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 24, 2012

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 7, 2012, there were issued and outstanding

33,179 shares of the registrant’s Class A Common Stock.

 

 

 

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Table of Contents

STATER BROS. HOLDINGS INC.

June 24, 2012

INDEX

 

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of September 25, 2011 and June 24, 2012 (Unaudited)			3
		Consolidated Statements of Income (Unaudited) for the 13 weeks ended June 26, 2011 and June 24, 2012			5
		Consolidated Statements of Income (Unaudited) for the 39 weeks ended June 26, 2011 and June 24, 2012			6
		Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks ended June 26, 2011 and June 24, 2012			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			21
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			23
Item 3.		Defaults Upon Senior Securities			23
Item 4.		(Removed and Reserved)			23
Item 5.		Other Information			23
Item 6.		Exhibits			23
SIGNATURES					24

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

 

		Sept. 25,				June. 24,
		2011				2012
						(Unaudited)
Current assets
Cash and cash equivalents		$	235,784			$	223,477
Restricted cash			3,121				—
Receivables, net of allowance of $984 and $1,027			32,166				34,872
Inventories			231,121				225,425
Prepaid expenses			11,705				11,329
Deferred income taxes			30,994				33,761
Note receivable, current portion			600				600
Total current assets			545,491				529,464
Property and equipment
Land			105,039				109,182
Buildings and improvements			573,625				580,708
Store fixtures and equipment			448,845				461,221
Property subject to capital leases			9,983				11,410
			1,137,492				1,162,521
Less accumulated depreciation and amortization			512,069				549,997
			625,423				612,524
Deferred income taxes, long-term			40,241				42,276
Deferred debt issuance cost, net			10,690				8,999
Note receivable, less current portion			2,165				1,620
Other assets			8,757				8,767
			61,853				61,662
Total assets		$	1,232,767			$	1,203,650

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. 25,				June 24,
		2011				2012
						(Unaudited)
Current liabilities
Accounts payable		$	141,030			$	140,398
Accrued payroll and related expenses			106,023				111,981
Accrued interest			17,768				7,229
Other accrued liabilities			34,004				26,018
Accrued income taxes			6,732				3,017
Current portion of capital lease obligations			1,107				1,144
Current portion of long-term debt			38,798				12,688
Total current liabilities			345,462				302,475
Capital lease obligations, less current portion			1,099				1,349
Long-term debt, less current portion			642,577				634,065
Long-term portion of self-insurance and other reserves			41,553				49,234
Long-term deferred benefits			75,853				74,795
Other long-term liabilities			45,459				42,017
Total liabilities			1,152,003				1,103,935
Commitment and contingencies
Stockholder’s equity
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 0 in 2011 and 2012			—				—
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 33,837 in 2011 and 33,179 in 2012			—				—
Additional paid-in capital			8,604				8,437
Accumulated other comprehensive loss			(23,045	)			(23,045	)
Retained earnings			95,205				114,323
Total stockholder’s equity			80,764				99,715
Total liabilities and stockholder’s equity		$	1,232,767			$	1,203,650

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 26,				June 24,
		2011				2012
Sales		$	939,026			$	949,772
Cost of goods sold			687,710				698,550
Gross profit			251,316				251,222
Operating expenses
Selling, general and administrative expenses			215,066				216,330
Depreciation and amortization			11,831				11,350
Total operating expenses			226,897				227,680
Operating profit			24,419				23,542
Interest income			213				25
Interest expense			(11,827	)			(11,630	)
Other income, net			183				326
Income before income taxes			12,988				12,263
Income taxes			5,353				4,985
Net income		$	7,635			$	7,278
Earnings per average common share outstanding		$	225.64			$	219.36
Average common shares outstanding			33,837				33,179
Shares outstanding at end of period			33,837				33,179

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 26,				June 24,
		2011				2012
Sales		$	2,751,460			$	2,848,159
Cost of goods sold			2,016,234				2,076,570
Gross profit			735,226				771,589
Operating expenses
Selling, general and administrative expenses			620,912				648,030
Depreciation and amortization			36,346				34,133
Total operating expenses			657,258				682,163
Operating profit			77,968				89,426
Interest income			688				89
Interest expense			(43,662	)			(35,314	)
Interest expense related to purchase of debt			(1,775	)			—
Other income, net			93				938
Income before income taxes			33,312				55,139
Income taxes			13,488				22,418
Net income		$	19,824			$	32,721
Earnings per average common share outstanding		$	579.68			$	974.04
Average common shares outstanding			34,198				33,593
Shares outstanding at end of period			33,837				33,179

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 26,				June 24,
		2011				2012
Operating activities:
Net income		$	19,824			$	32,721
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			44,774				42,273
Amortization of debt issuance costs			5,436				1,691
Premium paid on debt purchase			1,775				—
(Increase) decrease in deferred income taxes			1,797				(4,802	)
Gain on disposals of assets			(93	)			(940	)
Changes in operating assets and liabilities:
Decrease in restricted cash			—				3,121
(Increase) decrease in receivables			1,783				(2,706	)
Decrease in income tax receivable			465				—
(Increase) decrease in inventories			(40,972	)			5,696
Decrease in prepaid expenses			1,800				376
(Increase) decrease in other assets			158				(10	)
Increase (decrease) in accounts payable			9,936				(632	)
Decrease in accrued income taxes			(527	)			(3,715	)
Decrease in other accrued liabilities			(21,915	)			(12,567	)
Increase in long-term reserves			8,920				3,181
Net cash provided by operating activities			33,161				63,687
Financing activities:
Proceeds from issuance of long-term debt			400,000				—
Proceeds from capital lease financing			—				724
Debt issuance cost			(8,556	)			—
Principal payments on long-term debt			(526,812	)			(34,622	)
Principal payments on capital lease obligations			(1,148	)			(437	)
Stock redemption			(9,540	)			(8,770	)
Dividend paid			(5,000	)			(5,000	)
Net cash used in financing activities			(151,056	)			(48,105	)
Investing activities:
Payment on long-term note receivable			—				545
Payment on long-term receivable			6,726				—
Purchase of property and equipment			(37,253	)			(30,008	)
Proceeds from sale of property and equipment			326				1,574
Net cash used in investing activities			(30,201	)			(27,889	)
Net decrease in cash and cash equivalents			(148,096	)			(12,307	)
Cash and cash equivalents at beginning of period			325,005				235,784
Cash and cash equivalents at end of period		$	176,909			$	223,477
Interest paid		$	44,184			$	44,505
Income taxes paid		$	11,755			$	30,950

See accompanying notes to unaudited consolidated financial statements.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 24, 2012

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 24, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012.

The consolidated balance sheet at September 25, 2011 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 25, 2011.

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 – 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 4 – 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 24, 2012, 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.

For federal tax purposes, the Company is subject to review of its fiscal 2008 through fiscal 2011 tax returns. During the second quarter of 2012, the Franchise Tax Board concluded their audit of the Company’s 2008 and 2009 state tax returns and made no significant changes to the Company’s reported taxes. For state tax purposes, the Company is subject to review of its fiscal 2010 and fiscal 2011 tax returns.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 24, 2012

 

Note 5 – Pension Plan

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.

 

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		June 26,				June 24,				June 26,				June 24,
		2011				2012				2011				2012
		(in thousands)								(in thousands)
Expected return on assets		$	(955	)		$	(1,024	)		$	(2,864	)		$	(3,071	)
Service cost			882				975				2,648				2,926
Interest cost			1,046				1,092				3,140				3,275
Amortization of prior service cost			1				—				2				2
Amortization of recognized losses			384				528				1,152				1,585
Net pension expense		$	1,358			$	1,571			$	4,078			$	4,717
Actuarial assumptions used to determine net pension expense were:
Discount rate			5.00	%			4.50	%			5.00	%			4.50	%
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 following table provides the components of net periodic pension expense:

The Company made approximately $6.8 million of contributions to its noncontributory defined pension plan during the thirty-nine weeks ended June 24, 2012 which included an additional $5.5 million contribution above the Company’s funding requirement. The Company expects to contribute an additional $0.8 million to the Plan during the remainder of fiscal 2012.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 24, 2012

 

Note 6 – Debt Issuance and Early Extinguishment of Debt

Issuance of Notes

On November 29, 2010, the Company completed the sale of $255.0 million in aggregate principal amount of 7.375% Senior Notes due November 15, 2018 (the “Notes”) in a private offering. At the time of issuance, these Notes were unregistered and are unsecured obligations of the Company. On September 20, 2011, the Company completed the exchange of the unregistered 7.375% Senior Notes for virtually identical registered $255.0 million 7.375% Senior Notes due November 15, 2018 collectively (the “7.375% Senior Notes”). The Company incurred approximately $6.6 million of debt issuance costs related to the issuance of the Notes and registration of the 7.375% Senior Notes, which will be amortized to interest expense over the term of the 7.375% Senior Notes.

Issuance of Credit Facility

On November 29, 2010, the Company and Markets entered into a $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” (defined as the British Bankers Association LIBOR Rate adjusted for the maximum reserve requirement for Eurocurrency funding), 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 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 24, 2012, the interest rate on the Term Loan was based on the Eurodollar Rate and consisted of a ninety day rate of approximately 2.970% on approximately $3.6 million of outstanding principal amount and a twelve month rate of approximately 3.627% on approximately $103.2 million of outstanding principal amount.

Subject to certain restrictions, the entire amount of the Revolving Credit Facility may be used for loans, letters of credit or a combination thereof. Borrowings 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 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.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 24, 2012

 

Note 6 – Debt Issuance and Early Extinguishment of Debt (contd.)

 

Issuance of Credit Facility (contd.)

 

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 24, 2012, the Company and Markets were in compliance with all restrictive covenants under the Credit Facility.

As of June 24, 2012, the Company had $57.4 million of outstanding letters of credit and it had $42.6 million available under the credit facility.

The Company had no short-term borrowings outstanding under the Revolving Credit Facility as of June 24, 2012 and the Company did not incur any short-term borrowings under the Revolving Credit Facility during the thirty-nine weeks ended June 24, 2012.

Early Extinguishment of Debt

The Company used the proceeds from the 7.375% Senior Notes and the Term Loan and cash on hand to purchase and retire early 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 expense related to purchase of debt” in the Company’s consolidated statements of income for fiscal 2011. 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. In fiscal 2011, the Company recorded to “Interest expense” approximately $3.5 million in unamortized deferred offering costs related to the Retired Notes.

Note 7 – Subsidiaries Guarantee

As of June 24, 2012, the Company had $285.0 million of outstanding 7.75% Senior Notes due April 15, 2015 and $255.0 million of outstanding 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.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 24, 2012

 

Note 8 – 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.

On November 5, 2010, an action by Diego De Jesus Martinez was filed in the Superior Court of the State of California for the County of Los Angeles against Markets (“Martinez Case”) seeking individual and potential class action monetary damages for alleged discrepancies between the actual time worked by certain employees and the amounts recorded on Markets’ time clock reports. On October 26, 2011, following a mediation, the Martinez Case was settled and the court approved the settlement in July of 2012. The full settlement amount was recorded in the Company’s consolidated financial statements for the fiscal year ended September 25, 2011 and the recorded amount was paid on July 18, 2012.

In May of 2011, Markets was served with an action filed in the Superior Court of the State of California for the County of Riverside (“Harold F. Lunsford et al. v. Stater Bros. Markets”) seeking individual and potential class action damages including associated penalties for Markets’ alleged failure to provide meal periods, rest periods or compensation in lieu thereof and alleged failure to pay certain wages for terminated employees. On January 26, 2012, following a mediation, this case was settled subject to final court approval of the settlement and the full settlement amount has been recorded in the Company’s consolidated financial statements for fiscal 2012.

Note 9 – Note Receivable

During the construction of the Company’s Corporate Offices and Distribution Center, the Company paid for certain construction costs at the Company’s Support Services building which were the responsibility of the Inland Valley Development Agency (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 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 10 – Dividends and Stock Redemptions

On December 28, 2010, the Company paid a $5.0 million dividend to La Cadena Investments (“La Cadena”), the sole shareholder of the Company. On December 21, 2011, the Company declared a $5.0 million dividend to La Cadena which was paid on December 23, 2011.

On February 11, 2011, the Company redeemed 715 shares of its Class A Common Stock for approximately $9.5 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 of the shares.

On March 16, 2012, the Company redeemed 658 shares of its Class A Common Stock for approximately $8.8 million. The redemption was for shares held by the Trust which La Cadena had distributed to the Trust prior to the redemption of the shares.

As of June 24, 2012, the Company had the ability and right under the Credit Facility to make restricted payments, including dividends, of up to $35.1 million.

 

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STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

JUNE 24, 2012

 

Note 11 – 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 market quotes 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 Debt

The fair value of the Company’s 7.75% Senior Notes and 7.375% Senior Notes are determined based on observable inputs that are corroborated by market data (Level 2 as defined by ASC Topic 820, “Fair Value Measurements and Disclosures”) Although a market quote for the fair value of the Company’s Term Loan is not readily available, the Company believes its carrying value approximates fair value. As of June 24, 2012, the estimated fair value of the Company’s Long-Term debt was $677.9 million.

 

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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 25, 2011.

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 fiscal year ended September 25, 2011.

 

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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 Securities 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 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-six (“76”) year Stater Bros. tradition.

Our strategy in the near term is to retain customer counts during these challenging economic times by continuing to provide exceptional customer service and value to our customers on their purchases from our supermarkets.

Our marketing area of Southern California is highly competitive and constantly changing. 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 26,				June 24,				2012 to 2011
($ in thousands)		2011				2012				Dollar				%
Sales		$	939,026			$	949,772			$	10,746				1.14	%
Gross Profit		$	251,316			$	251,222			$	(94	)			(0.04	)%
as a % of sales			26.76	%			26.45	%

 

		Thirty-Nine Weeks Ended								Change
		June 26,				June 24,				2012 to 2011
($ in thousands)		2011				2012				Dollar				%
Sales		$	2,751,460			$	2,848,159			$	96,699				3.51	%
Gross Profit		$	735,226			$	771,589			$	36,363				4.95	%
as a % of sales			26.72	%			27.09	%

Sales

Our sales increased $10.7 million and $96.7 million for the thirteen and thirty-nine week periods of fiscal 2012, respectively, an increase over prior year sales of 1.14% and 3.51%, 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. In the fourth quarter of fiscal 2011, we opened a replacement store in Grand Terrace, California that replaced an existing older store. In the second quarter of fiscal 2012, we opened a replacement store in Lake Elsinore, California that replaced an existing older store. We have had no new store openings nor any store closures in either fiscal 2011 or 2012

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 2012 compared to the third quarter of fiscal 2011 increased $10.7 million or 1.14%. For the thirty-nine week period of fiscal 2012, like store sales increased $96.7 million or 3.51% from the thirty-nine week period of fiscal 2011.

 

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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 2012, as a percentage of sales, was 26.45%, a decrease of 31 basis points when compared to the third quarter fiscal 2011 gross profit margin of 26.76%. Our gross margin declined in the third quarter of fiscal 2012 as we extended promotional pricing in order to combat competitive pressures and grow customer counts. Our gross margin for the thirty-nine week period of fiscal 2012 was 27.09%, an increase of 37 basis points over the 26.72% for the thirty-nine week period of fiscal 2011. We attribute our year-to-date increase in gross profit margin to more focused marketing efforts and our ability to pass on inflation which increased our profit margin in the first two quarters of fiscal 2012. Our gross margin gains in the first two quarters of fiscal 2012 have been partially offset by our gross margin decline in the third quarter of fiscal 2012. We anticipate that the current economic conditions and continued and growing competitive pressures could limit our ability to further pass on cost inflation which could put pressure on our gross margin in the foreseeable future.

Operating Expenses and Operating Profit

 

		Thirteen Weeks Ended								Change
		June 26,				June 24,				2012 to 2011
($ in thousands)		2011				2012				Dollar				%
Operating Expenses:
Selling, general and administrative expenses		$	215,066			$	216,330			$	1,264				0.59	%
as a % of sales			22.90	%			22.77	%
Depreciation and amortization		$	11,831			$	11,350			$	(481	)			(4.07	)%
as a % of sales			1.26	%			1.20	%
Operating profit		$	24,419			$	23,542			$	(877	)			(3.59	)%
as a % of sales			2.60	%			2.48	%

 

		Thirty-Nine Weeks Ended								Change
		June 26,				June 24,				2012 to 2011
($ in thousands)		2011				2012				Dollar				%
Operating Expenses:
Selling, general and administrative expenses		$	620,912			$	648,030			$	27,118				4.37	%
as a % of sales			22.57	%			22.75	%
Depreciation and amortization		$	36,346			$	34,133			$	(2,213	)			(6.09	)%
as a % of sales			1.32	%			1.20	%
Operating profit		$	77,968			$	89,426			$	11,458				14.70	%
as a % of sales			2.83	%			3.14	%

 

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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 decrease in selling, general and administrative expenses, as a percentage of sales, in the thirteen week period of fiscal 2012 compared to the same period of fiscal 2011, is primarily attributed to decreases in payroll related cost of approximately ten basis points, as a percentage of sales, and a reduction in electronic funds transfer fees of approximately seven basis points, as a percentage of sales.

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 and to a litigation settlement in the first quarter of fiscal 2012. The increase in labor cost included an increase of approximately 18 basis points, as a percentage of sales, in union insurance cost.

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses was $0.3 million for both of the third quarters of fiscal 2012 and 2011 and was $0.9 million for both the thirty-nine weeks ended June 24, 2012 and June 26, 2011.

Depreciation and Amortization

Depreciation and amortization expense in the third quarter of fiscal 2012 was $11.4 million compared to $11.8 million for the third quarter of fiscal 2011. Depreciation for the thirty-nine week periods of fiscal 2012 and 2011 was $34.1 million and $36.3 million, respectively. Included in the third quarters of fiscal 2012 and 2011 cost of goods sold is $2.7 million and $2.8 million, respectively, and $8.1 million and $8.4 million for the thirty-nine week fiscal 2012 and 2011, respectively, of depreciation and amortization related to our warehousing and distribution activities.

Interest Income

Interest income was $25,000 and $213,000 for the third quarters of fiscal 2012 and 2011, respectively, and $89,000 and $688,000 for the thirty-nine week periods of fiscal 2012 and 2011, respectively. We anticipate that our interest income will continue to be low as interest rates continue to be depressed.

Interest Expense

Prior to the effect of capitalized interest, interest expense was $11.7 million and $12.0 million for the third quarter of fiscal 2012 and 2011, respectively, and $35.7 million and $43.9 million for the thirty-nine week periods of fiscal 2012 and 2011, respectively. Interest expense in fiscal 2011 included $3.5 million from the write off of unamortized deferred offering cost on our early retired $525.0 million 8.125% Senior Notes in fiscal 2011.

Interest Expense Related to Purchase of Debt

In the first quarter of fiscal 2011, we paid approximately $1.8 million in tender premium related to our tender offer to early redeem a significant portion of our $525.0 million 8.125% Senior Notes.

Income Before Income Taxes

Income before income taxes amounted to $12.3 million and $13.0 million for the third quarters of fiscal 2012 and 2011, respectively, and was $55.1 million and $33.3 million for the thirty-nine week periods of fiscal 2012 and 2011, respectively.

Income Taxes

Income taxes amounted to $5.0 million and $5.4 million in the third quarters of fiscal 2012 and 2011, respectively, and $22.4 million and $13.5 million in the thirty-nine week periods of fiscal 2012 and 2011, respectively. Our effective tax rate was 40.7% and 41.2% for the third quarters of fiscal 2012 and 2011, respectively, and was 40.7% and 40.5% for the thirty-nine week periods of fiscal 2012 and 2011, respectively.

Net Income

Net income amounted to $7.3 million and $7.6 million in the third quarter of fiscal 2012 and 2011, respectively. Net income for the thirty-nine weeks ended June 24, 2012 amounted to $32.7 million compared to $19.8 million for the thirty-nine weeks ended June 26, 2011.

 

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STATER BROS. HOLDINGS INC.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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. The letters of credit are maintained pursuant to our workers’ compensation and general liability self-insurance requirements.

As of June 24, 2012, we had $57.4 million of outstanding letters of credit and we had $42.6 million available under our credit facility.

We had no short-term borrowings outstanding under our revolving credit facility as of June 24, 2012. We did not incur any short-term borrowings under our revolving credit facility during the thirty-nine week period of fiscal 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.)

 

The following table sets forth our contractual cash obligations and commercial commitments as of June 24, 2012.

 

		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		$	106,753			$	12,688			$	94,065			$	—			$	—
Interest			9,107				4,693				4,414				—				—
			115,860				17,381				98,479				—				—
7.75% Senior Notes due April 2015
Principal			285,000				—				285,000				—				—
Interest			66,263				22,088				44,175				—				—
			351,263				22,088				329,175				—				—
7.375% Senior Notes due November 2018
Principal			255,000				—				—				—				255,000
Interest			122,241				18,806				37,613				37,613				28,209
			377,241				18,806				37,613				37,613				283,209
Capital lease obligations (2)
Principal			2,493				1,144				1,332				17				—
Interest			347				251				96				—				—
			2,840				1,395				1,428				17				—
Operating leases (2)			327,724				39,391				64,407				51,392				172,534
Total contractual cash obligations		$	1,174,928			$	99,061			$	531,102			$	89,022			$	455,743

 

		Other Commercial Commitments (in thousands)
		Total				Less than 1 Year				1-3 Years				4-5 Years				After 5 Years
Standby letters of credit (3)		$	57,358			$	57,358			$	—			$	—			$	—
Total other commercial commitments		$	57,358			$	57,358			$	—			$	—			$	—

 

(1)

As of June 24, 2012, interest on our Term Loan is based on the Eurodollar Rate plus 2.500% and consisted of a ninety day rate of 2.970% on approximately $3.6 million of outstanding principal amount and a twelve month rate of 3.627% on approximately $103.2 million of outstanding principal amount. For purposes of contractual cash obligations shown here, we have assumed the 90 day and twelve month interest rates as of June 24, 2012 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 2012 and February 2013.

 

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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 $227.0 million at June 24, 2012 and $200.0 million at September 25, 2011, and our current ratios were 1.75:1 and 1.58:1, 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 24, 2012 and June 26, 2011 was $63.7 million and $33.2 million, respectively. Significant sources in cash from operating activities in the thirty-nine weeks of fiscal 2012 were our net income and non-cash depreciation and amortization offset in part by reduction in other accrued liabilities.

In the thirty-nine weeks of 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 24, 2012, we had the ability and right under our Credit Facility to pay restricted payments, including dividends, of up to $35.1 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, for at least the next 12 months. 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 agreement with the United Food and Commercial Workers was renewed in October 2011 and expires in March 2014. Our collective bargaining agreements with the International Brotherhood of Teamsters were renewed in October 2010 and expire 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.

 

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 due November 2014, our 7.75% Senior Notes due April 2015, our 7.375% Senior Notes due November 2018 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. 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.

 

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STATER BROS. HOLDINGS INC.

JUNE 24, 2012

PART I – FINANCIAL INFORMATION (contd.)

 

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 24, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 24, 2012. There were no material changes in our internal control over financial reporting during the thirteen and thirty-nine week periods ended June 24, 2012.

Because of the inherent limitation of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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.

On November 5, 2010, an action by Diego De Jesus Martinez was filed in the Superior Court of the State of California for the County of Los Angeles against Markets (“Martinez Case”) seeking individual and potential class action monetary damages for alleged discrepancies between the actual time worked by certain employees and the amounts recorded on Markets’ time clock reports. On October 26, 2011, following a mediation, the Martinez Case was settled and the court approved the settlement in July 2012. The full settlement amount was recorded in our consolidated financial statements for the fiscal year ended September 25, 2011 and the recorded amount was paid on July 18, 2012.

In May of 2011, Markets was served with an action filed in the Superior Court of the State of California for the County of Riverside (“Harold F. Lunsford et al. v. Stater Bros. Markets”) seeking individual and potential class action damages including associated penalties for Markets’ alleged failure to provide meal periods, rest periods or compensation in lieu thereof and alleged failure to pay certain wages for terminated employees. On January 26, 2012, following a mediation, this case was settled subject to final court approval of the settlement and the full settlement amount has been recorded in our consolidated financial statements for fiscal 2012.

 

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STATER BROS. HOLDINGS INC.

JUNE 24, 2012

 

Item 1A.

RISK FACTORS

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 25, 2011, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There are no material changes from the disclosure provided in the Form 10-K for the fiscal year ended September 25, 2011, as supplemented by our Form 10-Q for the thirteen and thirty-nine weeks ended June 24, 2012, with respect to the Risk Factors.

 

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

 

 

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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 7, 2012						/s/ Jack H. Brown
						Jack H. Brown
						Chairman of the Board, President, and Chief Executive Officer
						(Principal Executive Officer)
Date: August 7, 2012						/s/ David J. Harris
						David J. Harris
						Senior Vice President - Finance and Chief Financial Officer
						(Principal Financial Officer)
						(Principal Accounting Officer)

 

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