Stater Bros 10-Q 2009 Q1 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 December 28, 2008

OR

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

For the transition from                    to                    

Commission file number001-13222

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0350671
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
301 S. Tippecanoe Avenue
San Bernardino, California	92408
(Address of principal executive offices)	(Zip Code)

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

Not Applicable

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

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

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

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

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

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

STATER BROS. HOLDINGS INC.
December 28, 2008

INDEX

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 28, 2008 and December 28, 2008 (Unaudited)		3
Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 30, 2007 and December 28, 2008		5
Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 30, 2007 and December 28, 2008		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosure about Market Risk		23
Item 4. Controls and Procedures		23
PART II OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3. Defaults Upon Senior Securities		25
Item 4. Submission of Matters to a Vote of Security Holders		25
Item 5. Other Information		25
Item 6. Exhibits		25
SIGNATURES		26
EX-31.1
EX-31.2
EX-32.1

2

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

	Sept. 28,		Dec. 28,
	2008		2008
			(Unaudited)
Current assets
Cash and cash equivalents	$	144,942	$	122,503
Restricted cash		5,621		3,121
Receivables, net of allowance of $2,671 and $2,740		52,357		55,874
Income tax receivables		4,636		5,622
Inventories		233,719		242,186
Prepaid expenses		9,311		10,122
Deferred income taxes		26,863		24,063
Total current assets		477,449		463,491
Property and equipment
Land		111,899		111,899
Buildings and improvements		572,496		584,805
Store fixtures and equipment		448,178		452,232
Property subject to capital leases		10,061		10,061
		1,142,634		1,158,997
Less accumulated depreciation and amortization		410,308		423,461
		732,326		735,536
Deferred income taxes, long-term		21,178		22,631
Deferred debt issuance costs, net		14,478		13,675
Long-term receivable		22,228		22,228
Goodwill		2,894		2,894
Other assets		6,322		6,315
		67,100		67,743
Total assets	$	1,276,875	$	1,266,770

See accompanying notes to unaudited consolidated financial statements.

3

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

LIABILITIES AND STOCKHOLDER’S EQUITY

	Sept. 28,			Dec. 28,
	2008			2008
				(Unaudited)
Current liabilities
Accounts payable	$	167,647		$	172,747
Accrued payroll and related expenses		62,223			56,670
Other accrued liabilities		77,088			57,067
Current portion of capital lease obligations		1,162			1,206
Total current liabilities		308,120			287,690
Long-term debt		810,000			810,000
Capital lease obligations, less current portion		5,124			4,805
Long-term portion of self-insurance and other reserves		35,164			40,916
Long-term deferred benefits		66,340			67,542
Other long-term liabilities		11,621			11,770
Total liabilities		1,236,369			1,222,723
Commitment and Contingencies
Stockholder’s equity
Common Stock, $.01 par value:
Authorized shares - 100,000 Issued and outstanding shares - 0		—			—
Class A Common Stock, $.01 par value:
Authorized shares - 100,000 Issued and outstanding shares - 35,152		—			—
Additional paid-in capital		8,939			8,939
Accumulated other comprehensive loss		(5,200	)		(5,200	)
Retained earnings		36,767			40,308
Total stockholder’s equity		40,506			44,047
Total liabilities and stockholder’s equity	$	1,276,875		$	1,266,770

See accompanying notes to unaudited consolidated financial statements.

4

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share and share amounts)

	13 Weeks Ended
	Dec. 30,			Dec. 28,
	2007			2008
Sales	$	943,030		$	959,253
Cost of goods sold		698,601			712,391
Gross profit		244,429			246,862
Operating expenses
Selling, general and administrative expenses		204,318			211,004
Depreciation and amortization		12,908			13,360
Total operating expenses		217,226			224,364
Operating profit		27,203			22,498
Interest income		2,391			205
Interest expense		(13,581	)		(17,100	)
Other income, net		1,875			149
Income before income taxes		17,888			5,752
Income taxes		7,137			2,211
Net income	$	10,751		$	3,541
Earnings per average common shares outstanding	$	300.56		$	100.73
Average common shares outstanding		35,770			35,152
Shares outstanding at end of period		35,770			35,152

See accompanying notes to unaudited consolidated financial statements.

5

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	13 Weeks Ended
	Dec. 30,			Dec. 28,
	2007			2008
Operating activities:
Net income	$	10,751		$	3,541
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		16,107			17,660
Amortization of debt issuance costs		802			803
(Increase) decrease in deferred income taxes		(1,116	)		1,347
Gain on disposals of assets		(1,828	)		(104	)
Changes in operating assets and liabilities:
Decrease in restricted cash		2,500			2,500
Increase in receivables		(7,427	)		(3,517	)
Increase in income tax receivable		—			(986	)
Increase in inventories		(10,802	)		(8,467	)
(Increase) decrease in prepaid expenses		1,455			(6,761	)
Decrease in other assets		16			7
Increase (decrease) in accounts payable		(2,999	)		5,100
Increase in accrued income taxes		2,839			—
Decrease in other accrued liabilities		(31,859	)		(25,574	)
Increase in long-term reserves		6,942			7,103
Net cash used in operating activities		(14,619	)		(7,348	)
Financing activities:
Principal payments on capital lease obligations		(239	)		(275	)
Net cash used in financing activities		(239	)		(275	)
Investing activities:
(Increase) decrease in store construction reimbursement		(2,246	)		5,950
Purchase of property and equipment		(52,625	)		(20,955	)
Proceeds from sale of property and equipment		2,140			189
Net cash used in investing activities		(52,731	)		(14,816	)
Net decrease in cash and cash equivalents		(67,589	)		(22,439	)
Cash and cash equivalents at beginning of period		277,062			144,942
Cash and cash equivalents at end of period	$	209,473		$	122,503
Interest paid	$	32,489		$	32,633
Income taxes paid	$	5,500		$	1,850

See accompanying notes to unaudited consolidated financial statements.

6

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 28, 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. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen weeks ended December 28, 2008 are not necessarily indicative of the results that may be expected for the year ending September 27, 2009.

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

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

Note 2 – Principles of Consolidation

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

Note 3 – Recent Accounting Pronouncements

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

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

7

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 2008

Note 3 – Recent Accounting Pronouncements (contd.)

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

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

     The Company does not have any material tax positions that meet a less than a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During the thirteen weeks ended December 28, 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.

     For federal tax purposes, the Company is subject to review on its fiscal 2006, fiscal 2007 and fiscal 2008 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 2008 state tax returns.

8

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 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. 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, and 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:

	Dec. 30,			Dec. 28,
	2007			2008
	(in thousands)
Expected return on assets	$	(769	)	$	(806	)
Service cost		658			580
Interest cost		876			972
Amortization of prior service cost		(1	)		(1	)
Amortization of recognized losses		146			50
Net pension expense	$	910		$	795
Actuarial assumptions used to determine net pension expense were:
Discount rate		6.25	%		7.50	%
Rate of increase in compensation levels		3.00	%		3.00	%
Expected long-term rate of return on assets		6.50	%		6.50	%

The Company made approximately $1.1 million of contributions to its noncontributory defined pension plan in the thirteen weeks ended December 28, 2008 and the Company expects to contribute an additional $3.3 million during the remainder of fiscal 2009.

9

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 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:

	Retail		All Other			Total
	(in thousands)
Quarter ended December 30, 2007
Sales to external customers	$	912,972	$	30,058		$	943,030
Intersegment sales	$	—	$	26,951		$	26,951
Operating profit	$	26,562	$	641		$	27,203
Net income (loss)	$	17,458	$	(6,707	)	$	10,751
Total assets	$	1,602,623	$	(346,910	)	$	1,255,713
Quarter ended December 28, 2008
Sales to external customers	$	930,643	$	28,610		$	959,253
Intersegment sales	$	—	$	23,616		$	23,616
Operating profit (loss)	$	22,812	$	(314	)	$	22,498
Net income (loss)	$	13,427	$	(9,886	)	$	3,541
Total assets	$	1,681,913	$	(415,143	)	$	1,266,770

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.

10

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 2008

Note 10– Credit Facilities

     Markets’ Credit Facility

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

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

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

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

     The Credit Facility requires Markets to meet certain financial tests, including minimum net worth and the maintenance of minimum earnings levels. 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.

11

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 2008

Note 10– Credit Facilities (contd.)

Santee’s Revolver

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

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

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

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

     As of December 28, 2008, for purposes of both Markets’ Credit Facility and the Santee Revolver with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. However, there can be no assurance that Santee, Markets or the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.

     As of December 28, 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.

     The Company had no short-term borrowings outstanding as of December 28, 2008 and December 30, 2007. During the first quarter of fiscal 2008, the Company incurred $0.8 million in short-term borrowing under Santee’s credit facility which was fully re-paid during the first quarter of fiscal 2008. The Company did not incur any short-term borrowings during the first quarter of fiscal 2009.

Note 11– 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.

12

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

PART I — FINANCIAL INFORMATION (contd.)

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

CRITICAL ACCOUNTING POLICIES

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 used by us 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% for both the thirteen weeks ended December 28, 2008 and December 30, 2007. The analysis of self-insurance liability is sensitive to the rate used to discount the anticipated future cash flows for the workers’ compensation, automobile and general liability insurance reserves. As of December 28, 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 $1.2 million lower, respectively.

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.

The discount rate used to calculate the net periodic pension cost was 7.50% for the first quarter of 2009 and 6.25% for the first quarter of fiscal 2008. If the rate used to discount the net periodic pension cost was 6.50%, net periodic pension cost would have been $133,000 higher than the cost calculated at a 7.50% discount rate. If the rate used to calculate the net periodic pension cost was 8.50%, net periodic pension cost would have been $84,000 lower than the cost calculated at the 7.50% discount rate.

13

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 contribute to 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 over time, 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. Judgment is needed to determine if the recognition threshold is met to recognize the tax position taken or if a liability is needed to record an unrecognized tax liability. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. 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. This review is performed at the end of the fourth quarter unless indicators arise requiring an earlier evaluation. 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 estimate of fair value 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.

14

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 noncancelable lease payments and related ancillary costs after the closing date, net of estimated subtenant income. The lease liabilities for the closed facilities are usually paid over the lease terms.

Advertising Allowances

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

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

Significant Accounting Policies

In addition to the critical accounting policies disclosed above, there are certain accounting policies that we have adopted that may differ from policies of other companies within our industry and other companies as a whole. 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 unaudited consolidated financial statements contained herein and in our report on Form 10-K for the year ended September 28, 2008.

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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. We believe our 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 first quarter of fiscal 2009, we opened one new store, opened one replacement store and closed one store. We also completed three major remodels and were engaged in major remodels on nine stores. As of December 28, 2008, we had two new stores 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 first quarter of fiscal 2009, our sales grew 1.72% over the prior year. For the remainder of fiscal 2009, we anticipate that our sales will continue to grow as we plan to open an additional two new supermarkets by the end of our fiscal year and as we continue to focus on the expansion of sales in our existing supermarkets. Our future growth strategy is to continue to construct supermarkets in our core market areas and expand or remodel existing supermarkets based upon our review of marketing trends.

In the first quarter of fiscal 2009, our consolidated gross profit margin, as a percentage of sales, decreased from the previous year first quarter primarily as a result of our investing in gross margin in order to increase sales, maintain customer base and increase customer count where possible. Our marketing area of Southern California continues to be highly competitive and in flux. With the current economic conditions, this area has seen job losses and business closures which may put further pressure on our gross margin as we endeavor to retain our customer base. We anticipate continued competitive pressures from both existing and new “big box” format competitors, from ethnic markets and from our three major competitors, Vons, Albertsons and Ralphs.

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

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

RESULTS OF OPERATIONS

Sales and Cost of Goods Sold

	Fiscal Period Ended						Change
	Dec. 30,			Dec. 28,			2009 to 2008
(in thousands)	2007			2008			Dollar		%
Sales	$	943,030		$	959,253		$	16,223		1.72	%
Gross Profit	$	244,429		$	246,862		$	2,433		1.00	%
as a % of sales		25.92	%		25.73	%

Sales

The sales increase of $16.2 million or 1.72% in the first quarter of fiscal 2009 over the same period in fiscal 2008 is the result of the opening of a new store, opening a replacement store and increases 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 period, we only include the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year period. For stores that have been closed, we only include the prior year’s weekly sales that correspond to the weeks the stores were opened in the current year. Replacement store sales are included in like store sales.

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.

Like store sales increased $12.7 million or 1.40% over the first quarter of fiscal 2008. While like store sales were positive for the first quarter of fiscal 2009, like store sales were impacted by recent new store openings. We estimate that newly opened stores drew approximately $3.2 million of their first quarter 2009 sales from existing stores.

We have opened two new stores since September 30, 2007. These newly opened stores added approximately $6.5 million of sales to the first quarter of fiscal 2009, none of which has been included in like store sales. Since September 30, 2007, we have closed one store, which decreased fiscal 2009 sales by approximately $2.3 million when compared to fiscal 2008 sales. In the first quarter of fiscal 2009, sales for Santee decreased $1.4 million and pharmacy sales increased $0.8 million over the first quarter of fiscal 2008.

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

RESULTS OF OPERATIONS (contd.)

Gross Profit

The decrease in gross profit margin, as a percentage of sales, in the first quarter of fiscal 2009 over the same period for fiscal 2008 is due to our investing in gross margin in order to increase sales and hold and increase customer count. With the significant competitive activity in our market area and as we and our competitors take steps in these current tough economic times to hold customer base, we anticipate continued pressure on our gross margin in the foreseeable future.

Operating Expenses and Operating Profit

	Fiscal Period Ended						Change
	Dec. 30,			Dec. 28,			2009 to 2008
(in thousands)	2007			2008			Dollar			%
Operating Expenses:
Selling, general and administrative expenses	$	204,318		$	211,004		$	6,686			3.27	%
as a % of sales		21.67	%		21.99	%
Depreciation and amortization	$	12,908		$	13,360		$	452			3.50	%
as a % of sales		1.37	%		1.39	%
Operating profit	$	27,203		$	22,498		$	(4,705	)		(17.30	)%
as a % of sales		2.88	%		2.35	%

Selling, General and Administrative Expenses

The increase, as a percentage of sales, in selling, general and administrative expenses in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 is due primarily to increases, as a percentage of sales, in payroll related expenses under our union contracts. Rates under the contracts have increased for direct labor and benefit costs. Also, our rent expense has increased as a result of new store openings.

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for the first quarters of fiscal 2009 and fiscal 2008 is $287,000 and $255,000, respectively.

Depreciation and Amortization

The increase in depreciation and amortization expense in the first quarter of fiscal 2009 compared to the same period in fiscal 2008 is due primarily to new store construction, store remodels and other capital expenditures. Included in cost of goods sold is $4.3 million and $3.2 million of depreciation and amortization in the first quarters of fiscal 2009 and 2008, respectively, related to dairy production and warehousing and distribution activities. The increase in depreciation and amortization included in cost of goods sold is attributed to depreciation on our distribution center at Norton.

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

RESULTS OF OPERATIONS (contd.)

Interest Income

Interest income was $205,000 and $2.4 million for the first quarters of fiscal 2009 and 2008, respectively. Interest income has significantly decreased due to lower market rates and to lower cash balances on-hand compared to the previous year. We expect our interest income to continue to be lower in the current fiscal year as market rates continue to be depressed.

Interest Expense

Prior to the recognition of capitalized interest, interest expense was $17.3 million for both the first quarters of fiscal 2009 and fiscal 2008. We recognized capitalized interest of $150,000 and $3.7 million for the same periods of fiscal 2009 and fiscal 2008, respectively. The higher amount of interest capitalized in fiscal 2008 is due to our constructing the Norton distribution center during fiscal 2008.

Other Income, Net

In the first quarter of fiscal 2008, we sold shop buildings and land that we owned at a previous store site in Pomona, California for $1.9 million and recognized a pre-tax gain of $1.7 million which is included in Other income, net for fiscal 2008.

Income Before Income Taxes

Income before income taxes amounted to $5.8 million and $17.9 million in the first quarters of fiscal 2009 and fiscal 2008, respectively.

Income Taxes

Income taxes amounted to $2.2 million and $7.1 million in the first quarters of fiscal 2009 and fiscal 2008, respectively. Our effective tax rate was 38.4% and 39.9% for the first quarters of fiscal 2009 and 2008, respectively. The decrease in the effective rate for fiscal 2009 is due primarily to tax credits being applied against lower taxable income in the current year versus the prior year.

Net Income

Net income for the first quarter of fiscal 2009 amounted to $3.5 million compared to $10.8 million in the first quarter of fiscal 2008.

LIQUIDITY AND CAPITAL RESOURCES

We historically fund our daily cash flow requirements through funds provided by operations. We have the ability to borrow under our short-term revolving credit facilities. Markets’ credit agreement, as amended and restated on April 16, 2007 expires in May 2010 and consists of a revolving loan facility for working capital and letters of credit of $100.0 million. The letter of credit facility is maintained pursuant to our workers’ compensation and general liability self-insurance requirements. In addition, Santee’s revolving line of credit includes a credit line of $5.0 million all of which may be used to secure letters of credit. As of December 28, 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 December 28, 2008. During the first quarter of fiscal 2008, we drew $0.8 million in short-term borrowings under Santee’s credit facility which was re-paid in the same quarter. We have had no short-term borrowings in the first quarter of fiscal 2009.

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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 December 28, 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		149,297		42,656		85,313		21,328		—
		674,297		42,656		85,313		546,328		—
7.75% Senior Notes due April 2015
Principal		285,000		—		—		—		285,000
Interest		143,569		22,088		44,175		44,175		33,131
		428,569		22,088		44,175		44,175		318,131
Capital lease obligations(1)
Principal		6,011		1,206		3,028		1,650		127
Interest		2,444		904		1,176		359		5
		8,455		2,110		4,204		2,009		132
Operating leases(1)		347,586		35,137		63,970		51,321		197,158
Total contractual cash obligations	$	1,458,907	$	101,991	$	197,662	$	643,833	$	515,421
	Other Commercial Commitments
	(in thousands)
			Less than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
Standby letters of credit(2)		49,762	$	49,762	$	—	$	—	$	—
Total other commercial commitments		49,762	$	49,762	$	—	$	—	$	—

(1)

We lease the majority of our retail stores. 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 2009 and February 2010.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $175.8 million at December 28, 2008 and $169.3 million at September 28, 2008, and our current ratios were 1.61:1 and 1.55:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash used in operating activities for the thirteen weeks ended December 28, 2008 was $7.3 million compared to $14.6 million used in operating activities for the thirteen weeks ended December 30, 2007. Significant uses of cash in operating activities in the first quarter of fiscal 2009 included semi-annual interest payment on our long-term debt and increases in inventory levels to meet holiday sales demands.

Other significant uses of cash in the thirteen weeks ended December 28, 2008 included $16.6 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 $4.4 million on our new corporate office and distribution center.

As of December 28, 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’ Indentures and, after taking into consideration payments previously made, we had the ability and right to pay a restricted payment of up to $28.3 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 extends through March 2011. Our collective bargaining agreement with the International Brotherhood of Teamsters was renewed in September 2005 and expires in September 2010. Santee’s collective bargaining agreement with the International Brotherhood of Teamsters was renewed in July 2007 and expires in February 2012. We believe we have good relations with our employees.

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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STATER BROS. HOLDINGS INC.
DECEMBER 28, 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 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 28, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 28, 2008. There were no material changes in our internal control over financial reporting during the first quarter of 2009.

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STATER BROS. HOLDINGS INC.
DECEMBER 28, 2008

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

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

Item 1A.RISK FACTORS

Our performance is affected by inflation. 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. However, the economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

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

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

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STATER BROS. HOLDINGS INC.

DECEMBER 28, 2008

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.

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STATER BROS. HOLDINGS INC.

Signatures

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

Date: February 11, 2009	/s/ Jack H. Brown
	Jack H. Brown
	Chairman of the Board, President,      and Chief Executive Officer      (Principal Executive Officer)

Date: February 11, 2009	/s/ Phillip J. Smith
	Phillip J. Smith
	Executive Vice President      and Chief Financial Officer      (Principal Financial Officer)

26