Stater Bros 10Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

X quarterly report pursuant to section13 or15(d) of the securities

exchange act of 1934

For the quarterly period ended June 29, 2008

transition report pursuant to section13 or15(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 (State or other jurisdiction of incorporation or organization)		33-0350671 (I.R.S. Employer Identification No.)


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


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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx 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 filerx	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

As of August 13, 2008, there were issued and outstanding
35,770 shares of the registrant’s Class A Common Stock.

STATER BROS. HOLDINGS INC.
June 29, 2008

INDEX



PART I	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2007 and June 29, 2008 (Unaudited)	3

	Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 24, 2007 and June 29, 2008	5

	Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 24, 2007 and June 29, 2008	6

	Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 24, 2007 and June 29, 2008	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	28

Item 4T.	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

PART I - - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS


	Sept. 30,		June 29,
	2007		2008
			(Unaudited)
Current assets
Cash and cash equivalents	$	277,062	$	164,070
Restricted cash		8,121		5,621
Receivables, net of allowance of $1,006 in 2007 and $2,060 in 2008		46,391		53,155
Inventories		202,073		221,290
Prepaid expenses		11,026		10,432
Deferred income taxes		23,939		25,484


Total current assets		568,612		480,052

Property and equipment
Land		112,029		111,492
Buildings and improvements		479,808		587,170
Store fixtures and equipment		403,052		424,595
Property subject to capital leases		24,747		10,061

		1,019,636		1,133,318

Less accumulated depreciation and amortization		389,992		413,221


		629,644		720,097

Deferred income taxes, long-term		22,889		29,510
Deferred debt issuance cost, net		17,671		15,272
Long-term receivable		22,228		22,228
Goodwill		2,894		2,894
Other assets		6,340		6,337


		72,022		76,241


Total assets	$	1,270,278	$	1,276,390

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


	Sept. 30,			June 29,
	2007			2008
				(Unaudited)
Current liabilities
Accounts payable	$	187,978		$	184,139
Accrued payroll and related expenses		60,761			55,306
Other accrued liabilities		77,109			50,213
Accrued income taxes		4,727			31
Current portion of capital lease obligations		1,008			1,121


Total current liabilities		331,583			290,810

Long-term debt		810,000			810,000
Capital lease obligations, less current portion		6,285			5,430
Long-term portion of self-insurance and other reserves		36,307			40,497
Long-term deferred benefits		57,388			67,923
Other long-term liabilities		19,436			18,990


Total liabilities		1,260,999			1,233,650

Commitment and contingencies

Stockholder’s equity
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 0		-			-
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 35,770		-			-
Additional paid-in capital		9,096			9,096
Accumulated other comprehensive loss		(9,037	)		(9,037	)
Retained earnings		9,220			42,681


Total stockholder’s equity		9,279			42,740


Total liabilities and stockholder’s equity	$	1,270,278		$	1,276,390

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 24,			June 29,
	2007			2008
Sales	$	910,229		$	932,668
Cost of goods sold		656,442			683,447


Gross profit		253,787			249,221

Operating expenses
Selling, general and administrative expenses		199,849			207,853
Depreciation and amortization		12,313			12,996


Total operating expenses		212,162			220,849


Operating profit		41,625			28,372

Interest income		4,930			962
Interest expense		(16,829	)		(14,904	)
Interest related to debt purchase		(3,953	)		-
Other income, net		159			99


Income before income taxes		25,932			14,529

Income taxes		10,330			5,350


Net income	$	15,602		$	9,179


Earnings per average common share outstanding	$	431.26		$	256.61


Average common shares outstanding		36,178			35,770


Shares outstanding at end of period		35,770			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 24,			June 29,
	2007			2008
Sales	$	2,680,645		$	2,801,059
Cost of goods sold		1,935,524			2,051,131


Gross profit		745,121			749,928

Operating expenses
Selling, general and administrative expenses		605,335			620,703
Depreciation and amortization		36,282			39,069


Total operating expenses		641,617			659,772


Operating profit		103,504			90,156

Interest income		10,475			4,975
Interest expense		(44,863	)		(42,907	)
Interest related to debt purchase		(3,953	)		-
Other income (expenses), net		(9	)		2,839


Income before income taxes		65,154			55,063

Income taxes		26,190			21,602


Net income	$	38,964		$	33,461


Earnings per average common share outstanding	$	1,062.96		$	935.45


Average common shares outstanding		36,656			35,770


Shares outstanding at end of period		35,770			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 24,			June 29,
	2007			2008
Operating activities:
Net income	$	38,964		$	33,461
Adjustments to reconcile net income to net cash provided by operating activities:
Premium paid on purchase of debt		(1,750	)		-
Depreciation and amortization		45,060			49,894
Amortization of debt issuance costs		4,623			2,399
Increase in deferred income taxes		(6,115	)		(8,166	)
(Gain) Loss on disposals of assets		143			(2,544	)
Changes in operating assets and liabilities:
Decrease in restricted cash		16,000			2,500
Increase in receivables		(9,363	)		(541	)
Decrease in income tax receivables		3,863			-
Increase in inventories		(3,297	)		(19,217	)
Decrease in prepaid expenses		1,411			582
(Increase) decrease in other assets		(287	)		3
Decrease in accounts payable		(2,192	)		(3,839	)
Increase (decrease) in accrued income taxes		7,093			(4,696	)
Decrease in other accrued liabilities		(14,429	)		(32,351	)
Increase in long-term reserves		12,413			14,279


Net cash provided by operating activities		92,137			31,764


Financing activities:
Stock redemption		(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		(823	)		(742	)


Net cash provided by (used in) financing activities		82,698			(742	)


Investing activities:
Decrease in short-term investments		26,849			-
Increase in store construction reimbursements		(3,679	)		(6,223	)
Increase in long-term receivable		(10,068	)		-
Purchase of property and equipment		(112,590	)		(141,060	)
Proceeds from sale of property and equipment		204			3,269


Net cash used in investing activities		(99,284	)		(144,014	)


Net increase (decrease) in cash and cash equivalents		75,551			(112,992	)
Cash and cash equivalents at beginning of period		198,545			277,062


Cash and cash equivalents at end of period	$	274,096		$	164,070


Interest paid	$	57,278		$	65,437
Income taxes paid	$	21,350		$	34,550

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

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. They do not include certain footnotes and financial presentations normally required under U.S. generally accepted accounting principles and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2007. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results for the interim periods are not necessarily indicative of results for the full year ending September 28, 2008. The September 30, 2007 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2007.

Note 2 – Principles of Consolidation

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

Note 3 – Recent Accounting Pronouncements

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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115.”SFAS No. 159 permits a company to measure certain financial instruments and certain other items at fair value at specific election dates. The fair value option may be applied on an instrument by instrument basis, the election option is irrevocable once elected and the election must be applied to the entire instrument. Unrealized gains and losses on instruments for which the fair value option has been elected shall be reported in earnings at each subsequent reporting date. SFAS No. 159 will become effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of the adoption of SFAS No. 159 on its consolidated financial statements.

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

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 3 – Recent Accounting Pronouncements (contd.)

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles.SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s financial position or results of operations.

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 – Income Taxes

The Company does not have any tax positions that meet a less than a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During the thirty-nine weeks ended June 29, 2008, there have been no material changes to the amount of uncertain tax positions.

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

During the first quarter of fiscal 2008, the Internal Revenue Service (“IRS”) concluded their review of the federal tax returns for the Company’s fiscal 2004 and fiscal 2005 tax returns and the IRS made no changes to the Company’s reported taxes. For federal tax purposes, the Company is subject to review on its fiscal 2006 and fiscal 2007 tax returns. The Company is currently under audit for its fiscal 2005 state tax return by the State of California’s Franchise Tax Board (“FTB”). To date, the FTB has only made information document requests related to net operating losses and MIC tax credits generated by Santee. For state tax purposes, the Company is subject to review on its fiscal 2005 through fiscal 2007 state tax returns.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 7 – 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. The market value of plan assets is calculated using fair market values as provided by a third-party trustee. The plan’s investments include cash, which earns interest, governmental securities, and corporate bonds and securities, all of which have quoted market values.

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


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	June 24,			June 29,			June 24,			June 29,
	2007			2008			2007			2008
	(in thousands)						(in thousands)
Expected return on assets	$	(663	)	$	(784	)	$	(1,989	)	$	(2,353	)
Service cost		664			658			1,994			1,973
Interest cost		813			899			2,438			2,699
Amortization of prior service cost		(1	)		(1	)		(2	)		(2	)
Amortization of recognized losses		223			150			669			452
Net pension expense	$	1,036		$	922		$	3,110		$	2,769


Actuarial assumptions used to determine net pension expense were:

Discount rate		5.80	%		6.25	%		5.80	%		6.25	%
Rate of increase in compensation levels		3.00	%		3.00	%		3.00	%		3.00	%
Expected long-term rate of return on assets		5.00	%		6.50	%		5.00	%		6.50	%

The Company made approximately $4.9 million of contributions to its noncontributory defined pension plan during the thirty-nine weeks ended June 29, 2008 and the Company does not expect to make any additional contributions during the remainder of fiscal 2008.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 8 –Segment Information

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

The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and thirty-nine week periods ended June 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 assets as of 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.

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


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

Total assets as of June 29, 2008 amounted to $1.7 billion for the Retail segment and $(377.4) million for all other for a total of $1.3 billion in consolidated total assets.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 9 – Subsidiary Guarantee

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

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

Note 10–Issuance of New Debt and Early Extinguishment of Debt

On April 18, 2007, the Company issued $285.0 million in aggregate principal amount of 7.75% Senior Notes due April 15, 2015 in a private offering. The 7.75% Senior Notes were unregistered and are unsecured obligations of the Company. On September 7, 2007, the Company completed the exchange of the unregistered 7.75% Senior Notes due April 15, 2015 for virtually identical registered $285.0 million 7.75% Senior Notes due April 15, 2015 collectively (the “7.75% Senior Notes”). The Company incurred $7.2 million of debt issuance costs related to the issuance of the 7.75% Senior Notes, which will be amortized over the term to interest expense.

On June 18, 2007, the Company used part of the proceeds from the issuance of the 7.75% Senior Notes to redeemed all of its $175.0 million Floating Rate Senior Notes due 2010 (the “Floating Rate Senior Notes”) for $176.8 million which included a redemption premium of $1.8 million, plus accrued interest. In connection with the redemption of the Floating Rate Senior Notes, the Company expensed approximately $2.2 million of unamortized deferred offering costs related to the Floating Rate Senior Notes, in the third quarter of fiscal 2007. The $1.8 redemption premium and the $2.2 million of unamortized deferred offering costs were expensed to “Interest related to debt purchase” in the unaudited consolidated statements of income.

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.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 12 – New Corporate Office and Distribution Center

During the second quarter of fiscal 2008, the Company completed the construction of its new grocery distribution facility at the former Norton Air Force base (“Norton”). Construction continues on the refrigerated distribution facility, the final component of the Norton distribution center. Completion of the refrigerated distribution facility is anticipated in September 2008.

In the second quarter of fiscal 2008, the Company vacated its old grocery warehouses and moved all grocery product and operations to the new grocery distribution facility at Norton. The Company has recorded exit costs of $0.8 million in the third quarter of fiscal 2008 and $2.8 million for the thirty-nine weeks ended June 29, 2008, for the estimated remaining lease payments and related ancillary costs on the old grocery warehouses from the time of closures until the lease termination dates or estimated sub-lease dates. These exit costs have been included in “Selling, general and administrative expenses” in the unaudited consolidated statements of income and in “Other accrued liabilities” on the unaudited consolidated balance sheets as of June 29, 2008.

The following table reconciles the Company’s reserve for closures for the thirteen week and thirty-nine week periods ended June 29, 2008.


	Thirteen		Thirty-nine
	weeks ended		weeks ended
	June 29, 2008		June 29, 2008
	(in thousands)		(in thousands)
Reserve for closures at beginning of period	$	2,588	$	731
Additional amounts reserved during period		834		2,800
Amounts paid or otherwise settled during period		(1,299)		(1,408)

Reserve for closures at end of period	$	2,123	$	2,123

Note 13 – Credit Facilities

Markets’ Credit Facility

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

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

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 13 – Credit Facilities (contd.)

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

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

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

Santee’s Revolver

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

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

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

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

As of June 29, 2008, between Market’s and Santee’s credit agreements, the Company had $49.8 million of outstanding letters of credit and it had $55.2 million available under the revolving credit facilities.

As of June 29, 2008, for purposes of the credit facilities with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. However, there can be no assurance that Santee, Markets or the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 29, 2008

Note 14– 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.

In April of 2006, the Landlord under a Ground Lease for a supermarket occupied by Markets in the city of Fountain Valley, California filed an Action against Markets and the Lessee under a Sub-Ground Lease alleging that Markets failed to timely exercise its option to extend the term of the Ground Lease. The original Complaint filed in the California Superior Court for the County of Orange was amended to a Reformation and Declaratory Relief Cause of Action seeking determination of the parties’ rights under the Ground Lease and Sub-Ground Lease including a damage claim for additional rent of approximately $1.4 million. This case was settled in May of 2008 pursuant to a settlement agreement whereby Markets agreed to pay fair market value rent under the Ground Lease commencing June 1, 2008 and continuing through the end of the Lease term in August of 2014, which obligation has been appropriately reflected in the accompanying unaudited consolidated financial statements. Markets was not required to pay any additional rent for prior periods under the settlement agreement.

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. We discounted our workers’ compensation, automobile and general liability insurance reserves at a discount rate of 6.25% and 5.80% for the thirty-nine weeks ended June 29, 2008 and June 24, 2007, 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 29, 2008, if the rate utilized to discount the reserves were increased or decreased by 1.0%, the reserves for self insurance would have been $1.3 million higher or $1.3 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 7 – Retirement Plans in the accompanying notes to the unaudited consolidated financial statements contained herein and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation changes. In accordance with U.S. generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in our actual experience or significant changes in the assumptions may materially affect our pension obligations and expense for pension benefits.

For the thirty-nine weeks ended June 29, 2008, the discount rate used to calculate the net periodic pension cost was 6.25%. If the rate used to discount the net periodic pension cost was 5.25%, net periodic pension cost would have been $589,000 higher than the cost calculated at a 6.25% discount rate. If the rate used to calculate the net periodic pension cost was 7.25%, net periodic pension cost would have been $497,000 lower than the cost calculated at the 6.25% 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. While we expect contributions to these plans to continue to increase, the amount of increase or decrease will depend upon the outcome of collective bargaining, actions taken by trustees and the actual return on assets held in these plans. For these reasons, it is not practicable for us to determine the amount by which multi-employer pension contributions will increase or decrease.

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

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

Income Taxes
We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Judgment is needed to determine if the recognition threshold is met to recognize the tax position taken or if a liability is needed to record an unrecognized tax liability. In 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 comparing discounted projected cash flows to the 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.)

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

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

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

Gift Cards and Certificates
We recognize a liability when gift cards are sold and recognize sales revenue when the gift cards are used to purchase our products. Gift cards do not have an expiration date and we do not charge any service fees that cause a decrement to customer balances. While we will indefinitely honor all redeemable gift cards presented for payment, we may determine the likelihood of redemption to be remote for unredeemed card balances due to, among other things, long periods of inactivity. In these circumstances, to the extent there is no requirement for remitting card balances to government agencies under unclaimed property laws, gift card balances may be recognized as 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 for the year ended September 30, 2007.

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 holds all of our issued and outstanding capital stock. Jack H. Brown, the Chairman of the Board, President and Chief Executive Office of the Company, is the Managing General Partner of La Cadena with the power to vote the shares of our capital stock held by La Cadena on all matters, including with respect to the election of our Board of Directors, and any other matters requiring shareholder approval.

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

During the thirty-nine weeks ended June 29, 2008, we completed major remodels on seven stores. As of June 29, 2008, we had three new stores under construction and were engaged in major remodels on nine stores. 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 2008, our sales grew 2.47% over the prior year. Comparison of third quarter sales was affected by the timing of the Easter holiday. Easter fell in the second quarter of fiscal 2008 and the third quarter of fiscal 2007. Taking into effect the timing of the Easter holiday, we estimated that sales grew by 2.92% in the third quarter of fiscal 2008 over the same period in the prior year. Our sales for the thirty-nine weeks ended June 29, 2008, increased 4.49% over the same period in the prior 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, decreased for both the thirteen and thirty-nine week periods from the same periods in the prior year as a result of inflationary product cost increases that were not fully passed on to our customers and as we reduced pricing on selected items to maintain our customer base and to increase sales. Our marketing area of Southern California continues to be highly competitive and in flux. We anticipate continued competitive pressures from both existing and new “big box” format competitors, from ethnic markets and from our three major competitors, Vons, Albertsons and Ralphs. In the first quarter of fiscal 2008, the competition in our marketing area increased with the entry of a new foreign competitor, Tesco. Tesco is opening smaller format grocery stores which provide fewer product selection and less customer service than a typical supermarket. To date, the new Tesco stores have had a minimal impact on our sales, however their impact may change as they open additional stores and as they take steps to increase their market share.

During the second quarter of fiscal 2008, we completed the construction of our grocery distribution facility and are now receiving and shipping all warehoused grocery items from our new distribution center at the former Norton Air force Base (“Norton”). Construction continues on the refrigerated distribution facility which is the last remaining component to be completed at the Norton distribution center with its completion anticipated in September 2008.

STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS


	Thirteen Weeks Ended				Change
	June 24,		June 29,		2008 to 2007
*($ in thousands)*	2007		2008		Dollar		%

Sales	$	910,229	$	932,668	$	22,439		2.47%

Gross Profit	$	253,787	$	249,221	$	(4,566)		(1.80)%
as a % of sales		27.88%		26.72%


	Thirteen Weeks Ended				Change
	June 24,		June 29,		2008 to 2007
*($ in thousands)*	2007		2008		Dollar		%

Sales	$	2,680,645	$	2,801,059	$	120,414		4.49%

Gross Profit	$	745,121	$	749,928	$	4,807		0.65%
as a % of sales		27.80%		26.77%

Sales
The sales increase in the thirteen and thirty-nine weeks of fiscal 2008 over the same periods in fiscal 2007 is the result of the opening of new stores and an increase in like store sales. Quarterly sales are affected by the Easter holiday which fell in the second quarter of fiscal 2008 and the third quarter of fiscal 2007.

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

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.

Comparison between third quarter fiscal 2008 and third quarter fiscal 2007 is affected by the timing of the Easter holiday. We estimate that the timing of the Easter holiday increased second quarter fiscal 2007 sales by $4.0 million. After taking into consideration the effect of the Easter holiday, like store sales increased $15.4 million or 1.76% over third quarter of fiscal 2007. While like store sales were positive for the third quarter of fiscal 2008, like store sales were impacted by recent new store openings. We estimate that newly opened stores drew $3.8 million of their third quarter 2008 sales from existing stores. We have opened three new stores since March 26, 2007 which generated approximately $12.2 million in sales in the third quarter of fiscal 2008 of which approximately $10.5 million are not included in like store sales.

For the thirty-nine week period of fiscal 2008 like store sales increased $75.7 million or 2.92% when compared to the same period in fiscal 2007. While like store sales were positive for the thirty-nine weeks ended June 29, 2008, like store sales were impacted by recently opened stores. We estimate that newly opened stores drew $9.3 million of their thirty-nine week fiscal sales from existing stores. We have opened four new stores since September 24, 2006, which generated $52.1 million in sales for the thirty-nine weeks ended June 29, 2008 of which approximately $33.5 million is not included in like store sales. We have closed one store since September 24, 2006, which reduced fiscal 2008 sales by approximately $0.8 million when compared to fiscal 2007 sales.

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

RESULTS OF OPERATIONS (contd.)

Santee Sales
Santee sales decreased by $0.3 million in the third quarter of fiscal 2008 compared to the third quarter of 2007. Santee sales increased by $9.4 million in the thirty-nine week period of fiscal 2008 when compared to the same period of fiscal 2007. The year-to-date increase in sales is attributed to higher milk prices.

Gross Profit
The decrease in gross profit margin, as a percentage of sales, in both the thirteen weeks and thirty-nine weeks ended June 29, 2008, when compared to the same periods of fiscal 2007, is due to product cost increases that were not fully passed on to our customers and as we reduced pricing on selected items to maintain our customer base and to increase sales. We have experienced and continue to experience increases in commodity prices such as fuel, plastics, grains and products associated with these commodities. We have experienced higher transportation cost due to rising fuel prices. In addition, we have had higher warehouse and transportation costs as we have moved from our old grocery warehouses and are transitioning into our new grocery distribution facility at Norton.

Operating Expenses and Income



	Thirteen Weeks Ended				Change
	June 24,		June 29,		2008 to 2007
*($ in thousands)*	2007		2008		Dollar			%
Operating Expenses:
Selling, general and
administrative expenses	$	199,849	$	207,853	$	8,004			4.01%
as a % of sales		21.96%		22.29%

Depreciation and amortization	$	12,313	$	12,996	$	683			5.55%
as a % of sales		1.35%		1.39%

Operating profit	$	41,625	$	28,372	$	(13,253	)		(31.84)%
as a % of sales		4.57%		3.04%


	Thirty-Nine Weeks Ended				Change
	June 24,		June 29,		2008 to 2007
*($ in thousands)*	2007		2008		Dollar			%
Operating Expenses:
Selling, general and
administrative expenses	$	605,335	$	620,703	$	15,368			2.54%
as a % of sales		22.59%		22.16%

Depreciation and amortization	$	36,282	$	39,069	$	2,787			7.68%
as a % of sales		1.35%		1.39%

Operating profit	$	103,504	$	90,156	$	(13,348	)		(12.90)%
as a % of sales		3.86%		3.22%

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 in selling, general and administrative expenses, as a percentage of sales, in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 is attributed primarily to the recognition of additional exit costs related to the closure of our old grocery warehouses and corporate offices of 0.09%, as a percentage of sales, and to increases in property taxes of 0.19%, as a percentage of sales, due to increased property values at Norton. Direct labor increased, as a percentage of sales, in the current year by 0.35%, caused by higher labor rates under the UFCW contract. Manager incentive bonuses and deferred benefit costs decreased, as a percentage of sales, by 0.31% and 0.15%, respectively, due to the reduction in operating profit.

The decline in selling, general and administrative expenses, as a percentage of sales, in the thirty-nine weeks ended June 29, 2008 compared to the thirty-nine weeks ended June 24, 2007 is due primarily to an overall reduction in payroll related costs and to a reduction in advertising expenses. Payroll related cost decreased 0.52%, as a percentage of sales, and consisted primarily of a reduction in union insurance, as a percentage of sales, of 0.31% and a reduction of 0.26%, as a percentage of sales, in manager incentive bonuses and deferred benefits costs. Partially offsetting these labor reductions was an increase in direct labor cost of 0.24%, as a percentage of sales. The reduction in union insurance is due to lower union insurance costs recognized under the current UFCW contract. Direct labor has increased due to higher labor rates under the UFCW contract. Advertising costs, as a percentage of sales, decreased 0.19% as a result of our negotiating lower printing and distribution rates on our twice weekly print advertisements. For the thirty-nine weeks ended June 29, 2008, we recognized $2.8 million or 0.10%, as a percentage of sales, in exit costs related to the closure of our old grocery warehouses and corporate offices. We have calculated our exit costs based on the remaining lease payments and related ancillary costs on our old grocery warehouses from the time of these warehouse closures until the lease termination dates or estimated sub-lease dates. These exit costs have been included in the “Selling, general and administrative expenses” in the unaudited consolidated statements of income and in the “Other accrued liabilities” on the unaudited consolidated balance sheets as of June 29, 2008.

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 2008 and fiscal 2007 is $301,000 and $248,000, respectively, and $871,000 and $774,000 for the thirty-nine weeks ended June 29, 2008 and June 24, 2007, respectively.

Depreciation and Amortization
The increase in depreciation expense in the thirteen week and thirty-nine week periods ended June 29, 2008 compared to the same periods of fiscal 2007 is due to the commencement of depreciation expense on our new corporate office building in October 2007 and to opening new stores, remodeling existing stores and other capital expenditures. Included in cost of goods sold is depreciation expense related to our dairy production and our warehousing and transportation activities of $4.2 million and $2.9 million in the third quarter of fiscal 2008 and fiscal 2007, respectively, and $10.8 million and $8.8 million in the thirty-nine week fiscal 2008 and 2007, respectively. Our depreciation expense in cost of goods sold has increased due to our occupying our new grocery distribution facility at Norton in February 2008.

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

RESULTS OF OPERATIONS (contd.)

Interest Income
Interest income was $1.0 million and $4.9 million for the third quarters of fiscal 2008 and 2007, respectively, and $5.0 million and $10.5 million for the thirty-nine week periods of fiscal 2008 and 2007, respectively. Interest income has decreased due to lower interest rate yields in the current year compared to the prior year and to lower cash reserves as we have used cash on-hand to build our new office and distribution center at Norton. We anticipate that our interest income will continue to decline in the future as we use cash on-hand to complete the new refrigerated distribution facility, the final phase of our new office and distribution center.

Interest Expense
Interest expense was $14.9 million and $16.8 million for the third quarters of fiscal 2008 and fiscal 2007, respectively. Interest expense was higher in the third quarter of fiscal 2007 primarily because we had both our $175.0 million Floating Rate Senior Notes due 2010 (“Floating Rate Senior Notes”) and our $285.0 million 7.75% Senior Notes due 2015 (“7.75% Senior Notes”) outstanding during the third quarter of fiscal 2007. The 7.75% Senior Notes were issued on April 18, 2007 and the Floating Rate Senior Notes were redeemed on June 18, 2007.

Interest expense was $42.9 million and $44.9 for the thirty-nine weeks of fiscal 2008 and fiscal 2007 respectively. The reduction in interest expense in the current year is due primarily to $2.7 million more of interest being capitalized in the current year due to our construction of the Norton distribution center and to both the 7.75% Senior Notes and the Floating Rate Senior Notes being outstanding in the third quarter of fiscal 2007. Offsetting these savings in interest expense was higher incurred interest cost due to the $285.0 million 7.75% Senior Notes being outstanding in the current fiscal year versus the $175.0 million Floating Rate Senior Notes being outstanding in the prior year.

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 Senior Notes. We paid a premium of $1.8 million to redeem the Floating Rate Senior Notes and we expensed $2.2 million of unamortized debt offering costs related to the Floating Rate Senior Notes.

Other Income/Expenses, net
In the first quarter of fiscal 2008, we sold shop buildings and land that we owned at a previous store site in Pomona, California for $1.9 million and recognized a pre-tax gain of $1.7 million. In the second quarter of fiscal 2008, we sold a satellite dairy distribution facility in San Bernardino, California for $1.0 million and recognized a pre-tax gain of $0.6 million. This property was acquired by the State of California to make way for a freeway expansion.

Income Before Income Taxes
Income before income taxes amounted to $14.5 million and $25.9 million in the third quarters of fiscal 2008 and fiscal 2007, respectively. Income before income taxes amounted to $55.1 million and $65.2 million in the thirty-nine week periods of fiscal 2008 and fiscal 2007, respectively.

Income Taxes
Income taxes amounted to $5.4 million and $10.3 million in the third quarters of fiscal 2008 and fiscal 2007, respectively, and $21.6 million and $26.2 million in the thirty-nine week periods of fiscal 2008 and 2007, respectively. Our effective tax rate was 36.8% and 39.8% for the third quarters of fiscal 2008 and 2007, respectively, and 39.2% and 40.2% for the thirty-nine week periods of fiscal 2008 and 2007, respectively. The reduction in the effective tax rate in the third quarter of fiscal 2008 versus the third quarter of fiscal 2007 is due primarily to our being able to utilize state tax credits related to the construction of our new distribution center.

Net Income
Net income amounted to $9.2 million and $15.6 million in the third quarters of fiscal 2008 and fiscal 2007 respectively. Net income for the thirty-nine weeks ended June 29, 2008 amounted to $33.5 million compared to $39.0 million for the thirty-nine weeks ended June 24, 2007.

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

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 29, 2008, between Markets’ and Santee’s credit agreements, we had $49.8 million of outstanding letters of credit and we had $55.2 million available under the revolving loan facilities.

We had no short-term borrowings outstanding as of June 29, 2008. During the first quarter of fiscal 2008, we incurred $0.8 million in short-term borrowings under Santee’s credit facility which was fully re-paid during the first quarter of fiscal 2008.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The following table sets forth our contractual cash obligations and commercial commitments as of June 29, 2008.


	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		170,625		42,656		85,313		42,656		-

		695,625		42,656		85,313		567,656		-

7.75 % Senior Note due April 2015
Principal	$	285,000	$	-	$	-	$	-	$	285,000
Interest		154,613		22,088		44,175		44,175		44,175


		439,613		22,088		44,175		44,175		329,175
Capital lease obligations⁽¹⁾
Principal	$	6,551	$	1,121	$	2,810	$	2,106	$	514
Interest		2,957		989		1,403		528		37


		9,508		2,110		4,213		2,634		551
Operating leases⁽¹⁾		331,494		37,382		61,027		49,723		183,362

Total contractual cash obligations	$	1,476,240	$	104,236	$	194,728	$	664,188	$	513,088


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

Standby letters of credit⁽²⁾	$	49,774	$	49,774	$	-	$	-	$	-

Total other commercial commitments	$	49,774	$	49,774	$	-	$	-	$	-

⁽¹⁾We lease the majority of our retail stores, perishable goods warehouses and old grocery warehouses. 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 2008 and February 2009.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $189.2 million at June 29, 2008 and $237.0 million at September 30, 2007, and our current ratios were 1.65:1 and 1.71:1, 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 29, 2008 was $31.8 million compared to $92.1 million for the thirty-nine weeks ended June 24, 2007. Significant uses of cash from operating activities in the thirty-nine weeks of fiscal 2008 were increases in inventory and a reduction in other accrued liabilities offset by increases in workers compensation reserves and deferred benefits obligations. Inventory levels have increased as we have transitioned into our new grocery distribution facility and as we have added one new store. The new grocery distribution facility has significantly increased our storage capacity and we may increase inventory levels in the future as forward buy opportunities arise that would warrant advance purchase of product. The reduction in accrued liabilities is primarily the result of the timing of interest payments on our long-term debt.

Other significant uses of cash in the thirty-nine weeks ended June 29, 2008 included $141.1 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. We expended $101.9 million on the new corporate office and distribution center. We estimate that remaining fiscal 2008 expenditures for the distribution center will be $25.0 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 29, 2008, 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 $35.6 million.

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115.”SFAS No. 159 permits a company to measure certain financial instruments and certain other items at fair value at specific election dates. The fair value option may be applied on an instrument by instrument basis, the election option is irrevocable once elected and the election must be applied to the entire instrument. Unrealized gains and losses on instruments for which the fair value option has been elected shall be reported in earnings at each subsequent reporting date. SFAS No. 159 will become effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of SFAS No. 159 on our consolidated financial statements.

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

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

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

STATER BROS. HOLDINGS INC.
JUNE 29, 2008

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

Item 4T.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of June 29, 2008, 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.

Changes in Internal control Over Financial Reporting

During the thirty-nine weeks ended June 29, 2008, 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.

Limitations on Effectiveness of Controls

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, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are necessarily required to apply our judgment in evaluating the costs and benefits of such controls and procedures.

STATER BROS. HOLDINGS INC.
JUNE 29, 2008

PART II - OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

In April of 2006, the Landlord under a Ground Lease for a supermarket occupied by Markets in the city of Fountain Valley, California filed an Action against Markets and the Lessee under a Sub-Ground Lease alleging that Markets failed to timely exercise its option to extend the term of the Ground Lease. The original Complaint filed in the California Superior Court for the County of Orange was amended to a Reformation and Declaratory Relief Cause of Action seeking determination of the parties’ rights under the Ground Lease and Sub-Ground Lease including a damage claim for additional rent of approximately $1.4 million. This case was settled in May of 2008 pursuant to a settlement agreement whereby Markets agreed to pay fair market value rent under the Ground Lease commencing June 1, 2008 and continuing through the end of the Lease term in August of 2014, which obligation has been appropriately reflected in the accompanying consolidated financial statements. Markets was not required to pay any additional rent for prior periods under the settlement agreement.

For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the notes to consolidated financial statements section of our Form 10-K for the fiscal year ended September 30, 2007.

Item 1A.RISK FACTORS

Our performance is affected by inflation. In recent periods, we have experienced increases in transportation costs and the cost of products we sell in our stores. The increases in our costs are attributed to increases in fuel, plastic, grains and other commodity costs. As inflation has increased expenses, we have recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. Our ability to recover the effect of inflation in the future may be effected by steps taken by our competitors and by the sensitivity of our customers to price increases. The economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

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

STATER BROS. HOLDINGS INC.
JUNE 29, 2008

PART II - OTHER INFORMATION (contd.)

Item 1A.RISK FACTORS (contd.)

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, Albertsons, Ralphs, and a number of independent supermarket operators. We also face competitive pressures from existing and new “big box” format retailers. We expect Vons, Albertsons 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. In addition, we face additional competition with the entry into our marketing area of Tesco, a foreign competitor, in the first quarter of fiscal 2008. Tesco is opening smaller format grocery stores which provide fewer product selection and less customer service than a typical supermarket. Tesco’s current impact on our operations is minimal, however, their impact may be more significant in the future as they take steps to grow sales and increase their market share. We believe our everyday low prices, breadth of product offering, which includes approximately 40,000 items offered for sale in our stores, service departments and long-term customer relationships will assist and complement our ability to compete in this increased competitive environment. We monitor competitive activity and regularly review our marketing and business strategies and periodically adjust them to adapt to changes in our trading area.

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

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

	(a)		Exhibits

	31.1		Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

	32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 13, 2008		/s/ Jack H. Brown
		Jack H. Brown
		Chairman of the Board, President,
		and Chief Executive Officer
		(Principal Executive Officer)

Date: August 13, 2008		/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-Q2008 Q3 Quarterly report

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