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EX-32.1 - EX-32.1 - STATER BROS HOLDINGS INCv56061exv32w1.htm
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EX-31.2 - EX-31.2 - STATER BROS HOLDINGS INCv56061exv31w2.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ    quarterly report pursuant to section 13 or 15(d) of the securities exchange act of 1934
For the quarterly period ended March 28, 2010
     
    or
     
o    transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934
For the transition from                      to                     
Commission file 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
organization)
  (I.R.S. Employer Identification No.)
     
301 S. Tippecanoe Avenue
San Bernardino, California
  92408
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (909) 733-5000
Not Applicable
 
(Former name, former address and former fiscal year, if changed since last report.)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 (§232.405 of this chapter) 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):
Large accelerated filer o Accelerated filer o  Non-accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company o
     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 May 11, 2010, there were issued and outstanding
34,552 shares of the registrant’s Class A Common Stock.
 
 

 


 

STATER BROS. HOLDINGS INC.
March 28, 2010
INDEX
             
        Page
  FINANCIAL INFORMATION        
 
           
  Financial Statements        
 
           
 
  Consolidated Balance Sheets as of September 27, 2009 and March 28, 2010 (Unaudited)     3  
 
           
 
  Consolidated Statements of Income (Unaudited) for the 13 weeks ended March 29, 2009 and March 28, 2010     5  
 
           
 
  Consolidated Statements of Income (Unaudited) for the 26 weeks ended March 29, 2009 and March 28, 2010     6  
 
           
 
  Consolidated Statements of Cash Flows (Unaudited) for the 26 weeks ended March 29, 2009 and March 28, 2010     7  
 
           
 
  Notes to Consolidated Financial Statements (Unaudited)     8  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
 
           
  Quantitative and Qualitative Disclosure about Market Risk     23  
 
           
  Controls and Procedures     23  
 
           
  OTHER INFORMATION        
 
           
  Legal Proceedings     24  
 
           
  Risk Factors     24  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     25  
 
           
  Defaults Upon Senior Securities     25  
 
           
  (Removed and Reserved)     25  
 
           
  Other Information     25  
 
           
  Exhibits     25  
 
           
SIGNATURES     26  
 EX-31.1
 EX-31.2
 EX-32.1

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PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS

(In thousands)
ASSETS
                 
    Sept. 27,     Mar. 28,  
    2009     2010  
            (Unaudited)  
Current assets
               
Cash and cash equivalents
  $ 196,914     $ 263,929  
Restricted cash
    3,121       3,121  
Receivables, net of allowance of $759 and $738
    36,671       37,817  
Income tax refund receivable
    4,049       5,468  
Inventories
    212,856       225,965  
Prepaid expenses
    9,330       10,914  
Deferred income taxes
    20,479       24,800  
Assets held for sale
    83,617        
Note receivable, current portion
    300       493  
Long-term receivable, current portion
          17,741  
 
           
 
               
Total current assets
    567,337       590,248  
 
               
Property and equipment
               
Land
    97,430       97,430  
Buildings and improvements
    544,440       554,864  
Store fixtures and equipment
    428,431       435,506  
Property subject to capital leases
    9,983       9,983  
 
           
 
    1,080,284       1,097,783  
 
               
Less accumulated depreciation and amortization
    408,791       435,235  
 
           
 
    671,493       662,548  
 
               
Deferred income taxes, long-term
    36,014       36,195  
Deferred debt issuance cost, net
    11,276       9,662  
Note receivable, less current portion
    493        
Long-term receivable, less current portion
    18,867        
Other assets
    9,255       8,869  
 
           
 
    75,905       54,726  
 
           
Total assets
  $ 1,314,735     $ 1,307,522  
 
           
See accompanying notes to unaudited consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (contd.)

(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY
                 
    Sept. 27,     Mar. 28,  
    2009     2010  
            (Unaudited)  
Current liabilities
               
Accounts payable
  $ 153,083     $ 144,296  
Accrued payroll and related expenses
    53,313       57,691  
Other accrued liabilities
    79,618       78,358  
Liabilities held for sale
    5,634        
Current portion of capital lease obligations
    1,336       1,444  
 
           
 
               
Total current liabilities
    292,984       281,789  
 
               
Long-term debt
    810,000       810,000  
Capital lease obligations, less current portion
    3,768       3,018  
Long-term portion of self-insurance and other reserves
    36,227       38,883  
Long-term deferred benefits
    77,396       79,766  
Other long-term liabilities
    30,605       30,633  
 
           
 
               
Total liabilities
    1,250,980       1,244,089  
 
               
Commitment and contingencies
               
 
               
Stockholder’s equity
               
Common Stock, $.01 par value:
               
Authorized shares — 100,000
Issued and outstanding shares — 0
           
Class A Common Stock, $.01 par value:
               
Authorized shares — 100,000
Issued and outstanding shares — 35,152 in 2009, 34,552 in 2010
           
Additional paid-in capital
    8,939       8,786  
Accumulated other comprehensive loss
    (16,720 )     (16,720 )
Retained earnings
    71,536       71,367  
 
           
Total stockholder’s equity
    63,755       63,433  
 
           
Total liabilities and stockholder’s equity
  $ 1,314,735     $ 1,307,522  
 
           
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)
                 
    13 Weeks Ended  
    Mar. 29,     Mar. 28,  
    2009     2010  
Sales
  $ 930,996     $ 885,537  
Cost of goods sold
    675,170       649,092  
 
           
Gross profit
    255,826       236,445  
 
               
Operating expenses
               
Selling, general and administrative expenses
    206,312       198,018  
Gain on sale of dairy assets
          (1,446 )
Depreciation and amortization
    13,552       12,788  
 
           
Total operating expenses
    219,864       209,360  
 
           
 
               
Operating profit
    35,962       27,085  
 
               
Interest income
    125       26  
Interest expense
    (17,348 )     (17,374 )
Other income (expenses), net
    (43 )     16  
 
           
Income before income taxes
    18,696       9,753  
 
               
Income taxes
    7,575       3,786  
 
           
Net income
  $ 11,121     $ 5,967  
 
           
 
               
Earnings per average common share outstanding
  $ 316.37     $ 172.60  
 
           
 
               
Average common shares outstanding
    35,152       34,572  
 
           
 
               
Shares outstanding at end of period
    35,152       34,552  
 
           
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)
                 
    26 Weeks Ended  
    Mar. 29,     Mar. 28,  
    2009     2010  
Sales
  $ 1,890,249     $ 1,809,401  
Cost of goods sold
    1,387,561       1,334,806  
 
           
Gross profit
    502,688       474,595  
 
               
Operating expenses
               
Selling, general and administrative expenses
    417,316       403,306  
Gain on sale of dairy assets
          (9,396 )
Depreciation and amortization
    26,912       25,454  
 
           
Total operating expenses
    444,228       419,364  
 
           
 
               
Operating profit
    58,460       55,231  
 
               
Interest income
    330       85  
Interest expense
    (34,448 )     (34,563 )
Other income, net
    106       5  
 
           
Income before income taxes
    24,448       20,758  
Income taxes
    9,786       8,080  
 
           
Net income
  $ 14,662     $ 12,678  
 
           
 
               
Earnings per average common share outstanding
  $ 417.10     $ 363.66  
 
           
 
               
Average common shares outstanding
    35,152       34,862  
 
           
 
               
Shares outstanding at end of period
    35,152       34,552  
 
           
See accompanying notes to unaudited consolidated financial statements.

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STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)
                 
    26 Weeks Ended  
    March 29,     March 28,  
    2009     2010  
Operating activities:
               
Net income
  $ 14,662     $ 12,678  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    35,521       31,163  
Amortization of debt issuance costs
    1,614       1,614  
Increase in deferred income taxes
    (454 )     (4,502 )
Gain on sale of dairy assets
          (9,396 )
Gain on disposals of assets
    (17 )     (3 )
Changes in operating assets and liabilities:
               
Decrease in restricted cash
    2,500        
Increase in receivables
    (4,097 )     (1,146 )
Increase in income tax receivables
          (1,419 )
(Increase) decrease in inventories
    5,578       (13,109 )
Increase in prepaid expenses
    (243 )     (1,584 )
Decrease in assets held for sale
    160       215  
Decrease in other assets
    140       703  
Decrease in accounts payable
    (29,532 )     (8,787 )
Increase in income taxes payable
    5,140        
Increase (decrease) in liabilities held for sale
    (3,616 )     1,014  
Increase (decrease) in other accrued liabilities
    (6,749 )     3,118  
Increase in long-term reserves
    10,425       5,054  
 
           
Net cash provided by operating activities
    31,032       15,613  
 
           
Financing activities:
               
Principal payments on capital lease obligations
    (553 )     (642 )
Stock redemption
          (8,000 )
Dividend paid
          (5,000 )
 
           
Net cash used in financing activities
    (553 )     (13,642 )
 
           
Investing activities:
               
(Increase) decrease in note receivable
    (793 )     300  
Decrease in store construction reimbursement
    7,952        
Proceeds from sale of dairy assets, net of fees
          85,833  
Purchase of property and equipment
    (31,047 )     (21,132 )
Proceeds from sale of property and equipment
    203       43  
 
           
Net cash provided by (used in) investing activities
    (23,685 )     65,044  
 
           
Net increase in cash and cash equivalents
    6,794       67,015  
Cash and cash equivalents at beginning of period
    144,987       196,914  
 
           
Cash and cash equivalents at end of period
  $ 151,781     $ 263,929  
 
           
 
               
Interest paid
  $ 32,884     $ 32,784  
Income taxes paid
  $ 5,100     $ 14,000  
See accompanying notes to unaudited consolidated financial statements.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2010
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 twenty-six weeks ended March 28, 2010 are not necessarily indicative of the results that may be expected 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 March 29, 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 the date of issuance of these consolidated financial statements and has determined that there were no material subsequent events that need to be disclosed other than the amendment to the credit facility as disclosed in “Note 10 — Credit Facility”.
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.
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.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2010
Note 6 — Income Taxes (contd)
     The Company does not have any material tax positions that did not meet a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During the twenty-six weeks ended March 28, 2010, there have been no material changes to the amount of uncertain tax positions.
     The Company recognizes interest and penalties related to income tax deficiencies or assessments by taxing authorities for any underpayment of income taxes separately from income tax expenses as interest expense and other operating expenses, respectively.
     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”).
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, governmental securities, and corporate bonds and securities, all of which have quoted market values.
The following table provides the components of net periodic pension expense:
                                 
    Thirteen Weeks Ended     Twenty-Six Weeks Ended  
    Mar. 29,     Mar. 28,     Mar. 29,     Mar. 28,  
    2009     2010     2009     2010  
    (in thousands)     (in thousands)  
 
                               
Expected return on assets
  $ (801 )   $ (878 )   $ (1,601 )   $ (1,755 )
Service cost
    573       841       1,147       1,682  
Interest cost
    965       1,028       1,929       2,057  
Amortization of prior service cost
                (1 )     (1 )
Amortization of recognized losses
    50       359       99       718  
 
                       
Net pension expense
  $ 787     $ 1,350     $ 1,573     $ 2,701  
 
                       
 
                               
Actuarial assumptions used to determine net pension expense were:
                               
Discount rate
    7.50 %     5.50 %     7.50 %     5.50 %
Rate of increase in compensation levels
    3.00 %     3.00 %     3.00 %     3.00 %
Expected long-term rate of return on assets
    6.50 %     6.50 %     6.50 %     6.50 %
     The Company made approximately $1.8 million of contributions to its noncontributory defined pension plan during the twenty-six weeks ended March 28, 2010 and the Company expects to contribute an additional $1.4 million during the remainder of fiscal 2010.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2010
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. In the second quarter of fiscal 2010, the purchase price was adjusted upward by approximately $1.5 million due to an adjustment made for working capital. Dairies’ assets which were sold consisted primarily of accounts receivable, inventory and property and equipment. The Company incurred approximately $3.8 million in transaction and other fees related to the transaction and recognized a gain, net of tax, of approximately $5.6 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 March 28, 2010, Dairies has accrued approximately $4.2 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.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2010
Note 10 — Credit Facility
     On May 4, 2010, the Company and Markets entered into the Third 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 subsidiary Super Rx. 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 “prime rate”), plus 1.00%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Eurodollar Rate Loans, the Eurodollar Rate will apply for periods, as selected by Markets, of one, two, three or six months (but in any event not later than the maturity date of the Credit Facility).
     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 certain amendments to the Indentures governing the 8.125% Senior Notes and the 7.75% Senior Notes.
     The Credit Facility will mature on April 1, 2013.
     As of March 28, 2010, the Company had $49.8 million of outstanding letters of credit and it had $50.2 million available under the Credit Facility and 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 no short-term borrowings outstanding as of March 28, 2010 and the Company did not incur any short-term borrowings during the twenty-six weeks ended March 28, 2010.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2010
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.
     On December 28, 2009, the Company 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.
     As of March 28, 2010, after taking into consideration the amendment to the Credit Facility on May 4, 2010, the Company has the ability and right under the Credit Facility and the Notes’ Indentures to make restricted payments, including dividends, of $34.3 million.
Note 13 — Long-Term Receivable
     During the second quarter of fiscal 2010, Markets entered into the Comprehensive Tri-Party Termination Infrastructure Reimbursement Agreement (the “Termination Agreement”) with the Inland Valley Development Agency (the “IVDA”) and Hillwood/San Bernardino, LLC (“Hillwood”) to terminate commitments with Hillwood under certain obligations and settle outstanding financial issues among the parties arising from several agreements previously entered into with Hillwood and the IVDA in connection with the development of the Company’s Norton distribution center. As part of the Termination Agreement, the amount previously due from the IVDA for tax increment reimbursement related to the construction of the Norton distribution center was negotiated downward from $18.9 million to $17.7 million with the $17.7 million to be paid to Markets no later than December 31, 2010. As such, the $17.7 million receivable has been classified as a current asset and the $1.2 million adjustment out of long-term receivable was recorded to “Building and improvements” in the Company’s March 28, 2010 consolidated balance sheet. Under the Termination Agreement, Markets paid approximately $0.7 million to Hillwood as reimbursement for shared improvement costs and any further financial commitments between Markets and Hillwood were terminated. The $0.7 million reimbursement was recorded to “Buildings and improvements” in the Company’s March 28, 2010 consolidated balance sheet.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2010
Note 14 — 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 believes the stated value approximates fair value.
     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
    March 28, 2010
    (In thousands)
    Carrying   Fair
    Amount   Value
Cash and cash equivalents
  $ 263,929     $ 263,929  
Receivables
  $ 43,285     $ 43,285  
Note receivable
  $ 493     $ 493  
Long-term receivable
  $ 17,741     $ 17,741  
Long-term debt
  $ 810,000     $ 816,188  
Capital lease obligations
  $ 4,462     $ 4,462  

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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.

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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”), 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 issuers 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. In the second quarter of fiscal 2010, the purchase price was adjusted upwards by approximately $1.5 million due to an adjustment for working capital. 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 fluid milk products sold in our supermarkets from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing. We incurred approximately $3.8 million in fees related to the Dairy Transaction and recognized a gain, net of tax, of approximately $5.6 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.
Both our second quarter and our year-to-date fiscal 2010 consolidated gross profit margins, as a percentage of sales, were lower than the comparable periods of 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.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
                                 
    Thirteen Weeks Ended   Change
    Mar. 29,   Mar. 28,   2010 to 2009
($ in thousands)   2009   2010   Dollar   %
 
                               
Sales
  $ 930,996     $ 885,537     $ (45,459 )     (4.88 )%
 
                               
Gross Profit
  $ 255,826     $ 236,445     $ (19,381 )     (7.58 )%
as a % of sales
    27.48 %     26.70 %                
                                 
    Twenty-Six Weeks Ended   Change
    Mar. 29,   Mar. 28,   2010 to 2009
($ in thousands)   2009   2010   Dollar   %
 
                               
Sales
  $ 1,890,249     $ 1,809,401     $ (80,848 )     (4.28 )%
 
                               
Gross Profit
  $ 502,688     $ 474,595     $ (28,093 )     (5.59 )%
as a % of sales
    26.59 %     26.23 %                
Sales
Overall our sales were down $45.5 million and $80.8 million for the thirteen and twenty-six week periods of fiscal 2010, respectively. The Dairy Transaction accounted for a decline in sales of $24.5 million and $49.6 million in the thirteen and twenty-six weeks of fiscal 2010, respectively. Sales in our supermarkets for the thirteen and the twenty-six weeks ended March 28, 2010 compared to the comparable periods of fiscal 2009 were down 2.31% and 1.70%, respectively. Our like store sales have been adversely affected by the downturn in our local economy and by continued competitive pressures. We anticipate that our like store sales for the remainder of fiscal 2010 will be lower than like store sales in fiscal 2009 as we believe that for the foreseeable future unemployment in our marketing area will continue to be high and competitive pressures will continue.
Like Store Sales
We calculate like store sales by comparing year-to-year sales for stores that are opened in both years. For stores that were not opened for the entire previous year periods, we only include the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year. For stores that have been closed, we only include the prior year’s weekly sales that correspond to the weeks the stores were opened in the current year. 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 for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 decreased $28.3 million or 3.12%. Our recently opened stores have had an impact on our existing store sales. We estimate that they drew approximately $2.3 million of their second quarter 2010 sales from our existing stores.
Since the beginning of the second quarter of fiscal 2009, we opened two stores, one of which was opened during a portion of the second quarter of fiscal 2009. As such, these corresponding sales in fiscal 2010 are not included in like store sales. These recently opened stores had second quarter fiscal 2010 sales of $9.3 million of which $7.3 million is not included in like store sales.

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
Like Store Sales (contd.)
For the twenty-six week period of fiscal 2010, like store sales decreased $48.6 million or 2.65% from the twenty-six week period of fiscal 2009. Our recently opened stores have had an impact on our existing store sales For the twenty-six weeks of fiscal 2010, we estimate that they drew approximately $6.0 million of their sales from our existing stores.
During fiscal 2009, we opened three stores, two of which were opened during a portion of the twenty-six weeks of fiscal 2009 and the third store was opened later in fiscal 2009. As such, these corresponding sales in fiscal 2010 are not included in like store sales. For the twenty-six weeks of fiscal 2010, these recently opened stores had sales of $28.1 million of which $18.5 million are not included in like store sales. We closed one store in the first quarter of fiscal 2009, which reduced the twenty-six week fiscal 2010 sales by approximately $1.2 million.
Gross Profit
Our gross profit margin in the second quarter of fiscal 2010, as a percentage of sales, was 26.70% a decline of 78 basis points when compared to the second quarter fiscal 2009 gross margin of 27.48%. The decline in our gross margin percentage in the second quarter of fiscal 2010 also caused our twenty-six week gross margin to decline 36 basis points compared to the same period of fiscal 2009. During March of 2009 and continuing through a portion of the third quarter of fiscal 2009, we were able to raise gross margin percentages as competitive pressures eased for a short period of time. At the end of the third quarter of fiscal 2009 and continuing into the twenty-six weeks of fiscal 2010, competitive pressures again intensified. We have taken actions, including the reduction in gross margins, in order to hold onto market share during these tough economic times. With the depressed economic conditions in the nation and in our marketing area, we and our competitors continue to take steps to retain market share, we anticipate our gross margins to be challenged in the foreseeable future.
Operating Expenses and Operating Profit
                                 
    Thirteen Weeks Ended   Change
    Mar. 29,   Mar. 28,   2010 to 2009
($ in thousands)   2009   2010   Dollar   %
Operating Expenses:
                               
Selling, general and administrative expenses
  $ 206,312     $ 198,018     $ (8,294 )     (4.02 )%
as a % of sales
    22.16 %     22.36 %                
 
                               
Gain on sale of assets
        $ (1,446 )   $ (1,446 )      
as a % of sales
          (0.16 )%                
 
                               
Depreciation and amortization
  $ 13,552     $ 12,788     $ (764 )     (5.64 )%
as a % of sales
    1.46 %     1.44 %                
 
                               
Operating profit
  $ 35,962     $ 27,085     $ (8,877 )     (24.68 )%
as a % of sales
    3.86 %     3.06 %                

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STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
Operating Expenses and Operating Profit (contd.)
                                 
    Twenty-Six Weeks Ended   Change
    Mar. 29,   Mar. 28,   2010 to 2009
($ in thousands)   2009   2010   Dollar   %
Operating Expenses:
                               
Selling, general and administrative expenses
  $ 417,316     $ 403,306     $ (14,010 )     (3.36 )%
as a % of sales
    22.08 %     22.29 %                
 
                               
Gain on sale of assets
  $     $ (9,396 )   $ (9,396 )      
as a % of sales
          (0.52 )%                
 
                               
Depreciation and amortization
  $ 26,912     $ 25,454     $ (1,458 )     (5.42 )%
as a % of sales
    1.42 %     1.41 %                
 
                               
Operating profit
  $ 58,460     $ 55,231     $ (3,229 )     (5.52 )%
as a % of sales
    3.09 %     3.05 %                
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses, as a percentage of sales, in the thirteen week and twenty-six week periods of fiscal 2010 versus the same periods of fiscal 2009 is attributed primarily to an increase in the second quarter of fiscal 2010 of approximately $2.0 million in union insurance under our UFCW contracts. The remaining increase in selling, general and administrative expense, as a percentage of sales, in the second quarter of fiscal 2010 over fiscal 2009 is attributed to cost being compared to lower consolidated sales volumes in the current year versus the prior year.
The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for the second quarters of fiscal 2010 and fiscal 2009 is $340,000 and $308,000, respectively, and $654,000 and $594,000 for the twenty-six weeks ended March 28, 2010 and March 29, 2009, respectively.
Gain on Sale of Dairy Assets
The pre-tax gain on sale of dairy assets in the thirteen week and twenty-six week periods of fiscal 2010 was approximately $1.4 million and $9.4 million, respectively. 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 second quarter and twenty-six weeks of fiscal 2010 compared to the same periods 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 depreciation and amortization expense related to warehousing and distribution activities in both fiscal 2010 and fiscal 2009 and also related to dairy production in fiscal 2009 of $2.8 million and $4.3 million in the second quarters of fiscal 2010 and 2009, respectively, and $5.7 million and $8.6 million for the twenty-six weeks of fiscal 2010 and 2009, respectively. The decrease in depreciation and amortization expense included in cost of goods sold is attributed to the Dairy Transaction.

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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 $26,000 and $125,000 for the second quarters of fiscal 2010 and 2009, respectively, and $85,000 and $330,000 for the twenty-six week periods of fiscal 2010 and 2009, respectively. Interest income has decreased due to lower market rates. We expect our interest income to continue to be lower in the current fiscal year as market rates continue to be depressed.
Interest Expense
Prior to the effect of capitalized interest, interest expense was $17.4 million for both the second quarter of fiscal 2010 and 2009, and $34.6 million and $34.7 million for the twenty-six week periods for fiscal 2010 and 2009, respectively. We did not capitalize any interest in the second quarter of fiscal 2010 and we capitalized $109,000 of interest in the second quarter of fiscal 2009. Our capitalized interest was $16,000 and $259,000 for the twenty-six week periods of fiscal 2010 and 2009, respectively. The decrease in the amount of capitalized interest in both the second quarter and year-to-date periods is due to our completion of the construction of our Norton distribution center and to no new store construction in the twenty-six weeks of fiscal 2010.
Income Before Income Taxes
Income before income taxes amounted to $9.8 million and $18.7 million for the second quarters of fiscal 2010 and fiscal 2009, respectively, and was $20.8 million and $24.4 million for the twenty-six week periods of fiscal 2010 and fiscal 2009, respectively.
Income Taxes
Income taxes amounted to $3.8 million and $7.6 million in the second quarters of fiscal 2010 and fiscal 2009, respectively, and $8.1 million and $9.8 million in the twenty-six week periods of fiscal 2010 and 2009, respectively. Our effective tax rate was 38.8% and 40.5% for the second quarters of fiscal 2010 and 2009, respectively, and 38.9% and 40.0% for the twenty-six week periods of fiscal 2010 and 2009, respectively. The lower effective tax rate in fiscal 2010 versus fiscal 2009 for both the thirteen and twenty-six week periods is due primarily to our tax credits being applied against lower taxable income in fiscal 2010.
Net Income
Net income amounted to $6.0 million and $11.1 million in the second quarter of fiscal 2010 and fiscal 2009, respectively. Net income for the twenty-six weeks ended March 28, 2010 amounted to $12.7 million compared to $14.7 million for the twenty-six weeks ended March 29, 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 facility. Our credit agreement, as amended and restated on May 4, 2010, expires in April 2013 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.
As of March 28, 2010, we had $49.8 million of outstanding letters of credit and we had $50.2 million available under our credit facility.
We had no short-term borrowings outstanding as of March 28, 2010 and we did not incur any short-term borrowings during the twenty-six weeks of fiscal 2010.

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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 following table sets forth our contractual cash obligations and commercial commitments as of March 28, 2010.
                                         
    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 Note 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
  $ 4,462     $ 1,444     $ 2,299     $ 719     $  
Interest
    1,343       651       623       69        
 
                             
 
    5,805       2,095       2,922       788        
 
                                       
Operating leases (1)
    352,416       36,966       64,973       49,953       200,524  
 
                             
Total contractual cash obligations
  $ 1,396,343     $ 103,805     $ 701,054     $ 94,916     $ 496,568  
 
                             
 
 
    Other Commercial Commitments  
    (in thousands)  
            Less than                     After  
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
     
 
                                       
Standby letters of credit (2)
  $ 49,762     $ 49,762     $     $     $  
 
                             
Total other commercial commitments
  $ 49,762     $ 49,762     $     $     $  
 
                             
 
(1)   We lease the majority of our retail stores. We have subleased our old office and distribution warehouses located in Colton, California under an initial 15 year term for an amount equal to our lease payments. For purposes of contractual cash obligations shown here, minimum lease payments on this lease are shown without sub-lease offset. Certain of our operating leases provide for minimum annual payments that change over the primary term of the lease. For purposes of contractual cash obligations shown here, contractual step increases or decreases are shown in the period they are due. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.
 
(2)   Standby letters of credit are committed as security for workers’ compensation obligations. Outstanding letters of credit expire between September 2010 and February 2011.

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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 $308.5 million at March 28, 2010 and $274.4 million at September 27, 2009, and our current ratios were 2.09:1 and 1.94:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.
Net cash provided by operating activities for the twenty-six week periods ended March 28, 2010 and March 29, 2009 was $15.6 million and $31.0 million, respectfully. Significant sources of cash provided by operating activities was non-cash depreciation and amortization offset by an increase in inventory levels and a decrease in accounts payable.
The Dairy Transaction generated approximately $85.8 million in cash. Other significant uses of cash in the twenty-six week period ended March 28, 2010 included a capital stock redemption of $8.0 million and a dividend payment of $5.0 million.
As of March 28, 2010, after taking into consideration the amendment to our Credit Facility on May 4, 2010, we have the ability and right to pay restricted payments, including dividends, of up to $34.3 million.
We believe that operating cash flows and current cash reserves will be sufficient to meet our currently identified operating needs and scheduled capital expenditures. However, we may elect to fund some capital expenditures through capital leases, operating leases or debt financing. There can be no assurance that such debt and lease financing will be available to us in the future.
Labor Relations
Our collective bargaining agreements with the UFCW were renewed in March 2007 and 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.

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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.

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STATER BROS. HOLDINGS INC.
MARCH 28, 2010
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 March 28, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 28, 2010. There were no material changes in our internal control over financial reporting during the thirteen and twenty-six week periods ended March 28, 2010.

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STATER BROS. HOLDINGS INC.
MARCH 28, 2010
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, Albertsons 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.

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STATER BROS. HOLDINGS INC.
MARCH 28, 2010
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     None
Item 3. DEFAULTS UPON SENIOR SECURITIES
     None
Item 4. (REMOVED AND RESERVED)
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 to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  10.17   Third Amended and Restated Credit Agreement, dated as of May 4, 2010, by and among Stater Bros. Markets, Stater Bros. Holdings Inc. and Bank of America, N.A., previously filed as an exhibit to the Current Report on Form 8-K dated May 10, 2010.

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STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
     
Date: May 11, 2010  /s/ Jack H. Brown    
  Jack H. Brown   
  Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)   
     
Date: May 11, 2010  /s/ Phillip J. Smith    
  Phillip J. Smith   
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)   
 

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