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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 28, 2003

OR

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

For the transition from            to           

Commission file number 001-13222

STATER BROS. HOLDINGS INC.

Not Applicable

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.              Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [  ] No [X]

As of February 11, 2004, there were issued and outstanding
38,301 shares of the registrant’s Class A Common Stock.

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STATER BROS. HOLDINGS INC.
DECEMBER 28, 2003

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS

See accompanying notes to unaudited consolidated financial statements.

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

LIABILITIES AND STOCKHOLDERS’ DEFICIT

See accompanying notes to unaudited consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)

See accompanying notes to unaudited consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See accompanying notes to unaudited consolidated financial statements.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 2003

Note 1 - Basis of Presentation

     In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of Stater Bros. Holdings Inc. (the “Company”) and its subsidiaries as of September 28, 2003 and December 28, 2003 and the results of its operations and cash flows for the thirteen weeks ended December 29, 2002 and December 28, 2003. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s latest annual report filed on Form 10-K. The operating results for the thirteen weeks ended December 28, 2003 are not necessarily indicative of the results of operations for a full year.

Note 2 - Income Taxes

     The provision for income taxes for the thirteen weeks ended December 29, 2002 and December 28, 2003 consists of the following:

Note 3 - Unconsolidated Affiliate

     As of December 28, 2003, the Company owned 50% of Santee Dairies LLC. Through its wholly owned subsidiary, Santee Dairies, Inc. (“Santee”), it operates a fluid milk processing plant located in City of Industry, California. The Company was not the controlling stockholder. Accordingly, the Company accounted for its investment in Santee using the equity method of accounting and recognized income of $746,000 and $626,000 for the thirteen weeks ended December 29, 2002 and December 28, 2003, respectively. Subsequent to December 28, 2003, the Company entered into an agreement that transferred control of Santee to the Company (see Note 7). The Company is a significant customer of Santee which supplies the Company with a substantial portion of its fluid milk and dairy products.

Summary of unaudited financial information for Santee is as follows:

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 28, 2003

Note 4 - Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 5 – Reclassifications

     Certain amounts in the prior period have been reclassified to conform to the current year period financial statements presentation.

Note 6 – 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 7 – Subsequent Event

     On January 29, 2004, a final settlement agreement (“the Settlement Agreement”) was executed in an action initiated in July of 2002 by Stater Bros. Markets (“Markets”), a wholly-owned subsidiary the Company, on its own behalf and derivatively on behalf of Santee in the Superior Court of California, County of Los Angeles, against Hughes Markets, Inc. (“Hughes”), Ralphs Grocery Company (“Ralphs”), Fred Meyer, Inc., and the Kroger Company (“Defendants”), alleging among other things breaches of their Product Purchase Agreement with Santee and failure to make certain capital contributions for Santee’s dairy facility in the City of Industry, California. In July of 2003, Defendants filed a cross-complaint against Markets, Santee and others seeking among other things Declaratory Relief for interpretation of the requirements of the Product Purchase Agreements and for damages against Markets, Santee and certain directors of Santee for the adoption of the Milk Incentive Program and payments to Markets under that program and other claims for damages.

     Under the Settlement Agreement, Defendants paid to Markets the sum of one million five hundred fifty thousand dollars ($1,550,000), the Hughes Product Purchase Agreement was terminated, and Ralphs will continue to purchase certain products from Santee in specified quantities through July 31, 2007. In addition, Hughes relinquished to Markets all of its rights, title, and interest in Santee Dairies, LLC, which had been jointly owned by Hughes and Markets since 1986.

     Santee Dairies, LLC will be dissolved and in subsequent periods, Santee’s financial position and results of operations will be consolidated with that of the Company’s.

     As of the date of the Settlement Agreement, Santee had $53,500,000 of 9.36% Senior Secured Notes due 2008 (“Santee Notes”) with various institutional investors. In the event of a change in control of Santee, the Santee Notes required the payment of principal, accrued interest and a make-whole payment. Subsequent to the Settlement Agreement, Markets loaned $55,000,000 to Santee and Santee made payments to the holders of the Santee Notes to retire the Santee Notes.

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STATER BROS. HOLDINGS INC.
DECEMBER 28, 2003

PART I - FINANCIAL INFORMATION (contd.)

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

		CRITICAL ACCOUNTING POLICIES
		The Company’s discussion and analysis of financial condition and results of operations are based upon the Company’s unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the use of estimates and judgements on the part of management. The Company based its estimates on the Company’s historical experience combined with management’s understanding of current facts and circumstances. The Company believes that the following critical accounting policies are the most important to the Company’s financial statement presentation and require the most difficult, subjective and complex judgements on the part of management.
		Revenue Recognition
		The Company recognizes revenue from the sale of its products at the point of sale to the customer. Sales are recognized net of any discounts given to the customer.
		Cost of Goods Sold
		Included in cost of goods sold are direct product purchase costs, all in-bound freight costs, all direct receiving and inspection costs, all quality assurance costs, all warehousing costs and all costs associated with transporting goods from the Company’s warehouses to its stores, net of earned vendor rebates and allowances. The Company recognizes, as a reduction to cost of goods sold, certain rebates and allowances (“allowances”) from its vendors as the allowances are earned. Allowances are earned by promoting certain products or by purchasing specified amounts of product. The Company records a liability for allowance funds that have been received but not yet earned.
		Selling, General and Administrative Expenses
		Included in selling, general and administrative expenses are all store operation costs which includes all store labor costs associated with receiving, displaying and selling the Company’s products at the store level; all advertising costs, net in fiscal 2004 of the portion of co-operative advertising allowances directly related to the fair value of the advertising and net of all co-operative advertising allowances in the prior years; certain salary, wages and administrative costs associated with the purchasing of the Company’s products and all security, management information services, accounting and corporate management costs.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		Selling, General and Administrative Expenses (contd.)
		Within the supermarket industry, there are a wide range of differences in the disclosure of costs related to the purchasing and distribution of products sold. Some companies include all of their costs in selling, general and administrative expenses. As noted under “Cost of Goods Sold”, the Company includes all purchasing and distribution costs to deliver the product for sale to its stores in cost of goods sold, except for certain salary, wages and administrative costs associated with the purchasing of its products.
		Vendor Rebates and Allowances
		The Company receives certain allowances from its vendors that relate to the purchase and promotion of certain products. All allowances, except for advertising allowances described under “Advertising Allowance”, are recognized as a reduction in cost of goods sold as the performance is completed and inventory sold. Allowances, such as slotting fees, which are tied to the promotion of certain products, are recognized as reductions in cost of goods sold as the Company meets the required performance criteria. Allowances that are based upon purchase or sales volumes are recognized as reductions in cost of goods sold as the products are sold. The Company receives lump-sum payments from vendors for the promotion or purchase of products over multi-year periods. The Company records a liability for unearned allowances and recognizes, as a reduction in cost of goods sold, these allowances over time as the criteria of these contracts are met.
		Advertising Allowances
		The Company receives co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. The Company recognizes the portion of co-operative advertising allowances directly related to the fair value of the advertising as a reduction in advertising costs. A significant portion of the Company’s advertising expenditures is in the form of twice weekly print advertisements. The Company distributes its print ads through inserts in local newspapers, in direct mailers and as handouts distributed in its stores. The Company analyzes, on a monthly basis, the direct out-of-pocket costs for printing and distributing its print ads. Using the number of ads in a typical twice weekly advertisement, the actual direct cost of an individual advertisement is determined. The cost determined is deemed to be the fair value of advertising. The amount of co-operative advertising allowances in excess of the direct fair value of the advertising is recognized as a reduction in cost of goods sold.
		Advertising
		The Company’s advertising costs, net of vendor allowances for co-operative advertising, are recognized in the period the advertising is incurred and are included in selling, general and administrative expenses.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		Leases
		Certain of the Company’s operating leases provide for minimum annual payments that change over the life of the lease. The aggregate minimum annual payments are expensed on a straight-line basis over the minimum lease term. The Company recognizes a liability for minimum step rents when the amount of straight-line rent expense exceeds the actual lease payment and it reduces the step rent liability when the actual lease payment exceeds the amount of straight-line rent expense.
		Self-Insurance Reserves
		The Company is primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. The Company is covered by umbrella insurance policies for catastrophic events. The Company records its self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates used by management are based on the Company’s historical experiences as well as current facts and circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial projections and the Company’s estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in compensation benefits structure. In recent years, the Company and employers within the State of California as a whole have seen significant increases in the severity of workers’ compensation claims. While the Company has factored these increases into its estimates of ultimate loss, no assurance can be given that future events will not require a change in these estimates. The Company discounts its workers’ compensation, automobile and general liability insurance reserves at a discount rate of approximately 7.5%.
		Inventories
		Inventories are stated at the lower of cost (first-in, first-out) or market. Management believes that its inventory turns and inventory controls are sufficient and that reserves are not needed for excess, obsolete or discontinued inventory.
		Investment in Affiliate
		As of December 28, 2003 the Company owned 50% of Santee Dairies, LLC. The Company was not the controlling stockholder and accordingly accounted for its investment using the equity method of accounting. Subsequent to December 28, 2003, the Company entered into an agreement that transferred control of Santee to the Company. Accordingly, in subsequent periods, Santee’s financial position and results of operations will be consolidated with that of the Company’s.
		Deferred Debt Issuance Costs
		Direct costs incurred as a result of financing transactions are capitalized and amortized to expense over the term of the applicable debt agreements.
		Deferred Income Taxes
		Although there can be no assurances as to future taxable income of the Company, the Company believes that its expectations of future taxable income, when combined with the income taxes paid in prior years, will be adequate to realize its deferred tax assets.
		Phantom Stock Plan
		It is the Company’s policy to expense phantom stock units to the extent that they vest and appreciate during the accounting period.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		OWNERSHIP OF THE COMPANY
		La Cadena Investments (“La Cadena”) is the sole shareholder of the Company and holds all of the shares of the Company’s Class A Common Stock. La Cadena is a California General Partnership whose partners include Jack H. Brown, Chairman of the Board, President and Chief Executive Officer of the Company and a former member of Senior Management of the Company. Jack H. Brown has a majority interest in La Cadena and is the managing general partner with the power to vote the shares of the Company held by La Cadena.
		RESULTS OF OPERATIONS
		The following table sets forth certain income statement components expressed as a percent of sales for the thirteen weeks ended December 29, 2002 and December 28, 2003.

		Throughout Managements’ discussion and analysis of financial condition and results of operations for the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003, is the pervasive and over-riding impact of the current labor dispute, as described below, on the Company’s financial condition and results of operations.
		The Company’s collective bargaining agreement with the United Food and Commercial Workers (“UFCW”) expired in October 2003. The UFCW had the same collective bargaining agreement with the Company that it had with the Company’s three major competitors, Vons, Albertson’s and Ralphs. On April 14, 2003, the Company signed an agreement with the UFCW that extended the expiring collective bargaining agreement until a new collective bargaining agreement is negotiated and stated that the Company would accept the same contract terms that the UFCW negotiates with Vons, Albertson’s and Ralphs. In return, the UFCW agreed not to strike the Company. The Company is not a party to the current contract negotiations between the UFCW and Vons, Albertson’s and Ralphs.
		On October 11, 2003, the UFCW declared a strike against Vons; in turn, Albertson’s and Ralphs locked out all of their UFCW employees (“the labor dispute”). Initially the UFCW placed picket lines at all Vons, Albertson’s and Ralphs stores in Southern California. Subsequently, the UFCW removed the picket lines at most of the Ralphs stores.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		RESULTS OF OPERATION (contd.)
		Many of the former Vons, Albertson’s and Ralphs customers have chosen to honor the picket lines and have taken their business to Stater Bros. Markets and other grocery retailers. The labor dispute has had both a significant and material effect on the Company’s sales volume, results of operations and financial position. Eleven of thirteen weeks in the first quarter of fiscal 2004 were affected by the strike.
		The increased sales volume has had a positive effect on results of operations as the Company has been able to realize some economics of scale from the increased sales volume. As a result, cost of goods sold, labor and other operating expenses, as a percentage of sales, have decreased in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003.
		While the effect of the labor dispute was favorable to the Company’s first quarter 2004 operating results and financial position, no estimate can be given as to the length of the labor dispute nor its continued impact on the Company. Also, the financial impact of any new bargaining agreement with the UFCW on the Company’s labor and benefit costs, the possible retention of new customers after the labor dispute concludes, the cost to return to normalized operations and the impact of competitive pressures after the conclusion of the labor dispute are unknown and cannot be projected with any degree of certainty. The impact of these factors may involve significant risk and uncertainties that could materially impact the Company’s future financial performance and financial position.
		Total sales for the thirteen weeks ended December 28, 2003, the first quarter of fiscal 2004, increased 50.6% and amounted to $1.027 billion compared to $681.5 million for the same period in the prior year. The increase in total sales in the first quarter of fiscal 2004 was primarily due to the increased volume related to the current labor dispute. Like store sales are calculated by comparing year-to-year sales for stores that are opened in both years. For stores that were not opened for the entire previous year, only the current year’s weekly sales that correspond to the weeks the store was open in the previous year are used. All of the current year replacement store sales are included in the like store sales calculation. Like store sales increased 49.3% for the thirteen-week period ended December 28, 2003.
		Gross profit for the thirteen weeks ended December 28, 2003, amounted to $304.9 million or 29.70% of sales compared to $184.2 million or 27.02% of sales in the same period of the prior year. The increase in gross profit, as a percentage of sales, is due in part to approximately 1.1% increase in gross profit, as a percentage of sales, from improved efficiencies in labor and facilities within warehouse and distribution operations resulting from the increased sales volume. The remaining improvement in gross profit, as a percentage of sales, is due primarily to improved shrink control in perishable departments resulting from the increased inventory turns. The amount of co-operative advertising allowances in excess of the fair value of advertising, which is included as a reduction in cost of goods sold, for the first quarters of fiscal 2004 and 2003 is $840,000 and $540,000, respectively.
		Operating expenses include selling, general and administrative expenses and depreciation and amortization. For the thirteen weeks ended December 28, 2003, selling, general and administrative expenses amounted to $226.9 million or 22.11% of sales compared to $160.4 million or 23.53% of sales for the thirteen weeks ended December 29, 2002.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		RESULTS OF OPERATIONS (contd.)
		While selling, general and administrative expenses increased $66.5 million in the current year over the prior year, selling general and administrative expenses, as a percentage of sales, decreased from 23.53% in fiscal 2003 to 22.11% in fiscal 2004. The increased sales volume resulting from the labor dispute allowed the Company to leverage fixed facility cost and reduce advertising cost, as a percentage of sales. Also, the Company’s primary energy provider reduced energy rates effective October of 2003. The reduction in cost, as a percentage of sales, for the fiscal first quarter of 2004 compared to the fiscal first quarter of 2003 from the leveraging of fixed facility cost, reduced advertising cost and reduced energy rates were approximately 0.43%, 0.24% and 0.50% respectively. The amount of salaries, wages and administrative costs associated with the purchase of the Company’s products included in selling, general and administrative expenses for the first quarters of fiscal 2004 and fiscal 2003 is $253,000 and $215,000 respectively.
		Depreciation and amortization expenses amounted to $7.4 million for the thirteen weeks ended December 28, 2003 and amounted to $6.3 million for the like period of the prior year. The increase in depreciation and amortization expense in fiscal 2004 was primarily due to an increase in fixed assets. Included in cost of goods sold is $1.6 million and $1.8 million of depreciation in the first quarters of fiscal 2004 and fiscal 2003, respectively, related to warehousing and distribution activities.
		Operating profit for the thirteen weeks ended December 28, 2003 amounted to $70.6 million or 6.87% of sales compared to $17.4 million or 2.56% of sales for the thirteen weeks ended December 29, 2002.
		Interest expense amounted to $13.2 million for the thirteen weeks ended December 28, 2003 compared to $13.3 million for the thirteen weeks ended December 29, 2002.
		The Company’s equity in income from unconsolidated affiliate amounted to $626,000 for the first quarter of fiscal 2004 compared to $746,000 in the first quarter of the prior year. The decrease in earnings in the first quarter of 2004 over the first quarter of 2003, was due to increased operating costs at Santee.
		Income before income taxes amounted to $57.9 million for the thirteen weeks ended December 28, 2003 compared to $4.8 million for the thirteen weeks ended December 29, 2002.
		Net income for the thirteen weeks ended December 28, 2003, amounted to $34.6 million compared to $2.9 million for the thirteen weeks ended December 29, 2002.
		LIQUIDITY AND CAPITAL RESOURCES
		The Company historically has funded its daily cash flow requirements through funds provided by operations and through borrowings from short-term revolving credit facilities. The Company’s credit agreement, as amended, became effective August 6, 1999 and expires in March 2005 and consists of a revolving loan facility for working capital of $75.0 million which includes a Letter of Credit Sublimit with a maximum availability of the lesser of a) the Revolving Loan Commitment or b) $50 million. As of December 28, 2003, the Company had $47.3 million of outstanding letters of credit and had $27.7 million available under the revolving loan facility. The letter of credit facility is maintained pursuant to the Company’s workers’ compensation and general liability self-insurance requirements and as security for certain rent obligations.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		LIQUIDITY AND CAPITAL RESOURCES (contd.)
		The Company had no short-term borrowings outstanding at the end of the first quarters of fiscal 2004 and 2003, and the Company did not incur short-term borrowings during the year to date periods ended December 28, 2003 and December 29, 2002.
		The following table sets forth the Company’s contractual cash obligations and commercial commitments as of December 28, 2003.

		(1) The Company leases the majority of its retail stores, offices and warehouse and distribution facilities. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.
		(2) Standby letters of credit are committed as security for workers’ compensation obligations and as security for current rent obligations. Outstanding letters of credit expire between December 2003 and October 2004.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		LIQUIDITY AND CAPITAL RESOURCES (contd.)
		Working capital amounted to $173.3 million at December 28, 2003 and $124.5 million at September 28, 2003, and the Company’s current ratios were 1.54:1, and 1.60:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.
		The net cash provided by operating activities in the thirteen weeks ended December 28, 2003 amounted to $140.3 million compared to $28.8 million for the thirteen weeks ended December 29, 2002. The change in cash provided from operating activities in the current year over prior year is due primarily from the effect of the labor dispute on the Company’s financial condition. Cash provided by operating activities consisted of an increase of $68.9 million in accounts payable, a $46.8 million increase in accrued liabilities and self-insurance reserves offset by a $20.0 million increase in restricted cash and a $13.0 million increase in inventory. The $20.0 million increase in restricted cash is a result of cash being used for workers’ compensation and general liability reserve requirements. Cash provided by operating activities in fiscal 2003 consisted of a $9.3 million increase in accrued liabilities and self-insurance reserves, a $7.3 million decrease in inventory and $8.2 million from depreciation.
		Net cash used by investing activities for the thirteen weeks ended December 28, 2003, amounted to $15.3 million compared to $11.0 million for the thirteen weeks ended December 29, 2002. The difference in net cash used by investing activities between the comparable periods is due to the Company’s capital expenditures during these periods, net of proceeds from asset dispositions. Capital expenditures amounted to $15.3 million in the first quarter of fiscal 2004 compared to $11.0 million in the first quarter of fiscal 2003.
		Net cash used by financing activities amounted to $262,000 and $291,000 for the thirteen weeks ended December 28, 2003 and December 29, 2002, respectively, and consisted of payments on the Company’s capitalized lease obligations.
		Subsequent to December 28, 2003, the Company entered into a Settlement Agreement that gave control of Santee to the Company. As of the date of the Settlement Agreement, Santee had $53,500,000 of 9.36% Senior Secured Notes due 2008 (“Santee Notes”) with various institutional investors. In the event of a change in control of Santee, the Santee Notes required the payment of principal, accrued interest and a make-whole payment. Subsequent to the Settlement Agreement, Markets loaned $55,000,000 to Santee and Santee made payments to the holders of the Santee Notes to retire the Santee Notes (see footnote entitled “Subsequent Events” in the Notes to the Unaudited Consolidated Financial Statements).

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		The Credit Facilities
		The Company’s principal operating subsidiary, Stater Bros. Markets, entered into a credit facility, as amended, with Bank of America N.A. on August 6, 1999 (“the credit facility”). The credit facility provides for (i) a $75.0 million revolving loan facility and (ii) a “Letter of Credit Sublimit” which is defined as an amount equal to the lesser of (a) the Revolving Loan Commitment and (b) $50,000,000. The Letter of Credit Sublimit is part of, and not in addition to, the Revolving Loan Commitment. Borrowings under the revolving loan facility are unsecured and expected to be used for certain working capital and corporate purposes. Letters of credit under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores, workers’ compensation insurance obligations and as security for certain rent obligations.
		The availability of the loans and letters of credit are subject to certain sublimits and other borrowing restrictions.
		Indebtedness of Stater Bros. Markets under the credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of the Company, and any subsidiaries that Stater Bros. Markets or Stater Bros. Development, Inc. acquires or forms after the date of the credit facility.
		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 Stater Bros. Markets of one, two, three or six months.
		The revolving loan facility will cease to be available and will be payable in full on March 31, 2005. Letters of credit under the credit facility can be issued until March 31, 2006. The loans under the revolving loan facility must be repaid for a period of ten consecutive days semi-annually.
		Loans under the revolving loan facility may be repaid and re-borrowed. The loans under the revolving loan facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments under the credit facility may be reduced by Stater Bros. Markets. Stater Bros. Markets will be required to pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of credit facility, payable quarterly in arrears. Outstanding letters of credit under the credit facility are subject to a fee of 1.25% per annum on the face amount of such letters of credit, payable quarterly in arrears. The Company will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of credit facility.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		The Credit Facilities (contd.)
		Availability of the loans and letters of credit under the credit facility is subject to a monthly borrowing base test based on inventory. The credit facility requires Stater Bros. Markets to meet certain financial tests, including minimum net worth and minimum EBITDA tests. The credit facility contains covenants which, among other things, will limit indebtedness, liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, asset sales, leases, investments, loans and advances, transactions with affiliates, sale and leasebacks, other matters customarily restricted in such agreements and modifications to the holding company status of the Company.
		The credit facility also contains covenants that apply to the Company and the Company is a party to the credit facility for purposes of these covenants. These covenants, among other things, limit dividends and other payments in respect of the Company’s capital stock, prepayments and redemptions of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by the Company.
		The credit facility requires the Company and Stater Bros. Markets to comply with certain covenants intended to ensure that their legal identities remain separate.
		The credit facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgments; defaults; invalidity of any guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief Executive Officer of Stater Bros. Markets; and change of control.
		As of December 28, 2003, for purposes of the credit facility with Bank of America, both Markets and the Company were in compliance with all restrictive covenants. The Company is also subject to certain covenants associated with its 10.75% Senior Notes due 2006. As of December 28, 2003, the Company was in compliance with all such covenants. However, there can be no assurance that the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.
		Labor Relations Substantially all of the Company’s hourly employees are members of either UCFW or International Brotherhood of Teamsters (“Teamsters”) labor unions and are represented by several different collective bargaining agreements.
		The Company’s collective bargaining agreement with the UFCW, which covers the largest number of employees, expired in October 2003. The UFCW had the same collective bargaining agreement with the Company that it had with the Company’s three major competitors, Vons, Albertson’s and Ralphs. On April 14, 2003, prior to the expiration of the collective bargaining agreement, the Company signed an agreement with the UFCW that extended the expiring collective bargaining agreement until a new collective bargaining agreement is negotiated and stated that the Company would accept the same contract terms that the UFCW negotiates with Vons, Albertson’s and Ralphs. In return, the UFCW agreed not to strike the Company. The Company is not a party to the current contract negotiations between the UFCW and Vons, Albertson’s and Ralphs.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		Labor Relations (contd.)
		Prior to the labor action, Vons, Albertson’s and Ralphs informed the UFCW that a strike against any one of the grocery chains would be considered as a strike against all three chains. On October 11, 2003, the UFCW declared a strike against Vons; in turn, Albertson’s and Ralphs locked out all of their UFCW employees. As of the date of this filing, a new agreement has not been reached and the labor dispute continues. The effect, if any, of any new collective bargaining agreement on the Company’s future labor and benefits costs is unknown.
		The Teamsters’ collective bargaining agreement was renewed in September 2002 and expires in September 2005.
		The Company values its employees and believes its relationship with them is good and that employee loyalty and enthusiasm are key elements of its operating performance.
		EFFECT OF INFLATION AND COMPETITION
		The Company’s performance is affected by inflation. In recent years, the impact of inflation on the operations of the Company has been moderate. As inflation has increased expenses, the Company has recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge the Company to become more cost efficient as its ability to recover increases in expenses through price increases is diminished. The future results of operations of the Company will depend upon the ability of the Company to adapt to the current economic environment as well as the current competitive conditions.
		The Company operates in a highly competitive industry characterized by narrow profit margins. Competitive factors include price, quality and variety of products, customer service, and store location and condition. The Company believes that its competitive strengths include its specialty services, everyday low prices, breadth of product selection, high product quality, one-stop shopping convenience, attention to customer service, convenient store locations, a long history of community involvement, established long-term customer base in the Inland Empire (consisting of San Bernardino and Riverside counties) and a growing customer awareness in the counties of Orange, San Diego and Los Angeles.
		Given the wide assortment of products it offers, the Company competes with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug stores, national general merchandisers and discount retailers, membership clubs and warehouse stores. The Company’s primary competitors include Vons, Albertson’s, Ralphs, and a number of independent supermarket operators. The Company, and its competitors, will be faced with additional competitive pressures with the entry in the geographic market area of Wal-Mart’s Super Center format stores. Wal-Mart currently has a number of Wal-Mart discount locations and Sam’s Clubs within the Company’s marketing area selling a variety of grocery products. The Company believes that its everyday low prices, breadth of product offering, specialty service departments and long-term customer relationships will help it withstand the increased competitive environment.

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STATER BROS. HOLDINGS INC.

PART I - FINANCIAL INFORMATION (contd.)

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in the Company’s market risks since the information provided under the caption “Quantitative and Qualitative Disclosure about Market Risk” in the Company’s filing on Form 10-K dated September 28, 2003.

Item 4. CONTROLS AND PROCEDURES

As of the quarter ended December 28, 2003, the Company carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that those controls and procedures were effective in making known to them, on a timely basis, the material information needed for the preparation of this Report on Form 10-Q. During the quarter ended December 28, 2003, there were no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect the internal control over financial reporting since the date of their evaluation, nor did they find any significant deficiencies or material weaknesses that would have required corrective actions to be taken.

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STATER BROS. HOLDINGS INC.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

		Various legal actions and claims are pending against the Company in the ordinary course of business. In the opinion of management and its general legal counsel, the ultimate resolution of such pending legal actions and claims will not have a material adverse effect on the Company’s consolidated financial position or its results of operations.
		For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of the Company’s Report on Form 10-K for the fiscal year ended September 28, 2003.
		Subsequent to December 28, 2003, a final settlement agreement was signed on January 29, 2004 by Markets and Defendants to resolve litigation matters and control of Santee. For a description of the settlement agreement, see the footnote entitled “Subsequent Event” in the Notes to the Consolidated Financial Statements (unaudited) contained in this Report on Form 10-Q.

Item 2. CHANGES IN 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 AND REPORTS ON FORM 8-K

(a)

Exhibits

	(b)		Reports on Form 8-K
			Current Report on Form 8-K dated February 2, 2004.

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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.

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