.33
Operating expenses
Selling, general and administrative expenses		23.37			21.84			22.79			22.56
Depreciation and amortization		1.20			1.34			1.16			1.27
Operating profit		2.99			2.75			2.49			2.50
Interest income		0.22			0.30			0.18			0.29
Interest expense		(1.73	)		(1.66	)		(1.71	)		(1.69	)
Other expenses, net		(0.03	)		(0.09	)		(0.03	)		(0.06	)
Income before income taxes		1.45	%		1.30	%		0.93	%		1.04	%

15

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 the prior year’s weekly sales that correspond to the weeks the stores were opened in the current year are used.

Sales for the thirteen weeks ended June 25, 2006, the third quarter of fiscal 2006, increased $45.5 million or 5.42% and amounted to $885.9 million compared to $840.4 million for the same period in the prior year. Sales for the thirty-nine weeks ended June 25, 2006 increased $94.2 million or 3.73% and amounted to $2.62 billion compared to $2.52 billion for the same period in the prior year.

For the thirteen weeks ended June 25, 2006, sales for Santee Dairies, Inc. (“Santee”) decreased $2.4 million, which was attributed primarily to reduced selling prices resulting from a reduction in raw milk pricing and to reduced purchases by the Ralphs Grocery Company. Super Rx, Inc. (“Super Rx”) sales added $4.8 million to consolidated sales for the thirteen weeks ended June 25, 2006. Comparison of fiscal third quarter sales is impacted by the timing of the Easter holiday in the current year versus the prior year. In the current year, the Easter holiday fell in the third quarter while the Easter holiday fell in the second quarter of the prior year. The Company estimated that the Easter holiday impacted fiscal 2005 second quarter sales by approximately $7.8 million. After taking into consideration the effect of the timing of the Easter holiday, like store sales increased 2.27% in the third quarter of fiscal 2006 over the same period in the previous fiscal year. While like store sales were positive for the quarter, like store sales were impacted by new store openings. The Company estimates that newly opened stores drew $8.5 million of their sales from existing stores in the thirteen weeks ended June 25, 2006. The Company opened four new stores in Southern California, since the beginning of the third quarter of fiscal 2005, increasing sales for the thirteen weeks ended June 25, 2006 by approximately $22.6 million. The closure of two stores in fiscal 2006 decreased third quarter sales by approximately $5.7 million when compared to the prior year.

Santee sales decreased $6.9 million in the thirty-nine weeks ended June 25, 2006 when compared to the same period in the previous year. The decrease in Santee sales is attributed primarily to reduced selling prices resulting from a reduction in raw milk pricing and to reduced purchases by the Ralphs Grocery Company. Super Rx sales increased consolidated sales for the thirty-nine weeks ended June 25, 2006 by $13.8 million. Like store sales increased 0.97% in fiscal 2006 over fiscal 2005. While like store sales are positive for the current fiscal year, like store sales were impacted by new store openings. The Company estimates that newly opened stores drew $19.0 million of their sales from existing stores in the thirty-nine weeks ended June 25, 2006. The Company opened six new stores in Southern California, since the beginning of fiscal 2005, increasing sales for the thirty-nine weeks ended June 25, 2006 by approximately $74.4 million. The closure of two stores in fiscal 2006 decreased year-to-date sales by approximately $10.7 million when compared to the prior year.

On July 18, 2006, subsequent to the end of the third quarter, the Company closed one store in Temecula, California and opened a new store in the adjacent community of French Valley, California the next morning. As of August 9, 2006, the Company operated 162 stores.

16

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

RESULTS OF OPERATIONS (contd.)

Gross profit for the thirteen weeks ended June 25, 2006, amounted to $229.7 million or 25.93% of sales compared to $231.6 million or 27.56% of sales in the same period of the prior year. Gross profit for the thirty-nine weeks ended June 25, 2006 amounted to $688.9 million or 26.33% of sales compared to $666.8 million or 26.44% of sales. Gross profit for the thirteen weeks ended June 25, 2006, as a percentage of sales, decreased 1.63% compared to the same period in the previous year. The decrease in gross profit, as a percentage of sales, is attributed to increased product costs, which, due to competitive pressures, were not fully passed through to the selling price of goods sold.

Gross profit, as a percentage of sales, for the thirty-nine week period ended June 25, 2006 decreased 0.11% compared to the same period in the previous year. The decrease in gross profit as a percentage of sales is attributed to increased product costs in the third quarter of 2006, which were not fully passed on in product selling prices, partially offset by increases in gross profit in the first two quarters of 2006 from reduced product shrink and reduced holiday promotional pricing.

Operating expenses include selling, general and administrative expenses, and depreciation and amortization. For the thirteen weeks ended June 25, 2006, selling, general and administrative expenses amounted to $193.5 million or 21.84% of sales compared to $196.4 million or 23.37% of sales. For the thirty-nine weeks ended June 25, 2006, selling, general and administrative expenses amounted to $590.2 million or 22.56% of sales compared to $574.9 million or 22.79% of sales for the same period of 2005.

The decrease 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 reduction in workers’ compensation expense of 0.34% of sales, reduction in union bonuses and union insurance of 0.80% of sales and a payment in the third quarter of 2005 of $5.0 million or 0.59%, as a percentage of sales, authorized by the Compensation Committee and the Board of Directors, to the Chairman of the Board, President and Chief Executive Officer of the Company that was not present in the current fiscal year. Workers’ compensation expense was reduced as a result of steps taken by the Company to reduce workers’ accidents and recent reforms in California workers’ compensation laws. Union bonuses were accrued under the UFCW contract over a twelve month period ending in February 2006. No further bonuses are due under the current UFCW contract.

The decrease in selling, general and administrative expenses, as a percentage of sales, for the thirty-nine week period of the current year compared to the prior year included reduction in union insurance of 0.26% of sales, reduction in workers’ compensation of 0.19% of sales and a payment in the third quarter of 2005 of $5.0 million or 0.20%, as a percentage of sales, authorized by the Compensation Committee and the Board of Directors, to the Chairman of the Board, President and Chief Executive Officer of the Company that was not present in the current fiscal year. These savings were partially offset by increases in manager incentive bonuses and union pension, which each increased 0.10% of sales.

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 third quarters of fiscal 2006 and fiscal 2005 is $243,000 and $267,000, respectively and $721,000 and $852,000 for the thirty-nine weeks ended June 25, 2006 and June 26, 2005, respectively.

17

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 $11.9 million for the thirteen weeks ended June 25, 2006 and $10.1 million for the thirteen weeks ended June 26, 2005. Depreciation and amortization expenses amounted to $33.3 million for the thirty-nine weeks ended June 25, 2006 and $29.2 million for the thirty-nine weeks ended June 26, 2005. The increase in depreciation and amortization expense in fiscal 2006 is primarily due to an increase in fixed assets. Included in cost of goods sold is $2.9 million and $3.0 million of depreciation in the third quarters of fiscal 2006 and fiscal 2005, respectively, and $8.8 million and $9.2 million in the thirty-nine week periods of fiscal 2006 and fiscal 2005, respectively, related to dairy production and warehousing and distribution activities.

Interest expense amounted to $14.7 million for the third quarter of 2006 compared to $14.5 million for the third quarter of 2005. For the fiscal year-to-date of 2006 and 2005, interest expense was $44.3 million and $43.2 million, respectively. The increase in interest expense for both the quarter and year-to-date periods is due primarily to increases in the interest rate on the Company’s Floating Rate Senior Notes due 2010.

Income before income taxes amounted to $11.5 million and $27.2 million for the thirteen and thirty-nine weeks ended June 25, 2006, respectively, and $12.2 million and $23.5 million for the thirteen and thirty-nine weeks ended June 26, 2005, respectively.

The effective tax rate in the third quarter of fiscal 2006 is higher than the previous year due to the reconciliation of 2005 tax returns to the tax provision, which has been recorded in the third quarter of 2006. The effect on both the thirteen and thirty-nine week periods of fiscal 2006 is not material.

Net income amounted to $5.7 million and $15.3 million for the thirteen and thirty-nine weeks ended June 25, 2006, respectively, and $7.3 million and $14.1 million for the thirteen and thirty-nine weeks ended June 26, 2005, respectively.

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 June 25, 2006, the Company had $54.9 million of outstanding letters of credit and had $20.1 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 and to secure the Company’s commitment for infrastructure improvements at the Company’s new distribution facility currently under construction.

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 25, 2006, Santee had $3.0 million of outstanding letters of credit in support of workers’ compensation liabilities and had $2.0 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 June 25, 2006 and did not incur short-term borrowings during the current fiscal year.

18

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Tabular Disclosure of Contractual Cash Obligations and Other Commitments

The following tables set forth the Company’s contractual cash obligations and commercial commitments as of June 25, 2006.

	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		255,937		42,656		85,313		85,313		42,655
		780,937		42,656		85,313		85,313		567,655
Floating Rate Senior Notes due June 2010 (1)
Principal		175,000		—		—		175,000		—
Interest		62,707		15,666		31,375		15,666		—
		237,707		15,666		31,375		190,666		—
Capital lease obligations(2)
Principal		8,660		1,136		2,094		2,810		2,620
Interest		5,380		1,281		2,130		1,403		566
		14,040		2,417		4,224		4,213		3,186
Operating leases(2)		259,645		36,083		54,130		36,562		132,870
Total contractual cash obligations	$	1,292,329	$	96,822	$	175,042	$	316,754	$	703,711
	Other Commercial Commitments
	(in thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
Standby letters of credit(3)	$	57,840	$	57,840	$	—	$	—	$	—
Total other commercial commitments	$	57,840	$	57,840	$	—	$	—	$	—

⁽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 June 25, 2006 was 8.83%.

Notes continued on next page

19

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Tabular Disclosure of Contractual Cash Obligations and Other Commitments (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)	The letter of credit facility is maintained pursuant to the Company’s workers’ compensation and general liability self-insurance requirements and to secure the Company’s commitment for infrastructure improvements at the Company’s new distribution facility currently under construction. Outstanding letters of credit expire between September 2006 and February 2007.

Working capital amounted to $241.4 million at June 25, 2006 and $279.1 million at September 25, 2005, and the Company’s current ratio was 1.94:1, and 2.02:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

Net cash provided by operating activities for the thirty-nine weeks ended June 25, 2006 was $33.0 million compared to $34.7 million provided for the thirty-nine weeks ended June 26, 2005. Significant uses of cash from operating activities in fiscal 2006 included an increase in inventory levels and reductions in other accrued liabilities. The increase in inventory as of June 25, 2006 is due primarily to the inventory levels needed to support the July 4^th holiday. Inventory levels are also higher due to an effort on the part of the Company to improve warehouse service levels to the stores. Decreases in other accrued liabilities are related to the timing of interest payments on the Company’s debt obligations and to timing of property and sales tax payments.

Other significant uses of cash included $52.2 million of capital expenditures during fiscal 2006 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, $30.8 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 $11.3 million, which is expected to be funded from cash on hand.

In January 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 (the “Moseley Trust”). As of June 25, 2006, based upon the Company’s consolidated earnings since June 27, 2004 and the initial amount allowed of $25.0 million under the Credit Facility and the Notes’ indenture, the Company, after taking into consideration the January 2006 payment to the Moseley Trust, had the ability and right to pay a restricted payment of up to $30.4 million. Subsequent to the end of the third quarter, as a result of a $5.0 million dividend declared on July 24, 2006 and paid on July 25, 2006 to La Cadena, the Company’s ability to pay a restricted payment was reduced to $25.4 million.

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.

20

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.

21

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”). In May, 2006, the Revolver was amended to reduce the required debt service level. 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 0.50% 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 June 25, 2006, 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 June 25, 2006, 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.

22

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 has evaluated the impact of FIN 47 and has determined that its implementation will not have a material effect on the Company’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 requires that a tax position meet a “more-likely-than-not” recognition threshold for the benefit of an uncertain tax position to be recognized in the financial statements, based on the technical merits of the position. Additionally, FIN 48 provides guidance on derecognition, measurement, classification, interest and penalties, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48 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.

23

STATER BROS. HOLDINGS INC.
JUNE 25, 2006

PART I — 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 June 25, 2006, the floating interest rate was 8.83%. 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 June 25, 2006, 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 June 25, 2006, 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.

24

STATER BROS. HOLDINGS INC.
JUNE 25, 2006

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 eight 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.

25

STATER BROS. HOLDINGS INC.
JUNE 25, 2006

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 to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26

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 9, 2006	/s/ Jack H. Brown
	Jack H. Brown
	Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
Date: August 9, 2006	/s/ Phillip J. Smith
	Phillip J. Smith
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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