Stater Bros 10Q 2007 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 24, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition from to

Commission file number001-13222

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)


Delaware		33-0350671

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

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 8, 2007, there were issued and outstanding
35,770 shares of the registrant’s Class A Common Stock.

STATER BROS. HOLDINGS INC.
June 24, 2007

INDEX


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 24, 2006 and June 24, 2007 (Unaudited)		3
	Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 25, 2006 and June 24, 2007		5
	Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 25, 2006 and June 24, 2007		6
	Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 25, 2006 and June 24, 2007		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		28
Item 4.	Controls and Procedures		28

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 1A.	Risk Factors		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Submission of Matters to a Vote of Security Holders		30
Item 5.	Other Information		30
Item 6.	Exhibits		30

SIGNATURES			31
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


Item 1.		FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS


	Sept. 24,		June 24,
	2006		2007
			(Unaudited)
Current assets
Cash and cash equivalents	$	198,545	$	274,096
Restricted cash		24,121		8,121
Short-term investments		26,849		—
Receivables, net of allowance of $936 and $903		35,310		48,352
Income tax receivables		3,863		—
Inventories		196,031		199,328
Prepaid expenses		8,513		7,102
Deferred income taxes		21,609		23,649


Total current assets		514,841		560,648

Property and equipment
Land		110,479		112,013
Buildings and improvements		323,805		411,401
Store fixtures and equipment		397,491		414,718
Property subject to capital leases		25,836		24,747

		857,611		962,879

Less accumulated depreciation and amortization		360,538		398,611

		497,073		564,268




Deferred debt issuance costs, net		15,972		17,828
Deferred income taxes, long-term		8,845		12,920
Long-term receivable		12,160		22,228
Goodwill		2,894		2,894
Other assets		6,307		6,582

		46,178		62,452

Total assets	$	1,058,092	$	1,187,368

See accompanying notes to unaudited consolidated financial statements.

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

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)


	Sept. 24,			June 24,
	2006			2007
				(Unaudited)
Current liabilities
Accounts payable	$	155,827		$	153,635
Accrued payroll and related expenses		55,582			61,905
Accrued income taxes		—			7,093
Other accrued liabilities		69,098			46,596
Current portion of capital lease obligations		1,054			974


Total current liabilities		281,561			270,203

Long-term debt		700,000			810,000
Capital lease obligations, less current portion		7,294			6,551
Long-term portion of self-insurance and other reserves		33,112			35,046
Long-term deferred benefits		43,573			54,615
Other long-term liabilities		3,631			3,068


Total liabilities		1,069,171			1,179,483

Commitment and Contingencies

Stockholder’s equity (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 - 36,895 in 2006 and 35,770 in 2007		—			—
Additional paid-in capital		9,382			9,096
Retained deficit		(20,461	)		(1,211	)


Total stockholder’s equity (deficit)		(11,079	)		7,885


Total liabilities and stockholder’s equity (deficit)	$	1,058,092		$	1,187,368

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share and share amounts)


	13 Weeks Ended
	June 25,			June 24,
	2006			2007
Sales	$	886,221		$	910,229
Cost of goods sold		656,521			656,442


Gross profit		229,700			253,787

Operating expenses
Selling, general and administrative expenses		193,451			199,849
Depreciation and amortization		11,898			12,313


Total operating expenses		205,349			212,162


Operating profit		24,351			41,625

Interest income		2,627			4,930
Interest expense		(14,731	)		(16,829	)
Interest related to debt purchase		—			(3,953	)
Other income (expenses), net		(702	)		159


Income before income taxes		11,545			25,932

Income taxes		5,803			10,330


Net income	$	5,742		$	15,602


Earnings per share	$	155.63		$	431.26


Average common shares outstanding		36,895			36,178


Shares outstanding at end of period		36,895			35,770

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share and share amounts)


	39 Weeks Ended
	June 25,			June 24,
	2006			2007
Sales	$	2,617,138		$	2,680,645
Cost of goods sold		1,928,211			1,935,524


Gross profit		688,927			745,121

Operating expenses
Selling, general and administrative expenses		590,227			605,335
Depreciation and amortization		33,315			36,282


Total operating expenses		623,542			641,617


Operating profit		65,385			103,504

Interest income		7,515			10,475
Interest expense		(44,271	)		(44,863	)
Interest related to debt purchase		—			(3,953	)
Other expenses, net		(1,395	)		(9	)


Income before income taxes		27,234			65,154

Income taxes		11,984			26,190


Net income	$	15,250		$	38,964


Earnings per share	$	406.14		$	1,062.96


Average common shares outstanding		37,549			36,656


Shares outstanding at end of period		36,895			35,770

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	39 Weeks Ended
	June 25,			June 24,
	2006			2007
Operating activities:
Net income	$	15,250		$	38,964
Adjustments to reconcile net income to net cash provided by operating activities:
Premium paid on purchase of debt		—			(1,750	)
Depreciation and amortization		42,141			45,060
Deferred income taxes		(2,694	)		(6,115	)
Amortization of debt issuance costs		2,284			4,623
Loss on disposals of assets		1,770			143
Changes in operating assets and liabilities:
Decrease in restricted cash		4,879			16,000
(Increase) decrease in receivables		4,825			(9,363	)
(Increase) decrease in income tax receivables		(2,622	)		3,863
Increase in inventories		(18,257	)		(3,297	)
(Increase) decrease in prepaid expenses		(260	)		1,411
(Increase) decrease in other assets		68			(287	)
Increase (decrease) in accounts payable		11,706			(2,192	)
Increase in accrued income taxes		—			7,093
Decrease in other accrued liabilities		(28,223	)		(14,429	)
Increase in long-term reserves		5,853			12,413


Net cash provided by operating activities		36,720			92,137


Financing activities:
Stock redemption		(18,750	)		(15,000	)
Debt issuance costs		—			(6,479	)
Proceeds from issuance of long-term debt		—			285,000
Principal payment on long-term debt		—			(175,000	)
Dividends paid		—			(5,000	)
Principal payments on capital lease obligation		(815	)		(823	)


Net cash (used in) provided by financing activities		(19,565	)		82,698


Investing activities:
Decrease in short-term investments		—			26,849
Increase in store construction reimbursements		(3,702	)		(3,679	)
Increase in long-term receivable		—			(10,068	)
Purchase of property and equipment		(83,026	)		(112,590	)
Proceeds from sale of property and equipment		648			204


Net cash used in investing activities		(86,080	)		(99,284	)


Net increase (decrease) in cash and cash equivalents		(68,925	)		75,551
Cash and cash equivalents at beginning of period		263,397			198,545


Cash and cash equivalents at end of period	$	194,472		$	274,096


Interest paid	$	54,269		$	57,278
Income taxes paid	$	17,300		$	21,350

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
JUNE 24, 2007

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 and the thirty-nine weeks ended June 24, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2007.

The consolidated balance sheet at September 24, 2006 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s report on Form 10-K/A for the year ended September 24, 2006.

Note 2 — Reclassifications

Certain amounts in the prior periods have been reclassified to conform to the current period financial statement presentation.

Note 3 — Recent Accounting Pronouncements

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.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 states that fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts and establishes a hierarchy that prioritizes the information used to develop fair value assumptions. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of SFAS No. 157 on its consolidated financial statements.

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” which requires an entity to (1) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the employer’s fiscal year end and (3) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS No. 158 has a two tiered effective date with recognition of funded status of defined benefit postretirement plan and disclosure requirements effective for fiscal years ending after June 15, 2007 for non-public entities and all other requirements effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 158 on its consolidated financial statements.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 2007

Note 4 — 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 5 — Restricted Cash

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

Note 6 — Retirement Plans

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

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


	13 Weeks Ended						39 Weeks Ended
	Jun. 25,			Jun. 24,			Jun. 25,			Jun. 24,
	2006			2007			2006			2007
	(in thousands)						(in thousands)
Expected return on assets	$	(425	)	$	(519	)	$	(1,275	)	$	(1,557	)
Service cost		715			683			2,147			2,050
Interest cost		738			817			2,215			2,452
Amortization of prior service cost		(1	)		(1	)		(2	)		(2	)
Amortization of recognized losses		262			214			785			644

Net pension expense	$	1,289		$	1,194		$	3,870		$	3,587


Actuarial assumptions used to determine net pension expense were:
Discount rate		5.50	%		5.80	%		5.50	%		5.80	%
Rate of increase in compensation levels		3.00	%		3.00	%		3.00	%		3.00	%
Expected long-term rate of return on assets		5.00	%		5.00	%		5.00	%		5.00	%

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 2007

Note 7 — Segment Information

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

The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and thirty-nine week periods ended June 25, 2006:


	Thirteen Weeks							Thirty-Nine Weeks
	Retail		All Other			Total		Retail		All Other			Total
	(in thousands)							(in thousands)
Sales to external customers	$	862,276	$	23,945		$	886,221	$	2,540,681	$	76,457		$	2,617,138
Intersegment sales		—		17,869			17,869		—		56,902			56,902
Operating profit (loss)		24,661		(310	)		24,351		63,198		2,187			65,385
Net income (loss)		14,465		(8,723	)		5,742		39,428		(24,178	)		15,250

Total net assets for the thirteen and thirty-nine week periods ended June 25, 2006 amounted to $1.4 billion for the Retail segment and $(348.0) million for all other for a total of $1.0 billion in consolidated total assets.

The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and thirty-nine week periods ended June 24, 2007:


	Thirteen Weeks							Thirty-Nine Weeks
	Retail		All Other			Total		Retail		All Other			Total
	(in thousands)							(in thousands)
Sales to external customers	$	885,478	$	24,751		$	910,229	$	2,608,793	$	71,852		$	2,680,645
Intersegment sales		—		21,775			21,775		—		59,841			59,841
Operating profit (loss)		41,694		(69	)		41,625		104,631		(1,127	)		103,504
Net income (loss)		26,756		(11,154	)		15,602		67,539		(28,575	)		38,964

Total net assets for the thirteen and thirty-nine week periods ended June 24, 2007 amounted to $1.5 billion for the Retail segment and $(324.2) million for all other for a total of $1.2 billion in consolidated total assets.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 2007

Note 8 — Subsidiary Guarantee

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

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

Note 9 — Corporate Office and Distribution Center

The Company is currently in the process of constructing a new corporate office and distribution center on a 160-acre site on the former Norton Air Force Base located in the City of San Bernardino, California. The new headquarters and distribution center will consolidate all of the Company’s corporate and distribution functions, other than dairy operations, in one location. The new facility will be located approximately eight miles from the Company’s current primary distribution facility and, as a result, there will be no appreciable change in the average distance between the new facility and its retail supermarkets.

The construction of the new corporate offices and distribution center is being undertaken in three components:

	•		Component 1: corporate offices and satellite buildings;

	•		Component 2: dry goods warehouse; and

	•		Component 3: refrigeration warehouse.

The Company acquired the principal project property making up the 160-acre site from the Inland Valley Development Agency, a joint powers agency (“IVDA”), in January 2006 and rough grading and site work on that property commenced in February 2006. Several smaller parcels making up the remaining project property were privately held. The Company completed the acquisition of the final privately held parcel in the 160-acre site in May 2006. Construction of the first component commenced in September 2006, with completion currently anticipated in September 2007; construction of the second component commenced in November 2006, with completion currently anticipated in January 2008; and construction of the third component commenced in April 2007, with completion currently anticipated in August 2008.

Note 10 — Notes Payable

New Senior Notes

On April 18, 2007, the Company issued $285.0 million in aggregate principal amount of 7.75% Senior Notes due April 15, 2015 (the “7.75% Senior Notes”) in a private offering. The 7.75% Senior Notes are unregistered and are unsecured obligations of the Company. On August 6, 2007 we filed an exchange offer with the Securities and Exchange Commission to exchange the 7.75% Senior Notes for virtually identical registered 7.75% Senior Notes due April 15, 2015. The 7.75% Senior Notes are guaranteed by Markets and Development and the Company’s indirect subsidiaries, Santee and Super Rx.

Note Redemption

On June 18, 2007, the Company redeemed all of its $175.0 million Floating Rate Senior Notes due 2010 for $176.8 million which included a redemption premium of $1,750,000, plus accrued interest. In connection with the redemption of the Floating Rate Notes, we expensed approximately $2.2 million of unamortized deferred offering cost related to the Floating Rate Notes.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 2007

Note 11 — Stock Redemption and Dividend

Stock Redemption

On April 27, 2007 the Company redeemed 1,125 shares of its Class A Common Stock for $15.0 million.

Dividend

On April 27, 2007 the Company paid a $5.0 million dividend to La Cadena Investments, the sole shareholder of the Company.

Note 12 — Credit Facilities

Credit Facility

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

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

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

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

Santee Credit Facility

On April 16, 2007, Santee entered into a Second Amended and Restated Business Loan Agreement (Receivables) with Bank of America, as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving line of credit in a principal amount of up to $5 million (the “Santee Revolver”), which replaced Santee’s existing revolver. Markets has guaranteed the obligations of Santee under the Santee Revolver. Under the Santee Revolver, Santee may borrow up to $5.0 million all of which may be used to secure letters of credit. Letters of credit under the Santee Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the Santee Revolver are secured by the receivables of Santee.

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

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

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 24, 2007

Note 13 — Litigation Matters

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

Note 14 — Subsequent Events

The Company currently leases its existing corporate headquarters and certain distribution facilities located in Colton, California. The current lease contains multiple lease options that gives the Company the right to control the property through May 2038. The annual rent for each option period is fixed and is deemed to be below market value. On July 19, 2007 the Company entered into a fifteen year sublease with a third party (the “Sublessee”), which also contains three, five year lease options. Under the sublease, the sublessee agreed to assume all lease payments and other liabilities under the lease and the sublessee paid the Company $2.0 million for the rights to the lease. The $2.0 million received from the sublessee will be amortized into income over the life of the initial sublease. On July 19, 2007, the Company exercised lease options to extend the current lease under the master lease agreement to May 2023.

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

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

Self-Insurance Reserves

We are primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. We are covered by umbrella insurance policies for catastrophic events. We record our self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates we use are based on our historical experiences as well as current facts and circumstances. We use third party actuarial analysis in making our estimates. Actuarial projections and our estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in compensation benefits structure. Recent legislative actions within California and efforts we have made within our stores to reduce claims have somewhat limited the severity of workers’ compensation claims. However, no assurances can be given that future legislative events, medical expenses and other loss factors will not require a change in our estimates. We discounted our workers’ compensation, automobile and general liability insurance reserves at a discount rate of 5.8% and 5.5% for the thirty-nine weeks ended June 24, 2007 and June 25, 2006, respectively. 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 June 24, 2007, if the rate utilized to discount the reserves were increased or decreased by 1.0%, the reserves for self insurance would have been $1.2 million higher or $1.1 million lower.

Employee Benefit Plans

The determination of our obligation and expense for pension benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions are disclosed in Note 6 — Retirement Plans in the accompanying notes to the Consolidated Financial Statements contained herein and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation changes. In accordance with U.S. generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in our actual experience or significant changes in the assumptions may materially affect our pension obligations and expense for pension benefits.

For the thirty-nine weeks of fiscal 2007, the discount rate used to calculate the net periodic pension cost was 5.8%. If the rate used to discount the net periodic pension cost was 4.8%, net periodic pension cost would have been $624,000 higher than the cost calculated at a 5.8% discount rate. If the rate used to calculate the net periodic pension cost was 6.8%, net periodic pension cost would have been $525,000 lower than the cost calculated at the 5.8% discount rate.

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

CRITICAL ACCOUNTING POLICIES (contd.)

Employee Benefit Plans (contd.)

We also participate in various multi-employer defined contribution retirement plans for all of our employees represented by labor unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements, generally based on the number of hours worked. Pension expenses for these plans are recognized as contributions are funded.

Long-Lived Assets

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

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

Income Taxes

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

Goodwill

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

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

CRITICAL ACCOUNTING POLICIES (contd.)

Store Closing Costs

We provide liabilities related to store closures for the present value of the estimated remaining noncancellable lease payments and related ancillary costs after the closing date, net of estimated subtenant income. We estimate the net lease liabilities using a risk free discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities are usually paid over the lease terms.

Advertising Allowances

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

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

Gift Cards and Certificates

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

Significant Accounting Policies

In addition to the critical accounting policies disclosed above, there are certain accounting policies that we have adopted that may differ from policies of other companies within the same industry. Such differences in the treatment of these policies may be important to the readers of our report on Form 10-Q and our unaudited consolidated financial statements contained herein. For further information regarding our accounting policies, refer to the significant accounting policies included in the notes to the consolidated financial statements contained herein and in our report on Form 10-K/A for the year ended September 24, 2006.

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

OWNERSHIP OF THE COMPANY

La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust dated June 29, 2000, holds all of our issued and outstanding capital stock. Jack H. Brown, the Chairman of the Board, President and Chief Executive Office of Stater Bros., is the Managing General Partner of La Cadena with the power to vote the shares of our capital stock held by La Cadena on all matters, including with respect to the election of our board of directors, and any other matters requiring shareholder approval.

EXECUTIVE OVERVIEW

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

During the thirty-nine weeks ended June 24, 2007, we completed five major remodels and we are in the process of completing major remodels on four stores. As of June 24, 2007, we had one new store under construction. We continually evaluate our stores for profitability, strategic positioning, impact of competition and sales growth potential and make store opening, store remodel and store closure decisions based on such evaluations.

In the third quarter of fiscal 2007, our sales grew 2.7% over the prior year. Our sales for the thirty-nine weeks ended June 24, 2007, increased 2.4% over the same period in the prior year. For the remainder of fiscal 2007, we anticipate that our sales will continue to grow as we benefit from recently opened stores and as we plan to open an additional supermarket by the end of our fiscal year. We continue to focus on expansion of sales in our existing supermarkets. Our future growth strategy is to continue to construct supermarkets in core market areas and expand or remodel existing supermarkets based upon our review of marketing trends.

Our consolidated gross profit margin, as a percentage of sales, increased for both the thirteen and thirty-nine week periods from the same periods in the prior year as a result of somewhat reduced competitive pricing pressures and by our efforts to focus our advertising markdowns and to control shrink. Our marketing area of Southern California continues to be highly competitive and in flux. We anticipate increased competition from new competitors moving into our marketing area. Competition from the three major national chains, as well as ethnic markets and “big box” retailers, will continue to be on-going.

Construction continues on schedule on our new corporate office and distribution facilities. Our corporate office, dry grocery warehouse, refrigerated warehouse and ancillary buildings are currently under construction. During fiscal 2007, we anticipate the completion of the corporate office and ancillary buildings, with the dry grocery building being completed in the first half of fiscal 2008 and the refrigerated building being completed by the end of fiscal 2008. Once completed, the new corporate office and distribution facilities will allow us to become even more efficient as we will be able to ship from one location rather than our current seven locations in four cities.

We have entered into a new collective bargaining agreement with the United Food and Commercial Workers Union (the “UFCW”). The new collective bargaining agreement became effective in March 2007 and is scheduled to expire in March 2010. On July 23, 2007 the UFCW ratified new four year collective bargaining agreements with our three major competitors.

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

RESULTS OF OPERATIONS


	13 Weeks Ended						Change
	Jun. 25,			Jun. 24,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%

Sales	$	886,221		$	910,229		$	24,008		2.71	%

Gross Profit	$	229,700		$	253,787		$	24,087		10.49	%
as a % of sales		25.92	%		27.88	%


	39 Weeks Ended						Change
	Jun. 25,			Jun. 24,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%

Sales	$	2,617,138		$	2,680,645		$	63,507		2.43	%

Gross Profit	$	688,927		$	745,121		$	56,194		8.16	%
as a % of sales		26.32	%		27.80	%

Sales

The sales increase in the thirteen and thirty-nine weeks of fiscal 2007 over the same periods in fiscal 2006 is the result of the opening of new stores and an increase in like store sales.

Like Store Sales

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

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

For the third quarter of 2007, like store sales increased $14.7 million or 1.7% over third quarter of fiscal 2006. We have opened three new stores since March 27, 2006. These newly opened stores added approximately $12.6 million of sales to the third quarter of fiscal 2007. While like store sales were positive for the third quarter of fiscal 2007, like store sales were impacted by newly opened stores. We estimate that newly opened stores drew $4.0 million of their third quarter 2007 sales from existing stores. Since March 27, 2006, we have closed two stores, which decreased third quarter fiscal 2007 sales by approximately $5.0 million when compared to the prior year.

For the thirty-nine week period of fiscal 2007, like store sales increased 1.6% when compared to the same period in fiscal 2006. We have opened five new stores since September 26, 2005, which added approximately $46.3 million of sales for the thirty-nine week fiscal 2007. A portion of these sales came from sales taken from our existing stores. We estimate that new stores drew approximately $14.0 million of their thirty-nine week fiscal 2007 sales from existing stores. We have closed three stores since September 26, 2005, which reduced fiscal 2007 sales by approximately $19.8 million when compared to fiscal 2006 sales.

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

RESULTS OF OPERATIONS (contd.)

Santee Sales

Santee sales increased $0.8 million in the third quarter and decreased $4.6 million for the thirty-nine week period of fiscal 2007, when compared to the same periods of fiscal 2006. The increase in Santee sales for the third quarter of fiscal 2007 compared to fiscal 2006 is attributed to increased raw milk prices during the quarter. The decrease in sales for thirty-nine week fiscal 2007 is attributed to reductions in sales to Ralphs Grocery Co. and independent retailers and to reduced raw milk prices during the first two quarters of fiscal 2007.

Gross Profit

The increase in gross profit margin, as a percentage of sales in the third quarter and the thirty-nine weeks of fiscal 2007 over the same period for fiscal 2006 is attributed primarily to somewhat reduced competitive pricing pressures and to our efforts to reduce the level of promotional discounting as compared to the prior year. During the thirteen week and thirty-nine week periods ended June 24, 2007, we have made concentrated efforts to focus our advertising markdowns on items within our stores that drive customer traffic and we continue to see improvement in shrink due to initiatives put in place over the last year. Our efforts have had a significant impact in improving gross profit margins in the current fiscal year compared to the prior fiscal year.

Operating Expenses and Income


	13 Weeks Ended						Change
	Jun. 25,			Jun. 24,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%

Operating Expenses:
Selling, general and administrative expenses	$	193,451		$	199,849		$	6,398		3.31	%
as a % of sales		21.83	%		21.96	%

Depreciation and amortization	$	11,898		$	12,313		$	415		3.49	%
as a % of sales		1.34	%		1.35	%

Operating profit	$	24,351		$	41,625		$	17,274		70.94	%
as a % of sales		2.75	%		4.57	%


	39 Weeks Ended						Change
	Jun. 25,			Jun. 24,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%

Operating Expenses:
Selling, general and administrative expenses	$	590,227		$	605,335		$	15,108		2.56	%
as a % of sales		22.55	%		22.59	%

Depreciation and amortization	$	33,315		$	36,282		$	2,967		8.91	%
as a % of sales		1.27	%		1.35	%

Operating profit	$	65,385		$	103,504		$	38,119		58.30	%
as a % of sales		2.50	%		3.86	%

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

RESULTS OF OPERATIONS (contd.)

Selling, General and Administrative Expenses

The increase, as a percentage of sales, in selling, general and administrative expenses in the third quarter of fiscal 2007 compared to the third quarter of fiscal 2006 is due primarily to an increase in direct labor costs, as a percentage of sales, of 0.2% and an increase in deferred benefits expense, as a percentage of sales, of 0.2%, partially offset by a reduction in other labor costs, as a percentage of sales of 0.2% and a reduction in advertising expense, as a percentage of sales of 0.2%. The increase in deferred benefits expense, as a percentage of sales, is attributed to the increase in our net income in the third quarter of fiscal 2007 as compared to the same period in the prior year. Direct labor costs increased as a percentage of sales due to the increase in California minimum wage on January 1, 2007 and higher labor costs related to the new UFCW contract. The reduction in advertising expense, as a percentage of sales is due to our efforts to narrow the width of our ad pages and to reduce the number of pages in our bi-weekly print ads.

Selling, general and administrative expenses, as a percentage of sales, in the thirty-nine week period of fiscal 2007 compared to the same period of fiscal 2006 as a whole were relatively unchanged. While overall selling, general and administrative expenses remained unchanged, deferred benefits expense, as a percentage of sales, increased 0.2%, management incentive bonuses, as a percentage of sales, increased 0.1% and electricity costs, as a percentage of sales, increased 0.1%. These increases were offset by a reduction in other labor costs, as a percentage of sales, of 0.4% and a reduction in advertising expense, as a percentage of sales, of 0.2%. The increase in deferred benefits expense and management incentive bonuses, as a percentage of sales, is attributed to increases in our net income. Other labor costs decreased, as a percentage of sales, as union benefit obligations in fiscal 2007 were reduced from fiscal 2006. Under the new UFCW contract we anticipate direct labor costs, as a percentage of sales, to increase.

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for the third quarters of fiscal 2007 and fiscal 2006 is $248,000 and $243,000, respectively and $774,000 and $721,000 for the thirty-nine weeks ended June 24, 2007 and June 25, 2006, respectively.

Depreciation and Amortization

The increase in depreciation expense in fiscal 2007 compared to fiscal 2006 is due primarily to new store construction, store remodels and other capital expenditures. Included in cost of goods sold is $2.9 million of depreciation in both the third quarters of fiscal 2007 and 2006, and $8.8 million in both the thirty-nine week periods of fiscal 2007 and fiscal 2006 related to dairy production and warehousing and distribution activities.

Interest Income

Interest income was $4.9 million and $2.6 million for the third quarters of fiscal 2007 and 2006, respectively, and $10.5 million and $7.5 million for the thirty-nine week periods of fiscal 2007 and 2006, respectively. Interest income has increased due to higher cash balances and improved interest rate realized on our short-term investments. We expect our interest income to decline in the future as cash on-hand is used in the construction of our new corporate office and distribution facilities.

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

RESULTS OF OPERATIONS (contd.)

Interest Expense

Prior to the effect of the amortization of capitalized interest, interest expense was $19.5 million and $15.4 million for the third quarter of fiscal 2007 and 2006, respectively, and $50.9 million and $46.0 million for the thirty-nine week periods for fiscal 2007 and 2006, respectively. Capitalized interest was $2.6 million and $0.7 million for the third quarter of fiscal 2007 and 2006, respectively, and $6.1 million and $1.7 million for the thirty-nine week periods of fiscal 2007 and 2006, respectively. The increase in interest expense is attributed to paying interest on both the new $285 million 7.75% Senior Notes due in 2015 and the Floating Rates Notes due in 2010 during the third quarter of fiscal 2007. Interest expense also increased due to increased interest rates on the Floating Rate Notes. The $285 million 7.75% Senior Notes were issued on April 18, 2007 and the Floating Rate Notes were redeemed on June 18, 2007. The increase in capitalized interest in fiscal 2007 over fiscal 2006 is attributed to the ongoing construction of the new corporate office and distribution facility.

Interest Related to Debt Purchase

In the third quarter of fiscal 2007, we incurred $4.0 million of interest expense related to the redemption of the Floating Rate Notes. We paid a premium of $1,750,000 to redeem the Floating Rate Notes and we expensed $2.2 million of unamortized debt offering costs related to the Floating Rate Notes.

Income Before Income Taxes

Income before income taxes amounted to $25.9 million and $11.5 million in the third quarters of fiscal 2007 and fiscal 2006, respectively. Income before income taxes amounted to $65.2 million and $27.2 million in the thirty-nine week periods of fiscal 2007 and fiscal 2006, respectively.

Income Taxes

Income taxes amounted to $10.3 million and $5.8 million in the third quarters of fiscal 2007 and fiscal 2006, respectively, and $26.2 million and $12.0 million in the thirty-nine week periods of fiscal 2007 and 2006, respectively. Our effective tax rate was 39.8% and 50.3% for the third quarters of fiscal 2007 and 2006, respectively, and 40.2% and 44.0% for the thirty-nine week periods of fiscal 2007 and 2006, respectively. The larger effective tax rate for fiscal year 2006 was due to the reconciliation of the fiscal 2006 tax return to the provision recorded in the third quarter of fiscal 2006.

Net Income

Net income for the third quarter of fiscal 2007 amounted to $15.6 million compared to $5.7 million in the third quarter of fiscal 2006. Net income for the thirty-nine weeks ended June 24, 2007 amounted to $39.0 million compared to $15.3 million for thirty-nine weeks ended June 25, 2006.

LIQUIDITY AND CAPITAL RESOURCES

We historically fund our daily cash flow requirements through funds provided by operations. We have the ability to borrow under our short-term revolving credit facilities. Markets’ credit agreement, as amended and restated on April 16, 2007 expires in May 2010 and consists of a revolving loan facility for working capital and letters of credit of $100.0 million. The letter of credit facility is maintained pursuant to our workers’ compensation and general liability self-insurance requirements. In addition, Santee’s revolving line of credit includes a credit line of $5.0 million all of which may be used to secure letters of credit. As of June 24, 2007, between Markets’ and Santee’s credit agreements, we had $50.4 million of outstanding letters of credit and we had $54.6 million available under the revolving loan facilities.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

We had no short-term borrowings outstanding as of June 24, 2007 and did not incur short-term borrowings during the quarterly period.

The following table sets forth our contractual cash obligations and commercial commitments as of June 24, 2007.


	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		213,281		42,656		85,313		85,312		—

		738,281		42,656		85,313		610,312		—
Floating Rate Senior Notes due June 2015
Principal	$	285,000	$	—	$	—	$	—	$	285,000
Interest		176,516		21,903		44,175		44,175		66,263

		461,516		21,903		44,175		44,175		351,263
Capital lease obligations⁽¹⁾
Principal	$	7,525	$	974	$	2,421	$	2,854	$	1,276
Interest		4,098		1,140		1,799		940		219

		11,623		2,114		4,220		3,794		1,495

Operating leases⁽¹⁾		271,986		39,167		52,260		37,956		142,603





Total contractual cash obligations	$	1,483,406	$	105,840	$	185,968	$	696,237	$	495,361


	Other Commercial Commitments
	(in thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years

Standby letters of credit⁽²⁾	$	50,433	$	50,433	$	—	$	—	$	—





Total other commercial commitments	$	50,433	$	50,433	$	—	$	—	$	—


⁽¹⁾		We lease the majority of our retail stores, offices, warehouses and distribution facilities. Certain of our operating leases provide for minimum annual payments that change over the primary term of the lease. For purposes of contractual cash obligations shown here, contractual step increases or decreases are shown in the period they are due. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.

⁽²⁾		Standby letters of credit are committed as security for workers’ compensation obligations. Outstanding letters of credit expire between September 2007 and February 2008.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $290.4 million at June 24, 2007 and $233.3 million at September 24, 2006, and our current ratio was 2.07:1 and 1.83:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash provided by operating activities for the thirty-nine weeks ended June 24, 2007 was $92.1 million compared to $36.7 million provided by operating activities for the thirty-nine weeks ended June 25, 2006. Significant sources of cash from operating activities in the thirty-nine weeks of fiscal 2007 included a reduction in restricted cash needed to secure workers’ compensation obligations, an increase in long-term reserves related primarily to increased liability for the deferred benefits plan and income from operations. Significant uses of cash from operations included decreases in accrued liabilities including the payment of deferred benefits liability for retired employees and payment of semi-annual interest on our $525 million 8.125% Notes.

Other significant uses of cash included $34.6 million of capital expenditures during the period for normal new store construction, store remodels and equipment purchases. Historically, new store construction costs, store remodels and equipment expenditures are financed through operating cash flows. In addition, we expended $88.1 million on the new corporate office and distribution center, of which $10.1 million has been classified as a long-term receivable related to a tax increment to be received in future years. We estimate that remaining fiscal 2007 expenditures for the new corporate office and distribution center will be approximately $47.5 million. We are funding the new corporate office and distribution center from cash allocated from the proceeds from the issuance of the 8.125% Senior Notes and the 7.75% Senior Notes. At this time we believe that available financing options will be sufficient to complete the project. However, there can be no assurances that such financing options will be available in the future.

As of June 24, 2007, based upon our consolidated earnings since June 27, 2004 and the initial amount allowed of $25.0 million under the Credit Facility and the Notes’ indenture and, after taking into consideration payments previously made, we had the ability and right to pay a restricted payment of up to $30.2 million.

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

Credit Facilities

Markets Credit Agreement

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

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

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facility will cease to be available and will be payable in full on May 31, 2010. Notwithstanding such maturity date, at any time prior thereto Markets shall be entitled to request the issuance of standby letters of credit having a tenor which is up to one year following such maturity date, and commercial letters of credit having a tenor which is up to 180 days following such maturity date. Loans under the Credit Facility must be repaid for a period of ten consecutive days semi-annually.

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.

The Credit Facility requires Holdings and its subsidiaries to meet minimum shareholders equity and EBITDA 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 Holdings and its subsidiaries, and Holdings is a party to the Credit Facility for purposes of these covenants. These covenants, among other things, limit the ability of Holdings 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.

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.

Santee Credit Agreement

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Santee Revolver will cease to be available and will be payable in full on May 31, 2010. Notwithstanding such maturity date, at any time prior thereto Santee shall be entitled to request the issuance of standby letters of credit having a tenor which is up to one year following such maturity date. Loans under the Santee Revolver must be repaid for a period of thirty consecutive days semi-annually.

The loans under the Santee Revolver 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 IBOR rate. Outstanding letters of credit under the Santee Revolver are subject to a fee of 1.25% per annum on the face amount of such letters of credit, payable quarterly in advance. Santee 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.

The Santee Revolver requires Santee to meet minimum tangible net worth and minimum EBITDA tests. The Santee Revolver contains covenants which, among other things, limit the ability of Santee to (i) incur indebtedness, grant liens and guarantee obligations, and (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates.

The Santee Revolver 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 and material adverse change.

Labor Relations

We have entered into a new collective bargaining agreement with the UFCW, which represents a substantial number of our stores’ hourly union employees. The new collective bargaining agreement became effective in March 2007 and is scheduled to expire in March 2010. Our UFCW members voted to accept the new collective bargaining agreement on January 17, 2007. The new collective bargaining agreement establishes a single-tier pay scale for our employees based on each employee’s seniority and provides gradual increases in hourly wages over a three-year period. These scheduled increases range from a $0.20 increase in hourly wages for clerks to a $3.00 increase in hourly wages for pharmacists. The new collective bargaining agreement provides for decreased contributions by us towards employee health and pension benefits. These benefit contributions match the terms negotiated and ratified on July 23, 2007 between the UFCW and our three major competitors Vons, Albertsons and Ralphs. The financial terms of our collective bargaining agreement and those of our major competitors with respect to matters other than benefits vary but do not contain materially different economic terms.

Santee’s collective bargaining agreement with the Teamsters, which represent approximately 300 dairy operating employees, was renewed in March 2004 and expired in March 2007. Santee has negotiated a new five-year collective bargaining agreement with the Teamsters that we believe is acceptable to all parties. The terms are substantially similar to the Teamsters’ agreement with Markets. We are awaiting the final agreement for signature.

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

Labor Relations (contd.)

Santee also has a collective bargaining agreement with the International Union of Operating Engineers Local No. 501, which covers approximately 20 plant engineering and maintenance employees (Local 501”). The agreement expired on May 31, 2007, and Santee has been negotiating the terms of a new agreement with Local 501. We believe that we have reached agreement on the terms of such new agreement, and are awaiting the final agreement for signature. We anticipate that the new agreement, among other things, will provide for wage increases of $0.40 per hour per year starting on June 1, 2008 and increased contributions by us toward employee health and pension benefits. It is contemplated that the new agreement will expire on May 31, 2012.

We value our employees and believe our relationship with them is good and that employee loyalty and enthusiasm are key elements of our operating performance.

RECENT ACCOUNTING PRONOUNCEMENTS

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. We are currently evaluating the impact of the adoption of FIN 48 on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 states that fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts and establishes a hierarchy that prioritizes the information used to develop fair value assumptions. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of the adoption of SFAS No. 157 on our consolidated financial statements.

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” which requires an entity to (1) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the employer’s fiscal year end and (3) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS No. 158 has a two tiered effective date with recognition of funded status of defined benefit postretirement plan and disclosure requirements effective for fiscal years ending after June 15, 2007 for non-public entities and all other requirements effective for fiscal years ending after December 15, 2008. We are currently evaluating the impact of the adoption of SFAS No. 158 on our consolidated financial statements.

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

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

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

STATER BROS. HOLDINGS INC.
June 24, 2007

PART I — FINANCIAL INFORMATION (contd.)


Item 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are subject to interest rate risk on our fixed interest rate debt obligations and floating rate debt obligations. Our fixed rate debt obligations are comprised of the 8.125% Senior Notes due June 2012, the 7.75% Senior Notes due 2015 and capital lease obligations. In general, the fair value of fixed rate debt will increase as the market rate of interest decreases and will decrease as the market rate of interest increases. The fair values of the 8.125% Senior Notes due June 2012 and the 7.75% Senior Notes due 2015 are based upon quoted market prices. Although quoted market prices are not readily available on our capital lease obligations, we believe that stated values approximate the fair value of these obligations. We have not engaged in any interest rate swap agreements, derivative financial instruments or other type of financial transactions to manage interest rate risk.

Item 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the costs and benefits of such controls and procedures.

As of the quarter ended June 24, 2007, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on our evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that those controls and procedures were effective, at the reasonable assurance level, in ensuring that the information needed to make timely decisions regarding the required disclosures contained in this Report on Form 10-Q was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a timely manner to insure that the information required to be disclosed by us in this Report on Form 10-Q was recorded, processed, summarized and reported within the time period specified for filing of this Report on Form 10-Q.

During the quarter ended June 24, 2007, there were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

STATER BROS. HOLDINGS INC.
June 24, 2007

PART II — OTHER INFORMATION


Item 1.		LEGAL PROCEEDINGS

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/A for the fiscal year ended September 24, 2006.


Item 1A.		RISK FACTORS

Our performance is affected by inflation. In recent years the impact of inflation on our operations has been moderate. As inflation has increased expenses, we have recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

The supermarket industry is a highly competitive industry, which is characterized by low profit margins. Competitive factors typically include the price, quality and variety of products, customer service, and store location and condition. We believe that our competitive strengths include our service departments, everyday low prices, breadth of product selection, high product quality, one-stop shopping convenience, attention to customer service, convenient store locations, a long history of community involvement and established long-term customer base in the Inland Empire (consisting of San Bernardino and Riverside counties) and in the counties of Kern, Orange, San Diego and Los Angeles.

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

STATER BROS. HOLDINGS INC.
June 24, 2007

PART II — OTHER INFORMATION (contd.)


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

On April 18, 2007, we issued $285.0 million of 7.75% Senior Notes in a private placement. These notes are not registered with the Securities and Exchange Commission. The proceeds have or will be used to: (1) redeem on June 18, 2007 all $175 million in aggregate principal amount of the outstanding Floating Rate Notes due 2010; (2) pay costs related to the construction of our new distribution center; (3) redeem on April 27, 2007 $15.0 million in aggregate value of our outstanding Class A Common Stock; (4) pay fees and expenses incurred in connection with the issuance of the $285.0 million 7.75% Senior Notes and the redemption of the Floating Rate Notes; and (5) pay on April 27, 2007, $5.0 million dividend to La Cadena our sole shareholder.


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.

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 8, 2007	/s/	Jack H. Brown

		Jack H. Brown
		Chairman of the Board, President,
		and Chief Executive Officer
		(Principal Executive Officer)

Date: August 8, 2007	/s/	Phillip J. Smith

		Phillip J. Smith
		Executive Vice President
		and Chief Financial Officer
		(Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Stater Bros Inactive 10-Q2007 Q3 Quarterly report

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