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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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