Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 26, 2011

OR

 

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

For the transition from              to             

Commission file number 001-13222

 

 

STATER BROS. HOLDINGS INC.

(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  x    No  ¨.

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  x    No  ¨.

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		¨		Accelerated filer		¨
Non-accelerated filer		x		Smaller reporting company		¨

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

As of August 9, 2011, there were issued and outstanding

33,837 shares of the registrant’s Class A Common Stock.

 

 

 

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STATER BROS. HOLDINGS INC.

June 26, 2011

INDEX

 

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of September 26, 2010 and June 26, 2011 (Unaudited)			3
		Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 27, 2010 and June  26, 2011			5
		Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 27, 2010 and June  26, 2011			6
		Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June  27, 2010 and June 26, 2011			7
		Notes to Consolidated Financial Statements (Unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.		Quantitative and Qualitative Disclosure about Market Risk			22
Item 4.		Controls and Procedures			22
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			22
Item 1A.		Risk Factors			23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3.		Defaults Upon Senior Securities			24
Item 4.		Submission of Matters to a Vote of Security Holders			24
Item 5.		Other Information			24
Item 6.		Exhibits			24
SIGNATURES					25

 

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PART I - FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

 

		Sept. 26, 2010				June. 26, 2011
						(Unaudited)
Current assets
Cash and cash equivalents		$	325,005			$	176,909
Restricted cash			3,121				3,121
Receivables, net of allowance of $1,219 and $ 1,244			35,614				33,831
Income tax receivable			—				1,412
Inventories			203,702				244,674
Prepaid expenses			12,678				10,878
Deferred income taxes			27,428				25,526
Current portion of long-term note receivable			—				600
Current portion of long-term receivable			16,001				9,275
Total current assets			623,549				506,226
Property and equipment
Land			97,770				101,202
Buildings and improvements			559,500				576,198
Store fixtures and equipment			438,306				448,327
Property subject to capital leases			9,983				9,983
			1,105,559				1,135,710
Less accumulated depreciation and amortization			461,495				502,418
			644,064				633,292
Deferred income taxes, long-term			38,272				38,377
Deferred debt issuance cost, net			8,074				11,194
Long-term note receivable, less current portion			—				2,418
Other assets			8,828				8,670
			55,174				60,659
Total assets		$	1,322,787			$	1,200,177

 

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. 26, 2010				June 26, 2011
						(Unaudited)
Current liabilities
Accounts payable		$	135,642			$	145,578
Accrued payroll and related expenses			85,404				99,252
Accrued interest			21,845				7,658
Other accrued liabilities			40,196				25,737
Accrued income taxes			527				—
Current portion of capital lease obligations			1,562				1,344
Current portion of long-term debt			132,250				7,250
Total current liabilities			417,426				286,819
Capital lease obligations, less current portion			2,206				1,276
Long-term debt, less current portion			677,750				675,938
Long-term portion of self-insurance and other reserves			40,565				47,156
Long-term deferred benefits			75,634				75,999
Other long-term liabilities			36,073				37,300
Total liabilities			1,249,654				1,124,488
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 - 34,552 in 2010, 33,837 in 2011			—				—
Additional paid-in capital			8,786				8,605
Accumulated other comprehensive loss			(18,926	)			(18,926	)
Retained earnings			83,273				86,010
Total stockholder’s equity			73,133				75,689
Total liabilities and stockholder’s equity		$	1,322,787			$	1,200,177

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
		June 27, 2010				June 26, 2011
Sales		$	900,044			$	939,026
Cost of goods sold			654,387				687,710
Gross profit			245,657				251,316
Operating expenses
Selling, general and administrative expenses			205,564				216,040
Depreciation and amortization			12,619				11,831
Total operating expenses			218,183				227,871
Operating profit			27,474				23,445
Interest income			27				213
Interest expense			(16,983	)			(11,827	)
Other income, net			17				183
Income before income taxes			10,535				12,014
Income taxes			4,553				4,956
Net income		$	5,982			$	7,058
Earnings per average common share outstanding		$	173.13			$	208.59
Average common shares outstanding			34,552				33,837
Shares outstanding at end of period			34,552				33,837

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)

 

		39 Weeks Ended
		June 27, 2010				June 26, 2011
Sales		$	2,709,445			$	2,751,460
Cost of goods sold			1,989,193				2,016,234
Gross profit			720,252				735,226
Operating expenses
Selling, general and administrative expenses			608,870				625,517
Gain on sale of dairy assets			(9,396	)			—
Depreciation and amortization			38,073				36,346
Total operating expenses			637,547				661,863
Operating profit			82,705				73,363
Interest income			112				688
Interest expense			(51,546	)			(43,662	)
Interest related to debt purchase			—				(1,775	)
Other income, net			22				93
Income before income taxes			31,293				28,707
Income taxes			12,633				11,611
Net income		$	18,660			$	17,096
Earnings per average common share outstanding		$	536.84			$	499.91
Average common shares outstanding			34,759				34,198
Shares outstanding at end of period			34,552				33,837

See accompanying notes to unaudited consolidated financial statements.

 

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STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		39 Weeks Ended
		June 27, 2010				June 26, 2011
Operating activities:
Net income		$	18,660			$	17,096
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			46,554				44,774
Amortization of debt issuance costs			2,408				5,436
Premium paid on early retirement of debt			—				1,775
(Increase) decrease in deferred income taxes			(6,190	)			1,797
Gain on sale of dairy assets			(9,396	)			—
Gain on disposals of assets			(21	)			(93	)
Changes in operating assets and liabilities:
Decrease in receivables			960				1,783
(Increase) decrease in income tax receivable			3,423				(1,412	)
Increase in inventories			(9,248	)			(40,972	)
(Increase) decrease in prepaid expenses			(1,715	)			1,800
Decrease in assets held for sale			215				—
Decrease in other assets			744				158
Increase (decrease) in accounts payable			(14,057	)			9,936
Decrease in accrued income taxes			—				(527	)
Decrease in other accrued liabilities			(15,565	)			(16,573	)
Increase in liabilities held for sale			1,014				—
Increase in long-term reserves			5,797				8,183
Net cash provided by operating activities			23,583				33,161
Financing activities:
Proceeds from issuance of long-term debt			—				400,000
Debt issuance cost			—				(8,556	)
Principal payments on long-term debt			—				(526,812	)
Principal payments on capital lease obligations			(983	)			(1,148	)
Stock redemption			(8,000	)			(9,540	)
Dividend paid			(5,000	)			(5,000	)
Net cash used in financing activities			(13,983	)			(151,056	)
Investing activities:
Decrease in note receivable			793				—
Decrease in long-term receivable			1,740				6,726
Proceeds from sale of dairy assets, net of fees			85,833				—
Purchase of property and equipment			(27,117	)			(37,253	)
Proceeds from sale of property and equipment			67				326
Net cash provided by (used in) investing activities			61,316				(30,201	)
Net increase (decrease) in cash and cash equivalents			70,916				(148,096	)
Cash and cash equivalents at beginning of period			196,914				325,005
Cash and cash equivalents at end of period		$	267,830			$	176,909
Interest paid		$	65,340			$	44,184
Income taxes paid		$	15,400			$	11,755

See accompanying notes to unaudited consolidated financial statements.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 26, 2011

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 thirty-nine weeks ended June 26, 2011 are not necessarily indicative of the results that may be expected for the year ending September 25, 2011.

The consolidated balance sheet at September 26, 2010 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 26, 2010.

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 – Subsequent Events

The Company has evaluated subsequent events through the date of issuance of these consolidated financial statements and has determined that, other than the events disclosed in “Note 11 – Long-Term Receivable”, there were no material subsequent events that need to be disclosed in the consolidated financial statements.

Note 4 – Use of Estimates

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

Note 5 – 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 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 thirty-nine weeks ended June 26, 2011, 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 or other operating expenses.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 26, 2011

 

Note 5 – Income Taxes (contd.)

 

For federal tax purposes, the Company is subject to review of its fiscal 2007 through fiscal 2010 tax returns. During the first quarter of fiscal 2011, the State of California’s Franchise Tax Board (the “FTB”) concluded their audit of the Company’s fiscal 2007 state return and made no significant changes to the Company’s reported taxes. For state tax purposes, the Company is subject to review of its fiscal 2008 through fiscal 2010 state tax returns. During the third quarter of fiscal 2011, the FTB began their audit of the Company’s fiscal 2008 and fiscal 2009 state tax returns. Nothing has come to the attention of the Company that would indicate any material findings by the FTB as a result of their audit.

Note 6 – Retirement Plans

The Company has a Noncontributory Defined Benefit Pension Plan (the “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 the Plan is to contribute annually at a rate that is intended to provide sufficient assets to meet future benefit payment requirements. The 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.

The following table provides the components of net periodic pension expense:

 

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		June 27, 2010				June 26, 2011				June 27, 2010				June 26, 2011
		(in thousands)								(in thousands)
Expected return on assets		$	(865	)		$	(971	)		$	(2,597	)		$	(2,913	)
Service cost			826				944				2,477				2,831
Interest cost			1,001				1,072				3,002				3,216
Amortization of prior service cost			(1	)			1				(2	)			2
Amortization of recognized losses			349				392				1,048				1,177
Net pension expense		$	1,310			$	1,438			$	3,928			$	4,313
Actuarial assumptions used to determine net pension expense were:
Discount rate			5.50	%			5.00	%			5.50	%			5.00	%
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 $2.1 million of contributions to its noncontributory defined pension plan during the thirty-nine weeks ended June 26, 2011 and the Company expects to contribute an additional $0.5 million during the remainder of fiscal 2011.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 26, 2011

 

Note 7 – 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 the assumption by Dean Foods 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 sale 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.

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.

Note 8 – New Debt Issuance and Early Extinguishment of Debt

Issuance of New Notes

On November 29, 2010, the Company issued $255.0 million in aggregate principal amount of 7.375% Senior Notes due November 15, 2018 (the “New Notes”) in a private offering. The New Notes are unregistered and unsecured obligations of the Company. The Company incurred approximately $6.6 million of debt issuance costs related to the issuance of the New Notes, which will be amortized to interest expense over the term of the New Notes.

Issuance of New Credit Facility

On November 29, 2010, the Company and Markets entered into a new $245.0 million senior secured credit facility (the “Credit Facility”) with Bank of America, N.A., as administrative agent and a lender. Lenders under the Credit Facility consist of a consortium of banks. The Credit Facility consists of a four-year $145.0 million term loan (the “Term Loan”) and a $100.0 million revolving credit facility (the “Revolving Credit Facility”). The Credit Facility replaced the Company’s existing $100.0 million credit facility. The Credit Facility is secured by substantially all of the Company’s personal property excluding certain intangible assets consisting of trademarks and shares of capital stock. The Credit Facility is guaranteed by the Company, its direct subsidiary Development and by its indirect subsidiaries Super Rx and Dairies.

The Term Loan bears interest at the Eurodollar Rate plus 2.50% or the Base Rate plus 1.50% (as defined in the Credit Facility) and the interest under the Term Loan is payable quarterly in arrears and includes mandatory quarterly principal payments of 5.0%, of the original outstanding balance, in each of the first two years of the agreement and 10.0%, of the original outstanding balance, in each of the years three and four of the agreement. The Term Loan also includes additional mandatory principal payments on the Term Loan based on a percentage of “excess cash flow” as defined in the Credit Facility. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the Credit Facility is held until the Term Loan is paid in full. The Company incurred approximately $2.0 million of debt issuance costs related to the Term Loan, which will be amortized to interest expense over the term of the Term Loan.

As of June 26, 2011, the interest rates on the Term Loan were based on the Eurodollar Rate and consisted of a ninety day rate of approximately 2.807% on approximately $3.6 million of outstanding principal amount and a twelve month rate of approximately 3.287% on approximately $139.6 million of outstanding principal amount.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 26, 2011

 

Note 8 – New Debt Issuance and Early Extinguishment of Debt (contd.)

 

Issuance of New Credit Facility (contd.)

Subject to certain restrictions, the entire amount of the Revolving Credit Facility may be used for loans, letters of credit or a combination thereof. Borrowing under the Revolving Credit Facility are secured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the Revolving Credit Facility are expected to be used for workers’ compensation insurance obligations and may be used for new store construction and certain other corporate purposes. The availability of the loans and letters of credit are subject to certain borrowing restrictions.

Loans under the Revolving 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 Bank of America “prime rate”), plus 1.50%, or (ii) the “Eurodollar Rate” (defined as the British Bankers Association LIBOR Rate adjusted for the maximum reserve requirement for Eurocurrency funding), plus 2.50%. For Eurodollar Rate loans, the Company will be entitled to select interest periods of one, two, three, six, nine or twelve months, subject to availability.

The Credit Facility requires the Company and 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 the Company 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, (iii) make restricted payments and (iv) make certain amendments to the Indentures governing the 7.375% Senior Notes and 7.75% Senior Notes (“Notes Indentures”). Markets and the Company’s other direct and indirect subsidiaries are not limited in their ability to transfer assets in the form of loans, advances or cash dividends to the Company. As of June 26, 2011, the Company and Markets were in compliance with all restrictive covenants under the Credit Facility.

The Company had no short-term borrowings outstanding under the Revolving Credit Facility as of June 26, 2011 and the Company did not incur any short-term borrowings under the Revolving Credit Facility during the quarter ended June 26, 2011.

Early Extinguishment of Debt

The Company used the proceeds from the New Notes and the Term Loan and cash on hand to purchase and retire early all of its $525.0 million 8.125% Senior Notes due June 15, 2012 (“Retired Notes”). On November 29, 2010, the Company paid approximately $479.2 million to purchase and make a tender payment on approximately $477.5 million outstanding balance of Retired Notes that had been validly tendered as of that date. The payment included a tender premium of approximately $1.8 million that has been recorded under “Interest related to debt purchase” in the Company’s consolidated statements of income. On December 13, 2010, the Company paid approximately $2.4 million to purchase approximately $2.4 million of outstanding Retired Notes that had been tendered as of that date. On January 14, 2011, the Company called all remaining outstanding Retired Notes and paid approximately $45.1 million to retire the remaining notes. During the first two quarters of fiscal 2011, the Company recorded to “Interest expense” approximately $3.5 million in unamortized deferred offering costs related to the Retired Notes.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 26, 2011

 

Note 9 – Subsidiary Guarantee

As of June 26, 2011, the Company had $285.0 million of 7.75% Senior Notes due April 15, 2015 and $255.0 million of unregistered 7.375% Senior Notes due November 15, 2018, 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.

Note 10 – Litigation Matters

In the ordinary course of business, the Company is party to various legal actions which it believes are incidental to the operation of its business and the business of its subsidiaries. The Company records an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. The Company believes that the outcome of such legal proceedings to which it is currently a party will not have a material adverse effect upon its results of operations or its consolidated financial condition.

In December 2008, an action by Dennis M. O’Connor, et al. was filed in the Los Angeles Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.), seeking individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. On September 23, 2010, following mediation, the case was settled. The full settlement amount was recorded in the Company’s consolidated financial statements for the fiscal year ended September 26, 2010. During the third quarter of fiscal 2011, the Company paid the previously recorded settlement amount.

Note 11 – Long-Term Receivable

The Company has approximately $9.3 million due from the Inland Valley Development Agency (the “IVDA”) for tax increment reimbursement related to the construction of the Company’s Distribution Center. In fiscal 2010, $17.7 million, which represented the net present value of the future tax increments, was converted to a cash payment of approximately $1.7 million and a note of approximately $16.0 million from the IVDA which was due December 31, 2010. In the second quarter of fiscal 2011, the IVDA paid approximately $0.1 million on the note and it paid approximately $6.6 million on the note in the third quarter of fiscal 2011 and requested an extension of the due date on the note to July 15, 2011 which was granted by the Company. Subsequent to June 26, 2011, the IVDA paid approximately $4.5 million and approximately $4.8 million on June 28, 2011 and July 7, 2011, respectively, which fully paid the remaining balance on the note due. The IVDA note bore an annual interest rate of 5.0%.

Note 12 – Dividends and Stock Redemptions

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, 2010, the Company paid a $5.0 million dividend to La Cadena.

On December 28, 2009, the Company redeemed and retired 600 shares of its Class A Common Stock for approximately $8.0 million. The redemption was for shares held by the Moseley Family Revocable Trust (the “Trust”) which La Cadena had distributed to the Trust prior to the redemption and retirement of the shares.

On February 11, 2011, the Company redeemed and retired 715 shares of its Class A Common Stock for approximately $9.5 million. The redemption was for shares held by the Trust which La Cadena had distributed to the Trust prior to the redemption and retirement of the shares.

As of June 26, 2011, the Company had the ability and right under the Credit Facility to make restricted payments, including dividends, of $32.1 million.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 26, 2011

 

Note 13 – Note Receivable

During the construction of the Company’s corporate offices and distribution facility, the Company paid for certain construction costs at the Company’s Support Services building which were the responsibility of the IVDA. These costs, which included the construction of an exterior wall of the building and asbestos removal, were needed before the building was habitable. The Company agreed to expend the funds on behalf of the IVDA with the understanding that the IVDA would reimburse these funds after the completion of construction. During the second quarter of fiscal 2011, the amount of reimbursement was agreed to by the IVDA and the Company reclassified approximately $3.0 million from building and improvements to long-term notes receivable on its consolidated balance sheets. The note bears an interest rate of 4.0% per annum and has a maturity date of April 2015 and includes quarterly principal and interest payments.

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 amount approximates fair value because of the short-term maturity of these instrument.

Receivables

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

Current Portion of 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 assuming a discount rate that approximates long-term market rates.

Long-Term Note Receivable

Although market quotes for the fair value of the Company’s long-term note 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 7.75% Senior Notes and the 7.375% 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 June 26, 2011
		(In thousands)
		Carrying Amount				Fair Value
Cash and cash equivalents		$	176,909			$	176,909
Receivables		$	35,243			$	35,243
Current portion of long-term receivable		$	9,275			$	9,275
Long-term note receivable		$	3,018			$	3,018
Capitalized lease obligations		$	2,620			$	2,620
Long-term debt		$	683,188			$	703,188

 

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Table of Contents

STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

PART I - FINANCIAL INFORMATION (contd.)

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

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 26, 2010.

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 26, 2010.

 

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Table of Contents

STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OWNERSHIP OF THE COMPANY

La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust holds all of our issued and outstanding capital stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer 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-five year Stater Bros.’ tradition.

During the third quarter of fiscal 2011 and on a year-to-date basis, we experienced an increase in like store sales which we attribute to our focused marketing efforts, during the second and third quarter of fiscal 2011. Our strategy in the near term is to retain customer counts during these challenging economic times by continuing to provide exceptional customer service and by providing value to our customers on their purchases from our supermarkets.

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 has put and will continue to put 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, Target and Winco and from our traditional grocery format competitors Vons, Albertsons and Ralphs and from independent supermarket operators.

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

Sales and Cost of Sales

 

		Thirteen Weeks Ended								Change
		June 27,				June 26,				2011 to 2010
($ in thousands)		2010				2011				Dollar				%
Sales		$	900,044			$	939,026			$	38,982				4.33	%
Gross Profit		$	245,657			$	251,316			$	5,659				2.30	%
as a % of sales			27.29	%			26.76	%
		Thirty-Nine Weeks Ended								Change
		June 27,				June 26,				2011 to 2010
($ in thousands)		2010				2011				Dollar				%
Sales		$	2,709,445			$	2,751,460			$	42,015				1.55	%
Gross Profit		$	720,252			$	735,226			$	14,974				2.08	%
as a % of sales			26.58	%			26.72	%

Sales

Overall, our sales increased $39.0 million and $42.0 million for the thirteen and thirty-nine week periods of fiscal 2011, respectively, an increase over prior year sales of 4.33% and 1.55%, respectively.

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. We have neither opened nor closed any stores during either of the thirty-nine weeks of fiscal 2010 and 2011.

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 third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 increased $39.0 million or 4.33%. For the thirty-nine week period of fiscal 2011, like store sales increased $45.6 million or 1.68% from the thirty-nine week period of fiscal 2010.

Our like store sales increased as a result of our marketing efforts which provided increased value to our customers. Increased like store sales for the remainder of fiscal 2011 will be dependent on our ability to maintain our marketing efforts and the reactionary steps taken by our key competitors.

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS (contd.)

 

Gross Profit

Our gross profit margin in the third quarter of fiscal 2011, as a percentage of sales, was 26.76% a decrease of 53 basis points when compared to the third quarter fiscal 2010 gross profit margin of 27.29%. Our thirty-nine week period of fiscal 2011 gross profit margin was 26.72%, an increase of 14 basis points over the 26.58% for the thirty-nine week period of fiscal 2010. During the third quarter of fiscal 2011, we continued a marketing program, begun in the second quarter of fiscal 2011, of additional targeted promotional efforts that has decreased gross margin percentage when compared to the third quarter of fiscal 2010, but has allowed us to increase like store sales. We have taken actions, including the lowering of gross profit 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 and we anticipate our gross margins to be challenged in the foreseeable future.

Operating Expenses and Operating Profit

 

		Thirteen Weeks Ended								Change
		June 27,				June 26,				2011 to 2010
($ in thousands)		2010				2011				Dollar				%
Operating Expenses:
Selling, general and administrative expenses		$	205,564			$	216,040			$	10,476				5.10	%
as a % of sales			22.84	%			23.00	%
Depreciation and amortization		$	12,619			$	11,831			$	(788	)			(6.24	)%
as a % of sales			1.40	%			1.26	%
Operating profit		$	27,474			$	23,445			$	(4,029	)			(14.66	)%
as a % of sales			3.05	%			2.50	%
		Thirty-Nine Weeks Ended								Change
		June 27,				June 26,				2011 to 2010
($ in thousands)		2010				2011				Dollar				%
Operating Expenses:
Selling, general and administrative expenses		$	608,870			$	625,517			$	16,647				2.73	%
as a % of sales			22.47	%			22.73	%
Gain on sale of dairy assets		$	(9,396	)		$	—			$	9,396				—
as a % of sales			(0.35	)%			0.00	%
Depreciation and amortization		$	38,073			$	36,346			$	(1,727	)			(4.54	)%
as a % of sales			1.41	%			1.32	%
Operating profit		$	82,705			$	73,363			$	(9,342	)			(11.30	)%
as a % of sales			3.05	%			2.67	%

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS (contd.)

 

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses, as a percentage of sales, in the thirteen week period of fiscal 2011 compared to the same period of fiscal 2010, is primarily attributed to increases in union insurance costs offset in part by lower advertising costs. In the third quarter of fiscal 2011, our union insurance costs increased 0.63%, as a percentage of sales, while our advertising costs, as a percentage of sales, decreased 0.13% compared to the third quarter of fiscal 2010.

On a year-to-date basis, selling, general and administrative expenses, as a percentage of sales, have increased primarily as a result of increased labor costs. Union insurance increased 0.62%, as a percentage of sales, which was partially offset by reductions in other labor related costs.

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for both the third quarters of fiscal 2011 and fiscal 2010 was $0.3 million and was $0.9 million and $1.0 million for the thirty-nine weeks ended June 26, 2011 and June 27, 2010, respectively.

Gain on Sale of Dairy Assets

Gain on sale of dairy assets comprised a pre-tax gain from the sale of our dairy assets of approximately $9.4 million in the thirty-nine week period of fiscal 2010. The Dairy transaction is described in “Note 7 – Asset Sale” to our unaudited consolidated financial statements contained herein.

Depreciation and Amortization

The decrease in depreciation and amortization expense in the third quarter and thirty-nine weeks of fiscal 2011 compared to the same periods in fiscal 2010 is due primarily to reduced fixed asset additions in the current year compared to levels in prior years. Included in cost of goods sold is depreciation and amortization expense related to warehousing and distribution activities of $2.8 million in each of the third quarters of fiscal 2011 and 2010 and $8.4 million and $8.5 million for the thirty-nine weeks of fiscal 2011 and 2010, respectively.

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS (contd.)

 

Interest Income

Interest income was $213,000 and $27,000 for the third quarters of fiscal 2011 and 2010, respectively, and $688,000 and $112,000 for the thirty-nine week periods of fiscal 2011 and 2010, respectively. Interest income was higher in the thirteen week and thirty-nine week periods of fiscal 2011 as a result of our notes due from the IVDA. We expect our interest income to be lower for the remainder of fiscal 2011 as our interest bearing long-term receivable has been fully collected.

Interest Expense

Prior to the effect of capitalized interest, interest expense was $12.0 million and $17.0 million for the third quarter of fiscal 2011 and 2010, respectively, and $43.9 million and $51.6 million for the thirty-nine week periods of fiscal 2011 and 2010, respectively. Our interest expense is lower in fiscal 2011 compared to fiscal 2010 as a result of reducing our outstanding long-term debt by approximately $126.8 million and by having lower interest rates on the remaining debt.

We capitalized $145,000 of interest in the third quarter of fiscal 2011 and we did not capitalize any interest in the third quarter of fiscal 2010. Our capitalized interest was $233,000 and $16,000 for the thirty-nine week periods of fiscal 2011 and 2010, respectively.

Interest Related to Debt Purchase

During fiscal 2011, we paid a tender premium of approximately $1.8 million related to our tender offer to early redeem a significant portion of our then outstanding $525.0 million 8.125% Senior Notes.

Income Before Income Taxes

Income before income taxes amounted to $12.0 million and $10.5 million for the third quarters of fiscal 2011 and fiscal 2010, respectively, and was $28.7 million and $31.3 million for the thirty-nine week periods of fiscal 2011 and fiscal 2010, respectively.

Income Taxes

Income taxes amounted to $5.0 million and $4.6 million in the third quarters of fiscal 2011 and fiscal 2010, respectively, and $11.6 million and $12.6 million in the thirty-nine week periods of fiscal 2011 and 2010, respectively. Our effective tax rate was 41.3% and 43.2% for the third quarters of fiscal 2011 and 2010, respectively, and was 40.4% for both the thirty-nine week periods of fiscal 2011 and 2010. The higher effective tax rate in the third quarter of fiscal 2010 was due to recording certain tax return adjustments in the third quarter of fiscal 2010.

Net Income

Net income amounted to $7.1 million and $6.0 million in the third quarter of fiscal 2011 and fiscal 2010, respectively. Net income for the thirty-nine weeks ended June 26, 2011 amounted to $17.1 million compared to $18.7 million for the thirty-nine weeks ended June 27, 2010.

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 facility expires in November 2014 and includes a revolving credit facility for working capital and letters of credit of $100.0 million. Letters of credit are maintained pursuant to our workers’ compensation and general liability self-insurance requirements.

As of June 26, 2011, we had $49.7 million of outstanding letters of credit and we had $50.3 million available under our credit facility.

We had no short-term borrowings outstanding as of June 26, 2011 and we did not incur any short-term borrowings during the thirty-nine weeks of fiscal 2011.

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

LIQUIDITY AND CAPITAL RESOURCES (contd.)

 

The following table sets forth our contractual cash obligations and commercial commitments as of June 26, 2011.

 

		Contractual Cash Obligations (in thousands)
		Total				Less than 1 Year				1-3 Years				4-5 Years				After 5 Years
Term Loan due November 2014 (1)
Principal			143,188			$	7,250			$	23,563			$	112,375			$	—
Interest			15,304				4,620				8,314				2,370				—
			158,492				11,870				31,877				114,745				—
7.75% Senior Notes due April 2015
Principal			285,000				—				—				285,000				—
Interest			88,351				22,088				44,175				22,088				—
			373,351				22,088				44,175				307,088				—
7.375% Senior Notes due November 2018
Principal			255,000				—				—				—				255,000
Interest			141,048				18,806				37,613				37,613				47,016
			396,048				18,806				37,613				37,613				302,016
Capital lease obligations (2)
Principal			2,620				1,344				1,276				—				—
Interest			566				347				219				—				—
			3,186				1,691				1,495				—				—
Operating leases (2)			347,271				38,465				66,648				52,420				189,738
Total contractual cash obligations		$	1,278,348			$	92,920			$	181,808			$	511,866			$	491,754
		Other Commercial Commitments (in thousands)
		Total				Less than 1 Year				1-3 Years				4-5 Years				After 5 Years
Standby letters of credit (3)		$	49,737			$	49,737			$	—			$	—			$	—
Total other commercial commitments		$	49,737			$	49,737			$	—			$	—			$	—

 

(1)

As of June 26, 2011, interest on our Term Loan is based on the Eurodollar Rate plus 2.500% and consisted of a ninety day rate of 2.807% on approximately $3.6 million and a twelve month rate of 3.287% on approximately $139.6 million. For purposes of contractual cash obligations shown here, we have assumed the 90 day and twelve month interest rates as of June 26, 2011 for the respective assumed short-term and long-term portions of our Term Loan.

(2)

We lease the majority of our retail stores. We have subleased our former headquarters building and certain former distribution facilities located in Colton, California under an initial 15 year term for an amount equal to our lease payment. For purposes of contractual cash obligations shown here, minimum lease payments on this lease are shown without sub-lease offsets. 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.

(3)	Standby letters of credit are committed as security for workers’ compensation obligations. Outstanding letters of credit expire between September 2011 and February 2012.

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

LIQUIDITY AND CAPITAL RESOURCES (contd.)

 

Working capital amounted to $219.4 million at June 26, 2011 and $206.1 million at September 27, 2010, and our current ratios were 1.77:1 and 1.49:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash provided by operating activities for the thirty-nine week periods ended June 26, 2011 and June 27, 2010 was $33.2 million and $23.6 million, respectively. Significant changes in cash from operating activities were non-cash depreciation and amortization and increases in long-term reserves for self insurance offset by increases in inventories.

In fiscal 2011, we had cash used in financing activities of $151.1 million which resulted primarily from the early retirement of all of our $525.0 million 8.125% Senior Notes offset by new debt issuances of $400.0 million that was comprised of $255.0 million of 7.375% Senior Notes due 2018 and a $145.0 million Term Loan due 2014.

As of June 26, 2011, we had the ability and right under our Credit Facility to pay a restricted payment, including dividends, of up to $32.1 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 extended through March 2011. We are currently operating under a contract extension with the UFCW. We are in negotiations with the UFCW to renew the bargaining agreements. We believe our contract negotiations with the UFCW will be successful. Our collective bargaining agreement with the International Brotherhood of Teamsters was renewed in October 2010 and expires in September 2015. We believe we have good relations with our employees.

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.

JUNE 26, 2011

 

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 our Term Loan, our 7.75% Senior Notes due April 2015, our 7.375% Senior Notes due November 2018 and our 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. While interest rate changes will impact the market value risk of our bonds, such changes in the market value of our bonds do not affect our earnings or cash flows. Our earnings and our cash flows may be affected to the extent the interest rate on our Term Loan changes at each interest rate renewal period. 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 June 26, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 26, 2011. There were no material changes in our internal control over financial reporting during the thirteen and thirty-nine week periods ended June 26, 2011.

PART II - OTHER INFORMATION

 

Item 1.

LEGAL PROCEEDINGS

In the ordinary course of business, we are party to various legal actions which we believe are incidental to the operation of our business and the business of our subsidiaries. We record an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. We believe that the outcome of such legal proceedings to which we are currently a party will not have a material adverse effect upon our results of operations or our consolidated financial condition.

In December 2008, an action by Dennis M. O’Connor, et al. was filed in the Los Angeles Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. On September 23, 2010, following mediation the case was settled. The full settlement amount was recorded in our consolidated financial statements for our fiscal year ended September 26, 2010. During the third quarter of fiscal 2011, we paid the previously recorded settlement amount.

 

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STATER BROS. HOLDINGS INC.

JUNE 26, 2011

 

Item 1A.

RISK FACTORS

The supermarket industry is highly competitive and generally characterized by narrow profit margins. We compete with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and independent and specialty grocers. Our primary traditional grocery format competitors include Vons, Albertsons, Ralphs, and a number of independent supermarket operators. We also face competition from restaurants and fast food chains as household food expenditures are directed to the purchase of food prepared outside the home.

Our principal competitors include traditional grocery format operators; “big box” format retailers, including Walmart, Target, Costco and Winco and regional markets which compete with us on the basis of location, quality of products, service, price, product variety and store condition. Our competitors maintain market share through high levels of promotional activities and discount pricing, which creates a difficult environment in which to consistently increase year-over-year sales gains. 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 face competitive pressure from existing competitors and from smaller format stores such as convenience stores, drug stores and discount stores that carry traditional grocery format items. Some of our competitors have greater resources than us and are not unionized resulting in their having lower labor cost. These competitors could use their resources to take measures which could adversely affect our competitive position.

Our marketing area in Southern California continues to be highly competitive and in flux. Our market changes frequently as competitors open and close supermarket locations and introduce new pricing strategies. We anticipate increased competition from “big box” format retailers, our traditional grocery format competitors and other smaller format competitors.

Our performance is affected by inflation and deflation. In recent periods, we have experienced increases in transportation costs and the cost of products we sell in our stores. Our costs fluctuate for increases and decreases in commodities such as fuel, plastic and other product categories. As inflation has increased expenses, we have recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

 

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STATER BROS. HOLDINGS INC.

JUNE 26, 2011

 

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.
101.INS		-XBRL Instance Document.
101.SCH		-XBRL Taxonomy Extension Schema Document.
101.CAL		-XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		-XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		-XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		-XBRL Taxonomy Extension Presentation Linkbase Document.

 

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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: August 9, 2011				/s/    JACK H. BROWN
				Jack H. Brown
				Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
Date: August 9, 2011				/s/    PHILLIP J. SMITH
				Phillip J. Smith
				Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)

 

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