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

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

Commission file number 001-13222

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Delaware		33-0350671
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)
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. Yes þ No o.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.

As of February 9, 2010, there were issued and outstanding
34,552 shares of the registrant’s Class A Common Stock.

 

 

STATER BROS. HOLDINGS INC.
December 27, 2009

INDEX

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of September 27, 2009 and December 27, 2009 (Unaudited)		3
		Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 28, 2008 and December 27, 2009		5
		Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 28, 2008 and December 27, 2009		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		21
Item 4.		Controls and Procedures		21
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		22
Item 1A.		Risk Factors		22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3.		Defaults Upon Senior Securities		23
Item 4.		Submission of Matters to a Vote of Security Holders		23
Item 5.		Other Information		23
Item 6.		Exhibits		23
SIGNATURES				24
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

ASSETS

		Sept. 27,				Dec. 27,
		2009				2009
						(Unaudited)
Current assets
Cash and cash equivalents		$	196,914			$	242,247
Restricted cash			3,121				3,121
Receivables, net of allowance of $759 and $767			36,671				41,616
Income tax receivables			4,049				—
Inventories			212,856				237,761
Prepaid expenses			9,330				11,452
Deferred income taxes			20,479				25,579
Assets held for sale			83,617				—
Note receivable, current portion			300				300
Total current assets			567,337				562,076
Property and equipment
Land			97,430				97,430
Buildings and improvements			544,440				550,002
Store fixtures and equipment			428,431				432,349
Property subject to capital leases			9,983				9,983
			1,080,284				1,089,764
Less accumulated depreciation and amortization			408,791				422,156
			671,493				667,608
Deferred income taxes, long-term			36,014				37,119
Deferred debt issuance cost, net			11,276				10,473
Note receivable, less current portion			493				493
Long-term receivable			18,867				18,867
Goodwill			2,894				2,894
Other assets			6,361				5,975
			75,905				75,821
Total assets		$	1,314,735			$	1,305,505

See accompanying notes to unaudited consolidated financial statements.

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

LIABILITIES AND STOCKHOLDER’S EQUITY

		Sept. 27,				Dec. 27,
		2009				2009
						(Unaudited)
Current liabilities
Accounts payable		$	153,083			$	157,000
Accrued payroll and related expenses			53,313				52,580
Other accrued liabilities			79,618				62,562
Income taxes payable			—				6,450
Liabilities held for sale			5,634				—
Current portion of capital lease obligations			1,336				1,389
Total current liabilities			292,984				279,981
Long-term debt			810,000				810,000
Capital lease obligations, less current portion			3,768				3,400
Long-term portion of self-insurance and other reserves			36,227				38,108
Long-term deferred benefits			77,396				78,375
Other long-term liabilities			30,605				30,175
Total liabilities			1,250,980				1,240,039
Commitments 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			(16,720	)			(16,720	)
Retained earnings			71,536				73,247
Total stockholder’s equity			63,755				65,466
Total liabilities and stockholder’s equity		$	1,314,735			$	1,305,505

See accompanying notes to unaudited consolidated financial statements.

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

		13 Weeks Ended
		Dec. 28,				Dec. 27,
		2008				2009
Sales		$	959,253			$	923,864
Cost of goods sold			712,391				685,714
Gross profit			246,862				238,150
Operating expenses
Selling, general and administrative expenses			211,004				205,288
Gain on sale of dairy assets			—				(7,950	)
Depreciation and amortization			13,360				12,666
Total operating expenses			224,364				210,004
Operating profit			22,498				28,146
Interest income			205				59
Interest expense			(17,100	)			(17,189	)
Other income (expenses), net			149				(11	)
Income before income taxes			5,752				11,005
Income taxes			2,211				4,294
Net income		$	3,541			$	6,711
Earnings per average common share outstanding		$	100.73			$	190.91
Average common shares outstanding			35,152				35,152
Shares outstanding at end of period			35,152				35,152

See accompanying notes to unaudited consolidated financial statements.

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

		13 Weeks Ended
		Dec. 28,				Dec. 27,
		2008				2009
Operating activities:
Net income		$	3,541			$	6,711
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			17,660				15,528
Amortization of debt issuance costs			803				803
(Increase) decrease in deferred income taxes			1,347				(6,205	)
Gain on sale of dairy assets			—				(7,950	)
(Gain) loss on disposals of assets			(104	)			13
Changes in operating assets and liabilities:
Decrease in restricted cash			2,500				—
Increase in receivables			(17,468	)			(4,945	)
(Increase) decrease in income tax receivables			(986	)			4,049
Increase in inventories			(7,437	)			(24,905	)
Increase in prepaid expenses			(7,091	)			(2,122	)
Decrease in assets held for sale			14,211				215
(Increase) decrease in other assets			(1,258)				796
Increase in accounts payable			4,696				3,917
Increase in income taxes payable			—				6,450
Increase in liabilities held of sale			488				1,014
Decrease in other accrued liabilities			(24,872	)			(17,789	)
Increase in long-term reserves			6,314				2,430
Net cash used in operating activities			(7,656	)			(21,990	)
Financing activities:
Principal payments on capital lease obligations			(272	)			(315	)
Dividend paid			—				(5,000	)
Net cash used in financing activities			(272	)			(5,315	)
Investing activities:
Decrease in store construction reimbursement			5,950				—
Proceeds from sale of dairy assets, net of fees			—				84,294
Purchase of property and equipment			(20,653	)			(11,666	)
Proceeds from sale of property and equipment			189				10
Net cash provided by (used in) investing activities			(14,514	)			72,638
Net increase (decrease) in cash and cash equivalents			(22,442	)			45,333
Cash and cash equivalents at beginning of period			144,942				196,914
Cash and cash equivalents at end of period		$	122,500			$	242,247
Interest paid		$	32,633			$	32,588
Income taxes paid		$	1,850			$	—

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 2009

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 27, 2009 are not necessarily indicative of the results that may be experienced for the year ending September 26, 2010.

     The consolidated balance sheet at September 27, 2009 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 27, 2009.

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 SBM Dairies, Inc. (“Dairies”). All significant inter-company transactions have been eliminated in consolidation.

Note 3 — Reclassifications

     Certain amounts in assets held for sale and deferred income taxes within the September 27, 2009 consolidated balance sheet and certain captions for operating activities within the December 28, 2009 statement of cash flows have been reclassified to conform to the current period’s financial statement presentation. Substantially all of the assets and certain liabilities of Dairies had been classified as “Held for Sale” prior to their disposal on October 11, 2009 as described in “Note 8 - Asset Sale” in these notes to the unaudited consolidated financial statements.

Note 4 — Subsequent Events

     The Company has evaluated subsequent events through February 9, 2010, the issuance date of its financial statements. Other than redemption of stock as discussed in “Note 12 — Dividend and Stock Redemption”, the Company did not have any material subsequent events that need to be disclosed.

Note 5 — 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.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 2009

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 do not meet 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 27, 2009, there were 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 of its fiscal 2006 through fiscal 2008 tax returns. For state tax purposes, the Company is subject to review of its fiscal 2006 through fiscal 2008 state tax returns. The Company is currently under audit for its fiscal 2006 and fiscal 2007 state tax returns by the State of California Franchise Tax Board (“FTB”). To date, the FTB has only made information document requests related to those years.

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. 28,				Dec. 27,
		2008				2009
		(in thousands)
Expected return on assets			(800	)		$	(877	)
Service cost			574				841
Interest cost			964				1,029
Amortization of prior service cost			(1	)			(1	)
Amortization of recognized losses			49				359
Net pension expense		$	786			$	1,351

Actuarial assumptions used to determine net pension expense were:

Discount rate			7.50	%			5.50	%
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 27, 2009 and the Company expects to contribute an additional $2.1 million during the remainder of fiscal 2010.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 2009

Note 8 — Asset Sale

     On October 11, 2009, the Company sold substantially all of the assets of Dairies to subsidiaries of Dean Foods (“Dean Foods”) for $88.0 million in cash, subject to a working capital adjustment, and assumption of certain liabilities including substantially all of Dairies’ current liabilities, which included accounts payable. Dairies’ assets which were sold consisted primarily of accounts receivable, inventory and property and equipment. The Company incurred approximately $3.7 million in transaction and other fees related to the transaction and recognized a gain, net of tax, of approximately $4.7 million. The pre-tax gain from the sale of Dairies’ assets is included in “Gain on sale of dairy assets” within the unaudited consolidated statements of income. Dairies retained responsibility for all workers compensation claims through the date of the transaction. As of December 27, 2009, Dairies has accrued approximately $4.3 million in workers’ compensation liabilities.

     Also on October 11, 2009, the Company entered into a ten year Product Purchase Agreement (the “PPA”) with Dean Foods to purchase substantially all of its milk products sold in its supermarkets from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing.

     As of October 11, 2009, the Company ceased all dairy manufacturing operations. Markets and Super Rx have similar customers, regulatory requirements and delivery methods to customers and are included together as one reportable segment. Prior to the Dairy Transaction, Dairies was a separate reportable segment of the Company. As operating activities of Dairies have ceased and operating results from September 28, 2009 to October 11, 2009 are not material to the overall financial statements of the Company taken as a whole, the Company no longer has separate reportable segments to disclose.

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 Dairies (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.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 2009

Note 10 — 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’ previous 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 the Company’s indirect subsidiaries Super Rx and Dairies (subject, in the case of Dairies, 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 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.

     The Credit Facility will mature on May 31, 2010. The Company is currently in the process of negotiating an amendment to the facility with Bank of America which would provide terms similar to those currently in place and would extend the maturity date.

     As of December 27, 2009, Markets and the Company were in compliance with all restrictive covenants under the Credit Facility. However, there can be no assurance that 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.

     The Company had $49.8 million of outstanding letters of credit and it had $50.2 million available under the Credit Facility.

     The Company had no short-term borrowings outstanding as of December 27, 2009. The Company did not incur any short-term borrowings during the thirteen weeks ended December 27, 2009.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 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.

Note 12 — Dividend and Stock Redemption

     On November 17, 2009, the Company paid a $5.0 million dividend to La Cadena Investments (“La Cadena”), the sole shareholder of the Company.

     Subsequent to December 27, 2009, the Company, on December 28, 2009, redeemed and retired 600 shares of its Class A Common Stock for $8.0 million. The redemption was for shares held by the Moseley Family Revocable Trust. La Cadena had distributed the shares to the Moseley Family Revocable Trust concurrently with the redemption and retirement of the shares.

     After the dividend payment on November 17, 2009 and the stock redemption on December 28, 2009, the Company had the ability under the Credit Facility and the Notes’ Indentures to make restricted payments, including dividends, of $11.4 million.

Note 13 — Fair Value of Financial Instruments

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

     Cash and Cash Equivalents

     The carrying amount approximates fair value because of the short-term maturity of these instruments.

     Receivables

     The carrying amount approximates fair value because of the short-term maturity of these instruments.

     Note Receivable

     Although a market quote for the fair value of the Company’s note receivable is not readily available, the Company believes the stated value approximates fair value.

     Long-Term Receivable

     Although market quotes for the fair value of the Company’s long-term receivable are not readily available, the Company valued its long-term receivable based on a discounted cash flow approach applying a discount rate that approximates long-term market rates.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 27, 2009

Note 13 — Fair Value of Financial Instruments (contd.)

     Long-Term Debt and Capital Lease Obligations

     The fair value of the 8.125% Senior Notes and the 7.75% Senior Notes, are based on quoted market prices. Although market quotes for the fair value of the Company’s capitalized lease obligations are not readily available, the Company believes the stated value approximates fair value.

     The estimated fair values of the Company’s financial instruments are as follows:

		As of
		December 27, 2009
		(In thousands)
		Carrying				Fair
		Amount				Value
Cash and cash equivalents		$	242,247			$	242,247
Receivables		$	41,616			$	41,616
Note receivable		$	793			$	793
Long-term receivable		$	18,867			$	18,867
Long-term debt		$	810,000			$	819,638
Capital lease obligations		$	4,789			$	4,789

STATER BROS. HOLDINGS INC.
MANAGEMENT’S 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

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in our report on Form 10-K for the year ended September 27, 2009.

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.

SIGNIFICANT ACCOUNTING POLICIES

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 27, 2009.

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”), 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.

AVAILABLE INFORMATION

We file quarterly and annual reports electronically with the Security and Exchange Commission (“SEC”) under forms 10-Q and 10-K and we file current reports on form 8-K and amendments to these reports. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issues that file electronically with the SEC. These electronic files can be found at the SEC’s website at http://www.sec.gov. The public may read and copy any of our reports filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. The public may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330.

EXECUTIVE OVERVIEW

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

On October 11, 2009, we sold substantially all of the assets of SBM Dairies, Inc (“Dairies”) to subsidiaries of Dean Foods (“Dean Foods”), (the “Dairy Transaction”), for $88.0 million in cash and assumption of certain liabilities including substantially all of Dairies current liabilities, which included accounts payable. Dairies assets which were sold consisted primarily of accounts receivable, inventory and property and equipment. Also on October 11, 2009, we entered into a ten year Product Purchase Agreement (the “PPA”) with Dean Foods to purchase substantially all milk products sold in our supermarkets from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing. We incurred approximately $3.7 million in fees related to the Dairy Transaction and recognized a gain, net of tax, of approximately $4.7 million. We retained responsibility for all workers’ compensation claims of Dairies’ employees for events occurring through the transaction date. As of October 11, 2009, the Company ceased all dairy manufacturing operations.

As a result of the Dairy Transaction and the continued decline in the current economy, we anticipate that our sales will be lower than in fiscal 2009. Our strategy in the near term is to retain customer counts during these tough economic times by continuing to provide exceptional customer service and provide value to our customers on their purchases from our supermarkets.

In the first quarter of fiscal 2010, our consolidated gross profit margin, as a percentage of sales, was comparable to the previous year. Our marketing area of Southern California continues to be highly competitive and in flux. With the current economic conditions, our marketing area has seen job losses and business closures which will put further pressure on our gross margin as we endeavor to retain our customer base. We anticipate continued competitive pressures from “big box” format competitors including Walmart, Costco and Target, from our traditional grocery format competitors Vons, Albertsons and Ralphs and from independent supermarket operators.

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

RESULTS OF OPERATIONS

Sales and Cost of Goods Sold

		Fiscal Period Ended								Change
		Dec. 28,				Dec. 27,				2010 to 2009
(in thousands)		2008				2009				Dollar				%
Sales		$	959,253			$	923,864			$	(35,389	)			(3.69	)%
Gross Profit		$	246,862			$	238,150			$	(8,712	)			(3.53	)%
as a % of sales			25.73	%			25.78	%

Sales

Sales in our supermarkets were down 1.11% for the first quarter of fiscal 2010 compared to the same period in fiscal 2009. Overall, sales were down $35.4 million or 3.69% for the first quarter, the Dairy Transaction accounted for $25.0 million of the sales decline in the quarter.

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, deflation, promotional discounting, customer traffic, buying trends, pricing pressures from competitors and competitive openings and closings.

Like store sales decreased $20.4 million or 2.19% from the first quarter of fiscal 2009. Like store sales were impacted by our recently opened stores. We estimate that our recently opened stores drew approximately $3.8 million of their first quarter 2010 sales from our existing stores.

During fiscal 2009, we opened three stores, one of which was opened during a portion of the first quarter of fiscal 2009 and the other two were opened later in fiscal 2009. As such, these corresponding sales in fiscal 2010 are not included in like store sales. These recently opened stores had sales of $14.2 million in the first quarter of fiscal 2010 of which $11.2 million of sales are not included in like store sales. We closed one store in the first quarter of fiscal 2009, which reduced first quarter 2010 sales by approximately $1.2 million.

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

RESULTS OF OPERATIONS (contd.)

Gross Profit

Gross profit margin, as a percentage of sales, in the first quarter of fiscal 2010 was comparable to the first quarter of fiscal 2009. With the depressed economic conditions in the nation and in our marketing area and with the significant competitive pressures, as we and our competitors compete to retain market share and our customer base, we anticipate our gross margins to be challenged in the foreseeable future.

Operating Expenses and Operating Profit

		Fiscal Period Ended								Change
		Dec. 28,				Dec. 27,				2010 to 2009
(in thousands)		2008				2009				Dollar			%
Operating Expenses:
Selling, general and administrative expenses		$	211,004			$	205,288			$	(5,716	)			(2.71	)%
as a % of sales			21.99	%			22.22	%
Gain on sale of assets		$	—			$	(7,950	)		$	(7,950	)			—
as a % of sales			—				(0.86	)%
Depreciation and amortization		$	13,360			$	12,666			$	(694	)			(5.19	)%
as a % of sales			1.39	%			1.37	%
Operating profit		$	22,498			$	28,146			$	5,648				25.10	%
as a % of sales			2.35	%			3.05	%

Selling, General and Administrative Expenses

The increase, as a percentage of sales, in selling, general and administrative expenses in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 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. 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 2010 and fiscal 2009 is $314,000 and $287,000, respectively.

Gain on Sale of Dairy Assets

Gain on sale of dairy assets comprises approximately $8.0 million of pre-tax gain from the sale of our dairy assets. The Dairy transaction is described in “Note 8 — Assets Sale” to our unaudited consolidated financial statements contained herein.

Depreciation and Amortization

The decrease in depreciation and amortization expense in the first quarter of fiscal 2010 compared to the same period in fiscal 2009 is due primarily to reduced fixed asset additions in the current year and to the Dairy Transaction. Included in cost of goods sold is $2.9 million and $4.3 million of depreciation and amortization in the first quarters of fiscal 2010 and 2009, respectively, related to warehousing and distribution activities in both fiscal periods and dairy production in fiscal 2009. The decrease in depreciation and amortization included in cost of goods sold is attributed to the Dairy Transaction.

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

RESULTS OF OPERATIONS (contd.)

Interest Income

Interest income was $59,000 and $205,000 for the first quarters of fiscal 2010 and 2009, respectively. Interest income has significantly decreased due to lower market rates in the current year 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

Interest expense was $17.2 million for the first quarter of fiscal 2010 and $17.1 million in the first quarter of fiscal 2009. The change in interest expense between the two periods is due to no interest being capitalized in the current fiscal year.

Income Before Income Taxes

Income before income taxes amounted to $11.0 million and $5.8 million in the first quarters of fiscal 2010 and fiscal 2009, respectively.

Income Taxes

Income taxes amounted to $4.3 million and $2.2 million in the first quarters of fiscal 2010 and fiscal 2009, respectively. Our effective tax rate was 39.0% and 38.4% for the first quarters of fiscal 2010 and 2009, respectively. The lower effective rate for fiscal 2009 is due primarily to tax credits being applied against lower taxable income in the prior year versus the current year.

Net Income

Net income for the first quarter of fiscal 2010 amounted to $6.7 million compared to $3.5 million in the first quarter of fiscal 2009.

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.

We are currently in the process of negotiating an amendment to Markets’ credit facility with Bank of America which would provide terms similar to those currently in place and would extend the maturity date.

As of December 27, 2009, we had $49.8 million of outstanding letters of credit and we had $50.2 million available under Markets’ credit facility.

We had no short-term borrowings outstanding as of December 27, 2009. We did not incur any short-term borrowings in the first quarter of fiscal 2010.

STATER BROS. HOLDINGS INC.
MANAGEMENT’S 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 27, 2009.

		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			106,640				42,656				63,984				—				—
			631,640				42,656				588,984				—				—
7.75% Senior Notes due April 2015
Principal			285,000				—				—				—				285,000
Interest			121,482				22,088				44,175				44,175				11,044
			406,482				22,088				44,175				44,175				296,044
Capital lease obligations (1)
Principal			4,789				1,389				2,487				913				—
Interest			1,539				706				723				110				—
			6,328				2,095				3,210				1,023				—
Operating leases (1)			358,648				37,204				65,186				50,730				205,528
Total contractual cash obligations		$	1,403,098			$	104,043			$	701,555			$	95,928			$	501,572
		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			$	—			$	—			$	—

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 $282.1 million at December 27, 2009 and $274.4 million at September 27, 2009, and our current ratios were 2.01:1 and 1.94:1, 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 27, 2009 was $22.0 million and was $7.7 million for the thirteen weeks ended December 28, 2008. Significant uses of cash for operating activities in the first quarter of fiscal 2010 included interest payments on our long-term debt and increases in inventory levels to meet holiday sales demands.

A significant source of cash in the first quarter of 2010 was the sale of assets associated with the Dairy Transaction. Other significant uses of cash in the thirteen weeks ended December 27, 2009 included $11.7 million of capital expenditures during the period for store remodels and equipment purchases. Historically, our new store construction costs, store remodels and equipment expenditures are financed through operating cash flows.

As of December 27, 2009, 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, including a redemption of stock of $8.0 million subsequent to December 27, 2009, we had the ability and right to pay a restricted payment of up to $11.4 million.

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

Labor Relations

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

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

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

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

STATER BROS. HOLDINGS INC.
DECEMBER 27, 2009

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 December 27, 2009. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 27, 2009. There were no material changes in our internal control over financial reporting during the first quarter of fiscal 2010.

STATER BROS. HOLDINGS INC.
DECEMBER 27, 2009

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 27, 2009.

Item 1A. RISK FACTORS

Our performance is affected by inflation and deflation. In recent years, we have experienced both increases and decreases in transportation costs and the cost of the products we sell in our stores. The changes in our costs are attributed to changes in fuel, plastic, grains and other commodity costs. During times of inflation, 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 traditional grocery format competitors include Vons, Albertson’s and Ralphs. We also face competitive pressures from existing and new “big box” format retailers including Walmart, Costco and Target and from a number of independent supermarket operators. We expect our competitors 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.

STATER BROS. HOLDINGS INC.
DECEMBER 27, 2009

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

     None

Item 3. DEFAULTS UPON SENIOR SECURITIES

     None

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

     None

Item 5. OTHER INFORMATION

     None

Item 6. EXHIBITS

     (a) Exhibits

	31.1		Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
	31.2		Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
	32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

STATER BROS. HOLDINGS INC.

Signatures

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