STATER BROS HOLDINGS INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - STATER BROS HOLDINGS INC	Financial_Report.xls
EX-31.1 - EX-31.1 - STATER BROS HOLDINGS INC	d457352dex311.htm
EX-31.2 - EX-31.2 - STATER BROS HOLDINGS INC	d457352dex312.htm
EX-32.1 - EX-32.1 - STATER BROS HOLDINGS INC	d457352dex321.htm

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 December 30, 2012

¨	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.

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 February 12, 2013, there were issued and outstanding

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

STATER BROS. HOLDINGS INC.

December 30, 2012

INDEX


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2012 and December 30, 2012 (Unaudited)		3

	Consolidated Statements of Income and Comprehensive Income (Unaudited) For the 13 weeks ended December 25, 2011 and December 30, 2012		5

	Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 25, 2011 and December 30, 2012		6

	Notes to Consolidated Financial Statements (Unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3.	Quantitative and Qualitative Disclosure about Market Risk		20

Item 4.	Controls and Procedures		20

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		20

Item 1A.	Risk Factors		21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3.	Defaults Upon Senior Securities		22

Item 4.	(Removed and Reserved)		22

Item 5.	Other Information		22

Item 6.	Exhibits		22

SIGNATURES			23

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	Sept. 30, 2012			Dec. 30, 2012
				(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	219,800		$	189,018
Receivables, net of allowance of $1,323 and $1,323		37,427			41,910
Income tax receivable		10,475			7,243
Inventories		229,117			254,073
Prepaid expenses		17,221			17,709
Deferred income taxes, current portion		28,519			25,798
Note receivable, current portion		600			600

Total current assets		543,159			536,351
Property and equipment
Land		109,729			109,666
Buildings and improvements		582,282			583,424
Store fixtures and equipment		465,576			468,088
Property subject to capital leases		11,410			11,615

		1,168,997			1,172,793
Less accumulated depreciation and amortization		(561,493	)		(572,570	)

		607,504			600,223
Deferred income taxes, less current portion		41,945			44,233
Deferred debt issuance costs, net		8,397			7,838
Note receivable, less current portion		1,423			1,219
Other assets		5,894			5,906

		57,659			59,196

Total assets	$	1,208,322		$	1,195,770

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS (contd.)

(In thousands, except share amounts)


	Sept. 30, 2012			Dec. 30, 2012
				(Unaudited)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Accounts payable	$	147,544		$	153,008
Accrued payroll and related expenses		103,918			94,996
Accrued interest		18,164			7,937
Other accrued liabilities		43,869			43,450
Current portion of capital lease obligations		1,242			1,236
Current portion of long-term debt		11,419			13,232

Total current liabilities		326,156			313,859
Long-term debt, less current portion		633,521			629,896
Capital lease obligations, less current portion		1,186			897
Long-term portion of self-insurance and other reserves		43,796			48,922
Long-term deferred benefits		70,118			68,647
Accrued pension and other		50,923			50,478

Total liabilities		1,125,700			1,112,699
Commitments and contingencies
Stockholder’s equity
Common Stock, $.01 par value:
Authorized shares - 100,000 Issued and outstanding shares - 0 in 2012 and 2013		—			—
Class A Common Stock, $.01 par value:
Authorized shares - 100,000 Issued and outstanding shares - 33,179 in 2012 and 2013		—			—
Additional paid-in capital		8,437			8,437
Accumulated other comprehensive loss		(30,126	)		(30,126	)
Retained earnings		104,311			104,760

Total stockholder’s equity		82,622			83,071

Total liabilities and stockholder’s equity	$	1,208,322		$	1,195,770

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share and share amounts)


	13 Weeks Ended
	Dec. 25, 2011			Dec. 30, 2012
Sales	$	960,724		$	968,744
Cost of goods sold		701,043			718,015

Gross profit		259,681			250,729
Operating expenses
Selling, general and administrative expenses		221,871			220,079
Gain on sale of property and equipment		(639	)		(1,933	)
Depreciation and amortization		11,412			11,683

Total operating expenses		232,644			229,829

Operating profit		27,037			20,900
Interest income		36			23
Interest expense		(11,949	)		(11,809	)

Income before income taxes		15,124			9,114
Income taxes		6,114			3,665

Net income and comprehensive income	$	9,010		$	5,449

Earnings per average common share outstanding	$	266.28		$	164.23

Average common shares outstanding		33,837		$	33,179

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	13 Weeks Ended
	Dec. 25, 2011			Dec. 30, 2012
Operating activities:
Net income	$	9,010		$	5,449
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		14,105			14,523
Amortization of debt issuance costs		566			559
(Increase) decrease in deferred income taxes		(4,908	)		433
Gain on disposals of assets		(639	)		(1,933	)
Changes in operating assets and liabilities:
Decrease in restricted cash		3,121			—
Increase in receivables		(7,976	)		(4,483	)
Decrease in income tax receivables		—			3,232
Increase in inventories		(29,569	)		(24,956	)
Increase in prepaid expenses		(3,115	)		(488	)
Increase in other assets		(7	)		(12	)
Increase in accounts payable		24,081			5,464
Increase in income taxes payable		3,671			—
Decrease in other accrued liabilities		(5,113	)		(19,568	)
Increase in long-term reserves		10,195			3,210

Net cash provided by (used in) operating activities		13,422			(18,570	)

Investing activities:
Collections on note receivable		204			204
Purchase of property and equipment		(12,558	)		(7,388	)
Proceeds from sale of property and equipment		1,035			2,079

Net cash used in investing activities		(11,319	)		(5,105	)

Financing Activities:
Proceeds from capital lease financing		724			—
Principal payments on long-term debt		(1,812	)		(1,812	)
Principal payments on capital lease obligations		(462	)		(295	)
Dividend paid		(5,000	)		(5,000	)

Net cash used in financing activities		(6,550	)		(7,107	)

Net decrease in cash and cash equivalents		(4,447	)		(30,782	)
Cash and cash equivalents at beginning of period		235,784			219,800

Cash and cash equivalents at end of period	$	231,337		$	189,018

Interest paid	$	21,728		$	21,477
Income taxes paid	$	7,350			—

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 30, 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 thirteen weeks ended December 30, 2012 are not necessarily indicative of the results that may be experienced for the fiscal year ending September 29, 2013.

The consolidated balance sheet at September 30, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) 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 fiscal year ended September 30, 2012.

Note 2 – Principles of Consolidation

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Stater Bros. Markets (“Markets”) and Stater Bros. Development, Inc. (“Development”), and Markets’ wholly-owned subsidiaries, Super Rx, Inc. (“Super Rx”) and SBM Dairies, Inc. (“Dairies”). All significant inter-company transactions have been eliminated in consolidation.

Note 3 – Reclassifications

Certain amounts in prior periods have been reclassified to conform to current period financial statement presentation. For the thirteen weeks ended December 25, 2011, the Company reclassified approximately $0.6 million from Other income, net to Gain on sale of property and equipment in the Consolidated Statements of Income and Comprehensive Income and it reclassified approximately $2.7 million from Accounts payable to Other accrued liabilities in the Statements of Consolidated Cash Flows.

Note 4 – Use of Estimates

The preparation of financial statements in conformity with GAAP 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 thirteen weeks ended December 30, 2012, there were no material changes to the amount of uncertain tax positions.

The Company recognizes interest and penalties related to income tax deficiencies or assessments by taxing authorities for any underpayment of income taxes separately from income tax expenses as either interest expense or other operating expenses.

For federal tax purposes, the Company is subject to review of its fiscal 2009 through fiscal 2012 tax returns. During fiscal 2012, the State of California’s 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 through fiscal 2012 tax returns.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 30, 2012

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 Plan’s investments are recorded at fair value and include cash, which earns interest, governmental securities and corporate bonds and securities.

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


	13 Weeks Ended
	Dec. 25, 2011			Dec. 30, 2012
	(in thousands)
Expected return on assets	$	(1,024	)	$	(1,176	)
Service cost		975			1,229
Interest cost		1,092			1,114
Amortization of prior service cost		1			1
Amortization of recognized losses		528			726

Net pension expense	$	1,572		$	1,894

Actuarial assumptions used to determine net pension expense were:
Discount rate		4.50	%		3.70	%
Rate of increase in compensation levels		3.00	%		3.00	%
Expected long-term rate of return on assets		6.50	%		6.00	%

The Company contributed $1.6 million to the Plan in the first quarter of fiscal 2013 and the Company expects to contribute $5.9 million during the remainder of fiscal 2013.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 30, 2012

Note 7 – 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 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.

On December 31, 2012, the Company made principal payments on the term loan of approximately $2.3 million which consisted of a contractual quarterly principal payment of $1.8 million and an excess cash payment of $0.5 million.

As of January 1, 2013, the interest rates on the Term Loan are based on the Eurodollar Rate and consisted of a 90 day rate of approximately 2.811% on approximately $10.9 million of outstanding principal amount and a 12 month rate of approximately 3.344% on approximately $89.9 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. 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.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 30, 2012

Note 7 – 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 $255.0 million 7.375% Senior Notes due November 15, 2018 (“7.375% Senior Notes”) and the $285.0 million 7.75% Senior Notes due April 15, 2015 (“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 December 30, 2012, the Company and Markets were in compliance with all restrictive financial covenants under the Credit Facility.

As of December 30, 2012, the Company had $59.9 million of outstanding letters of credit and had $40.1 million available under the Credit Facility.

The Company had no borrowings outstanding under the Revolving Credit Facility as of December 30, 2012 and the Company did not incur any borrowings under the Revolving Credit Facility during the fiscal quarter ended December 30, 2012.

Note 8 – Senior Notes and Subsidiary Guarantee

As of December 30, 2012, the Company had $285.0 million outstanding of the 7.75% Senior Notes and $255.0 million outstanding of the 7.375% Senior Notes, collectively (the “Notes”).

The Notes are guaranteed by the Company’s subsidiaries Markets and Development and the Company’s indirect subsidiaries Super Rx and Dairies (each a “subsidiary guarantor”, and collectively, the “subsidiary guarantors”). Condensed consolidating financial information with respect to the subsidiary guarantors is not provided because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and there are no subsidiaries of the Company other than the subsidiary guarantors.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 30, 2012

Note 9 – 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 consolidated financial statements.

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 which settlement was approved by the court. The full settlement amount was recorded in the Company’s consolidated financial statements for fiscal 2012 and the full amount was paid in fiscal 2013.

Note 10 – 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. 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 11 – Dividend

On December 23, 2011, the Company paid a $5.0 million dividend to La Cadena Investments (“La Cadena”), the sole shareholder of the Company. On December 24, 2012, the Company declared a $5.0 million dividend to La Cadena which was paid on December 27, 2012.

As of December 30, 2012, the Company had the ability and right to make restricted payments, including dividends, of $13.3 million.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 30, 2012

Note 12 - 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 are not readily available, the Company believes the stated value approximates fair value.

Long-Term Debt

The fair value of the 7.75% Senior Notes and the 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 market quotes for the fair value of the Company’s Term Loan and capitalized lease obligations are not readily available, the Company believes the stated value approximates fair value.

As of December 30, 2012, the estimated fair value of the Company’s Long-Term Debt was $666.8 million.

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PART I - FINANCIAL INFORMATION (contd.)

Item 2.

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

CRITICAL ACCOUNTING POLICIES

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies are summarized in our report on Form 10-K for the year ended September 30, 2012.

Our discussion and analysis of financial condition and results of operations are based upon our unaudited consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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 30, 2012.

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OWNERSHIP OF THE COMPANY

La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust (the “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, as Trustee of the Trust, 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 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-seven year Stater Bros.’ tradition.

During these tough economic times, our strategy is to retain customer counts by providing our customers with value and exceptional service on their visits to our stores. This strategy combined with continued and increasing competitive pressures has caused our gross profit margins to be reduced. We believe it is better to sacrifice short-term margins in order to retain our customers so that when our local economy does turn around we will still have them as customers.

Our marketing area of Southern California 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.

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Sales and Gross Profit


	Fiscal Period Ended						Change
	Dec. 25,			Dec. 30,			2013 to 2012
*(in thousands)*	2011			2012			Dollar			%
Sales	$	960,724		$	968,744		$	8,020			0.83	%
Gross Profit	$	259,681		$	250,729		$	(8,952	)		(3.45	)%
as a % of sales		27.03	%		25.88	%

Sales

Sales in our supermarkets increased 0.83% or $8.0 million for the first quarter of fiscal 2013 compared to the same period in fiscal 2012.

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. For replacement stores we include sales for the entire year for both the replaced and replacement store in our like store sales calculation.

Like store sales are affected by various factors including, but not limited to, inflation and deflation, promotional discounting, customer traffic, buying trends, pricing pressures from competitors and competitive openings and closings.

Like store sales increased $8.0 million or 0.83% from the first quarter of fiscal 2012.

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Gross Profit

Gross profit margin, as a percentage of sales, in the first quarter of fiscal 2013 decreased 115 basis points to 25.88% from 27.03% in fiscal 2012. The decrease in gross profit margins in the first quarter of fiscal 2013 follows a trend begun in the third quarter of fiscal 2012 of reduced gross margin percentages. Due to competitive pressures and our desire to retain customers, we have elected not to fully pass onto our customers cost inflation that we have experienced. We anticipate that the current economic conditions and competitive pressures will limit our ability to pass on price increases which will continue to put pressure on our gross margins for the foreseeable future.

Operating Expenses and Operating Profit


	Fiscal Period Ended						Change
	Dec. 25,			Dec. 30,			2013 to 2012
*(in thousands)*	2011			2012			Dollar			%
Operating Expenses:
Selling, general and administrative expenses	$	221,871		$	220,079		$	(1,792	)		(0.81	)%
as a % of sales		23.10	%		22.71	%
Gain of sale of property and equipment		(639	)		(1,933	)	$	(1,294	)		202.50	%
as a % of sales		(0.07	)%		(0.20	)%
Depreciation and amortization		11,412			11,683		$	271			2.37	%
as a % of sales		1.19	%		1.21	%
Operating profit	$	27,037		$	20,900		$	(6,137	)		(22.70	)%
as a % of sales		2.81	%		2.16	%

Selling, General and Administrative Expenses

The decrease, as a percentage of sales, in selling, general and administrative expenses in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 is due primarily to a decrease, as a percentage of sales, in payroll related expenses. Our payroll costs, as a percentage of sales, decreased 15 basis points. In the first quarter of fiscal 2012, we had a settlement of a lawsuit related to a class action labor claim (see “Part II, Item 1. Legal Proceedings” for further discussion of this claim).

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for the first quarters of fiscal 2013 and fiscal 2012 is $311,000 and $293,000, respectively.

Gain on Sale of Property and Equipment

In fiscal 2013, we had a pre-tax gain of approximately $1.9 million from the sale of an old store site. In fiscal 2012, we had a pre-tax net gain from the sale of property and equipment of approximately $0.6 million.

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Depreciation and Amortization

Depreciation and amortization expense in the first quarter of fiscal 2013 was $11.7 million compared to $11.4 million for the first quarter of fiscal 2012. Included in the first quarters of fiscal 2013 and fiscal 2012 cost of goods sold is $2.8 million and $2.7 million, respectively, of depreciation and amortization related to our warehousing and distribution activities.

Interest Income

Interest income was $23,000 and $36,000 for the first quarters of fiscal 2013 and fiscal 2012, respectively.

Interest Expense

Interest expense was $11.8 million for the first quarter of fiscal 2013 and $11.9 million in the first quarter of fiscal 2012.

Income Before Income Taxes

Income before income taxes amounted to $9.1 million and $15.1 million in the first quarters of fiscal 2013 and fiscal 2012, respectively.

Income Taxes

Income taxes amounted to $3.7 million and $6.1 million in the first quarters of fiscal 2013 and fiscal 2012, respectively.

Net Income

Net income for the first quarter of fiscal 2013 amounted to $5.4 million compared to $9.0 million in the first quarter of fiscal 2012.

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 December 30, 2012, we had approximately $59.9 million of outstanding letters of credit and we had approximately $40.1 million available under the revolving credit facility.

We had no short-term borrowings outstanding under our revolving credit facility as of December 30, 2012. We did not incur any short-term borrowings under our revolving credit facility in the first quarter of fiscal 2013.

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The following table sets forth our contractual cash obligations and commercial commitments as of December 30, 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	$	103,128	$	13,232	$	89,896	$	—	$	—
Interest		6,633		3,379		3,254		—		—

		109,761		16,611		93,150		—		—
7.75% Senior Notes due April 2015
Principal		285,000		—		285,000		—		—
Interest		55,219		22,088		33,131		—		—

		340,219		22,088		318,131		—		—
7.375% Senior Notes due November 2018
Principal		255,000		—		—		—		255,000
Interest		112,838		18,806		37,613		37,613		18,806

		367,838		18,806		37,613		37,613		273,806
Capital lease obligations ⁽²⁾
Principal		2,133		1,236		879		18		—
Interest		222		173		49		—		—

		2,355		1,409		928		18		—
Post retirement benefit obligation ⁽³⁾		5,929		5,929		N/A		N/A		N/A
Operating leases ⁽²⁾		348,068		40,720		73,761		59,321		174,266

Total contractual cash obligations	$	1,174,170	$	105,563	$	523,583	$	96,952	$	448,072


	Other Commercial Commitments (in thousands)
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Standby letters of credit ⁽⁴⁾	$	59,858	$	59,858	$	—	$	—	$	—

Total other commercial commitments	$	59,858	$	59,858	$	—	$	—	$	—

⁽¹⁾

Included in our term loan principal payments of less than one year is $0.5 million of excess cash payment under the agreement that was paid on December 31, 2012. Interest on our Term Loan is based on the Eurodollar Rate plus 2.500%. After principal payments on our Term Loan of $2.3 million on December 31, 2013, our interest rates consisted of a ninety day rate of 2.811% on approximately $10.9 million and a twelve month rate of 3.344% on approximately $89.9 million. For purposes of contractual cash obligations shown here, we have assumed the 90 day and twelve month interest rates as of January 1, 2013 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.

(footnotes continued on following page)

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (contd.)

⁽³⁾

As of September 30, 2012, we had unfunded pension and other post retirement obligations of $46.3 million under our Retired Benefit Pension Plan and our Early Retiree Medical Reimbursement Plan. Since we cannot determine the specific periods in which the obligations will be funded, the table above reflects no amounts related to these obligations except for the amount of $5.9 million which we expect to contribute to the Plan during the remainder of fiscal 2013.

⁽⁴⁾	Standby letters of credit are committed as security for workers’ compensation obligations. Outstanding letters of credit expire between February 2013 and December 2013.

Working capital amounted to $222.5 million at December 30, 2012 and $217.0 million at September 30, 2012, and our current ratios were 1.71:1 and 1.67:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash used in operating activities for the thirteen weeks ended December 30, 2012 was $18.6 million and net cash provided by operating activities was $13.4 million for the thirteen weeks ended December 25, 2011. Significant uses of cash in operating activities in the first quarter of fiscal 2013 included increases in inventory levels to meet holiday demands and decreases in accrued liabilities primarily due to interest payments and timing of payments on payroll related liabilities.

Significant sources of cash from operating activities in the first quarter of fiscal 2012 included an increase in accounts payable offset by increases in inventory levels, to meet holiday sales demand, and a decrease in accrued interest due to the timing of interest payments.

As of December 30, 2012, we had the ability and right to pay a restricted payment, including dividends, of up to $13.3 million.

We believe that operating cash flows and current cash reserves will be sufficient to meet identified operating needs and scheduled capital expenditures for the next twelve 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 agreements with the UFCW were renewed in October 2011 and expire in March 2014. 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.

STATER BROS. HOLDINGS INC.

DECEMBER 30, 2012

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 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 December 30, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 30, 2012. There were no material changes in our internal control over financial reporting during the first quarter of fiscal 2013.

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 consolidated financial statements.

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 which settlement was approved by the court. The full settlement amount was recorded in our consolidated financial statements for fiscal 2012 and the full amount was paid in fiscal 2013.

STATER BROS. HOLDINGS INC.

DECEMBER 30, 2012

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, regional markets, and “big box” format retailers, including Walmart, Target, Costco and Winco. Our competitors 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 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.

STATER BROS. HOLDINGS INC.

DECEMBER 30, 2012

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None

Item 4.

(REMOVED AND RESERVED)

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS



(a)		Exhibits

31.1		Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act.

31.2		Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act.

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 Lable Linkbase Document.

101.PRE		-XBRL Taxonomy Extension Presentation Linkbase Document.

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: February 12, 2013		/s/ Jack H. Brown
		Jack H. Brown
		Chairman of the Board, President,
		and Chief Executive Officer
		(Principal Executive Officer)

Date: February 12, 2013		/s/ David J. Harris
		David J. Harris
		Senior Vice President - Finance and Chief Financial Officer
		(Principal Financial Officer)
		(Principal Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company