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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

OR

Commission File Number:  000-31127

SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)

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.

As of August 1, 2002, the registrant had 19,855,840 outstanding shares of common stock, no par value.

PART I
FINANCIAL INFORMATION

SPARTAN STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)

Note 1
Accounting Policies

The Consolidated Financial Statements include the accounts of Spartan Stores, Inc. and its subsidiaries ("Spartan Stores"). All significant intercompany accounts and transactions have been eliminated.

The interim information contained in the Consolidated Financial Statements is unaudited. The statements reflect all adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods presented. All such adjustments are of a normal, recurring nature.

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis, except as disclosed in Note 2. These policies are presented in Note 1 to the Consolidated Financial Statements included in Spartan Stores' Annual Report on Form 10-K for the fiscal year ended March 30, 2002, filed with the Securities and Exchange Commission on June 28, 2002.

Certain reclassifications have been made to the fiscal 2002 financial statements to conform to the fiscal 2003 presentation.

Note 2
Cumulative Effect of a Change in Accounting Principle

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be applied to all business combinations after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other intangible assets in a business combination. We adopted SFAS No. 141 on March 31, 2002. There was no material impact as a result of the adoption. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subseq uent to initial adoption of SFAS No. 142 will be recorded as a charge to current period earnings. SFAS No. 142 also requires that goodwill be assigned to reporting units based upon the expected benefits to be derived from synergies resulting from the business combination.

We adopted SFAS No. 142 on March 31, 2002. In accordance with the provisions of SFAS No. 142, goodwill of approximately $30.3 million previously included in the retail segment was assigned to the grocery distribution segment based upon the expected benefits to be realized by each segment. Under the transitional provisions of SFAS No. 142, goodwill was tested for impairment as of March 31, 2002. Each of our reporting units were tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined based on a valuation study which primarily considered the discounted cash flow method and comparable market values. As a result of the impairment testing, we recorded an impairment loss to reduce the carrying value of goodwill at the retail grocery segment by $41.6 million (prior to provision for tax benefit of $6.2 million) to its implied fair value. Impairment was due to a number of factors including operating performance and the impact of new competiti on. In

accordance with SFAS No. 142, the impairment charge was reflected as a cumulative effect of a change in accounting principle in the Consolidated Statements of Operations for the first quarter of fiscal 2003.

Note 3
Goodwill and Other Intangible Assets

Spartan Stores' adoption of SFAS No. 142 eliminated the amortization of goodwill beginning in the first quarter of fiscal 2003.

The following table adjusts net (loss) earnings and (loss) earnings per share for the adoption of SFAS No. 142:

Changes in the carrying amount of goodwill were as follows:

The following table reflects the components of amortized intangible assets, included in other, net on the Condensed Consolidated Balance Sheets:

These intangible assets are amortized over the terms of the agreements (3 to 15 years) or the length of the leases (3 to 20 years). There are no expected residual values related to these intangible assets.

Amortization expense, excluding goodwill, was $.2 million for the quarters ended June 22, 2002 and June 23, 2001. Estimated amortization expense, excluding any future acquisitions, for each of the five succeeding fiscal years is as follows:

Note 4
Store Closing and Asset Impairment Charges

During the quarter ended June 22, 2002, the retail grocery segment recognized an impairment loss of $5.3 million on long-lived assets at twelve stores to be closed. The carrying amount of the assets at these stores was approximately $8.0 million at June 22, 2002. Additionally, the retail grocery segment recognized a charge of $7.7 million on store lease exit costs which include the present value of future minimum lease payments, calculated using a risk-free interest rate, and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated sublease recoveries. The stores are expected to be closed during the second and third quarters of fiscal 2003.

Note 5
Notes Payable and Long-Term Debt

On July 29, 2002, an amendment to the senior secured credit facility was approved by Spartan Stores' bank group. The credit facility dated March 18, 1999, as amended and restated July 29, 2002, consists of (1) a revolving credit facility in the amount of $75 million with a maximum term of six years from the date of the original credit facility, (2) a term loan A in the amount of $100 million with a maximum term of six years from the date of the original credit facility, (3) an acquisition facility in the amount of $75 million with a maximum term of seven years from the date of the original credit facility and (4) a term

loan B in the amount of $150 million with a maximum term of eight years from the date of the original credit facility. Interest rates payable on amounts borrowed under the credit facility are based on the prime rate, the federal funds rate or the Eurodollar rate, plus a stipulated margin. Under the amended and restated credit agreement, the interest rates for the revolving credit facility increased by .50% for the revolving credit facility and term loan A and .75% for the acquisition facility and term loan B.

The amendment also resulted in the modification of certain covenants under the credit facility. Based upon current operating conditions, Spartan Stores anticipates that it will continue to be in compliance with its covenants in the current year.

Note 6
Operating Segment Information

The following tables set forth segment information in thousands.

Results of Operations

The following table sets forth our Consolidated Statements of Operations as percentages of net sales:

          Net Sales. Net sales decreased $66.9 million, or 8.0%, from $832.5 million for the quarter ended June 23, 2001 to $765.6 million for the quarter ended June 22, 2002.

          Net sales in our retail grocery segment decreased $27.4 million, or 8.2%, from $336.3 million to $308.9 million. Same-store sales declined 8.0% which was driven by increased competitive conditions in our Ohio markets, weak economic conditions in Michigan, a slow start to the summer tourism season affecting the 36 stores in our tourism-dependent northern Michigan market and an early Easter holiday in fiscal 2002. Adjusting for the early Easter holiday in fiscal 2002, same-store sales declined 6.7%.

          In response to the retail same-store sales declines, we have implemented plans to improve operations in our retail grocery segment. These plans focus on customers' in-store experiences, product offerings, quality, selection and value, community involvement and quality of physical facilities. These plans also include the addition of key managerial associates in our all regions, continued improvement in

our category management techniques, introduction of additional local products, improved customer service training programs for our associates and continued implementation of our remodeling program.

          Net sales in our grocery distribution segment, after intercompany eliminations, declined $38.0 million, or 13.3%, from $285.1 million for the quarter ended June 23, 2001 to $247.1 million for the quarter ended June 22, 2002. The decrease resulted from the loss of a customer in the second quarter of fiscal 2002 totaling $13.7 million in sales for the comparable period, underperformance of our distribution marketing program which we believe restrained sales growth, and declines in sales of grocery and general merchandise products due to current Michigan economic conditions and continued competitive market conditions. Partially offsetting the decrease were increases in sales of perishables of $7.9 million. Our profitability improvement plans for this division include an increased focus on sales to existing customers, revisions to our pricing programs for certain product lines and continued efficiency enhancements.

          Net sales in our convenience distribution segment decreased $1.3 million, or 0.6%, from $209.3 million to $208.0 million. The decrease is the result of the impact of customers lost in fiscal 2002, decreases in cigarette sales volume to grocery stores as a result of higher cigarette prices and the competition of discount tobacco stores and wholesale clubs, partially offset by cigarette price inflation and new business that we obtained in fiscal 2002.

          Gross Margin. Gross margin decreased by $15.5 million, or 10.8%, from $143.9 million to $128.4 million. As a percent of net sales, gross margin decreased from 17.3% to 16.8%. The decline is primarily due to a higher mix of lower margin convenience store business and a more competitive environment for all our operating segments. Additionally, we believe that poor economic conditions, layoff announcements and uncertain employment conditions caused many grocery customers to purchase lower margin food products.

          We are continuing to improve our category management function by making additional changes to our merchandising efforts that will provide dedicated perishable and non-perishable merchants for our retail and distribution business segments. Through this effort, we expect to improve service to our customers in our retail and distribution segments by providing more strategically targeted product offerings. We are also studying changes to pricing strategies and believe that a change in pricing policy will help drive stronger customer traffic.                   

          Selling, General and Administrative Expenses. SG&A expenses decreased $6.0 million, or 4.7%, from $128.8 million to $122.8 million. As a percent of sales, SG&A expenses increased from 15.4% to 16.1%. The increase was primarily due to lower sales volumes, reducing leverage against fixed costs. Additionally, we recognized $.5 million in non-recurring charges related to the termination of the proposed high-yield, senior subordinated debt offering during the first quarter of fiscal 2003.

          Provision for Store Closings and Asset Impairments. During the first quarter of fiscal 2003, management made the decision to close twelve underperforming stores, ten in the Ohio market and two in the Michigan market. These stores are located in outlying geographic areas and do not meet our market share goals or present economical opportunities that will allow us to better serve our customers from other locations. As a result of this decision, asset impairments of $5.3 million and a store closing reserve of $7.7 million, included in other accrued expenses and other long-term liabilities on the Condensed Consolidated Balance Sheets, were recorded. The stores will be closed during the second and third quarters of fiscal 2003. Additionally, there will be residual pretax charges of approximately $2 million related to severance and inventory liquidation recorded as operating expenses in the remainder of fiscal

2003. We expect retail operating profits to improve by approximately $3 million annually from the store closings and produce $8 million in additional cash flow from inventory liquidations, which will be used to reduce related trade payables and bank debt, strengthening our financial position.

          Interest Expense. Interest expense decreased $1.1 million, or 17.0%, from $6.7 million to $5.6 million, and was 0.7% of net sales for the quarter ended June 22, 2002 compared to 0.8% for the corresponding period last prior year. Total average borrowings decreased to $309.4 million from $344.4 million in the corresponding period last year as a result of debt repayments. The debt reduction and lower interest rates drove this decrease in interest expense.

          Income Taxes. Our effective tax rate decreased to 33.7% for the quarter ended June 22, 2002 from 36.6% for the same period in the prior year. The federal tax provision for the current year net loss was recorded at 35%; however, this tax credit was decreased by 1.3% due to expenses related to state and city taxes recorded in the first quarter, bringing our effective tax rate to 33.7%.

Cumulative Effect of a Change in Accounting Principle

          In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the purchase method of accounting to be applied to all business combinations after June 30, 2001, and addresses the initial recognition and measurement of goodwill and other intangible assets in a business combination. We adopted SFAS No. 141 on March 31, 2002. There was no material impact as a result of the adoption. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accountin g principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 will be recorded as a charge to current period earnings. As a result of adopting these statements, we recorded a cumulative effect of a change in accounting principle to recognize an impairment of goodwill in the retail segment of $35.4 million, net of provision for tax benefit of $6.2 million.

Critical Accounting Policies

          This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, closed store reserves, retirement benefits and contingencies and litigation. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we make adjustments we consider appropriate under the facts and circumstances.

          We believe that the following represent the more critical estimates and assumptions used in the preparation of our consolidated financial statements.

          Insurance Reserves. We are primarily self-insured for workers' compensation and health care costs. Additionally, the discontinued insurance segment has provided commercial insurance coverage for fire and other casualties, liability, automobile, fidelity, theft, bonds, workers' compensation, business

interruption and group health plans. We record substantially all of our insurance liabilities based upon actuarial computations using actual claims data and estimates of claims incurred but not yet reported. If a greater amount of claims is incurred compared to estimates or health care costs increase more than anticipated, recorded reserves may be insufficient and additional costs could be recorded in the consolidated financial statements.

          Asset Impairment. We review and evaluate long-lived assets for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. When the undiscounted future cash flows are not sufficient to recover an asset's carrying amount, a discounted cash flow model is utilized to determine the impairment loss to be recorded. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value, less the cost to sell. Fair values are determined by independent appraisals or expected sales prices developed by certified valuation specialists. Estimates of future cash flows and expected sales prices are judgments based upon our experience and knowledge of operations. These estimates project cash flows several years into the future and are affected by changes in the economy, real estate market conditions and inflation.

          Store Closings. For stores to be closed that are subject to long-term lease commitments, reserves are recorded based upon the present value of remaining lease payments, calculated using a risk-free interest rate, net of estimated sublease recovery. If real estate and leasing markets change in the future, additional reserves could be required.

Liquidity and Capital Resources

          Net cash provided by operating activities was $19.5 million for the quarter ended June 22, 2002 and $17.3 million for the same period in the prior year. The increase in net cash provided by operating activities in fiscal 2003 is primarily the result of an improvement in net current assets invested in operations. As a result of the twelve store closings, we expect an additional $8 million in cash flow from inventory liquidations, which will be used to reduce related trade payables and bank debt, strengthening our financial position.

          Net cash used in investing activities was $1.9 million and $9.2 million for quarters ended June 22, 2002 and June 23, 2001, respectively. Cash used in investing activities decreased in fiscal 2003 primarily due to decreased capital expenditures and no acquisition costs in the current year.

          Net cash used in financing activities was $24.2 million for the quarter ended June 22, 2002 due primarily to debt repayments and debt issuance costs, partially offset by proceeds from the sale of common stock. Cash used in financing activities was $2.7 million for the quarter ended June 23, 2001 due primarily to debt repayments, offset by proceeds from long-term borrowings and proceeds from the sale of common stock.

          Our principal sources of liquidity are cash generated from operations and borrowings under a senior secured credit facility dated March 18, 1999, as amended and restated July 29, 2002. The credit facility consists of (1) a revolving credit facility in the amount of $75 million with a maximum term of six years from the date of the original credit facility, (2) a term loan A in the amount of $100 million with a maximum term of six years from the date of the original credit facility, (3) an acquisition facility in the amount of $75 million with a maximum term of seven years from the date of the original credit facility and (4) a term loan B in the amount of $150 million with a maximum term of eight years from the date of the original credit facility. At June 22, 2002, $264.5 million was outstanding under the credit facility. Interest rates payable on amounts borrowed under the credit facility are based on the prime rate, the

federal funds rate or the Eurodollar rate, plus a stipulated margin. Under the amended and restated credit agreement, the interest rates for the revolving credit facility increased by .50% for the revolving credit facility and term loan A and .75% for the acquisition facility and term loan B. Available borrowings under the credit facility are based on stipulated levels of earnings before interest, income taxes, depreciation and amortization, as defined in the credit facility. The credit facility contains covenants that include the maintenance of certain financial ratios. At June 22, 2002, Spartan Stores was in compliance with the credit facility covenants as in effect prior to the amendment. The July 29, 2002 amended and restated agreement resulted in the modification of certain financial covenants. Based on current operating conditions, Spartan Stores anticipates that it will be able to comply with the modified covenants in the current year.

          The credit agreement which governs our senior secured credit facility also limits our ability to make "restricted payments." Payment of cash dividends and other restricted payments are permitted only under conditions specified and are limited to amounts determined under specific and detailed formulas and allowances provided in the credit agreement, which is filed as an exhibit to this Form 10-Q. "Restricted payments" include cash dividends, as well as redemption of shares and a variety of other types of payments. As of the date of filing of this Form 10-Q, payment of cash dividends in limited amounts would be permitted under the bank credit facility. The covenants in the bank credit agreement could prohibit or limit the amount of dividends in the future. We intend to use any net earnings in our operations to repay debt, to acquire additional retail operations and to make restricted payments other than cash dividends. We do not anticipate paying any cash dividends for the foreseeable future, regardless of whether they are or are not permitted by the credit agreement.

          We have offered non-subordinated variable rate promissory notes to the public. The notes are offered in minimum denominations of $1,000 and may be issued by us at any time, although our credit facility restricts the total amount outstanding under the offering to approximately $15.0 million. The non-subordinated variable rate promissory notes are issued under a "shelf" registration statement filed with the Securities and Exchange Commission, effective February 26, 2001, which provides for the issuance of up to $100 million of debt securities. At June 22, 2002, approximately $12.3 million of these notes were outstanding.

          Our current ratio decreased to 1.46 to 1.00 at June 22, 2002 from 1.62 to 1.00 at March 30, 2002 and working capital decreased to $94.4 million at June 22, 2002 from $113.7 million at March 30, 2002.

          Our long-term debt to equity ratio at June 22, 2002 increased to 1.42 to 1.00 from 1.28 to 1.00 at March 30, 2002. The increase was primarily due to the net loss generated as a result of the goodwill impairment charge and provision for store closings and asset impairments for the quarter, partially offset by additional principal payments. Management continues to evaluate other longer-term acquisition opportunities, which could result in additional borrowings and additional leases being entered into if consummated, in turn increasing our leverage position.

          Our total capital structure includes borrowings under the senior secured credit facility, non-subordinated variable rate promissory notes, various other debt instruments, leases and shareholders' equity. Management believes that cash generated from operating activities and available borrowings under the credit facility will likely be sufficient to support operations in the current year under current circumstances.

Forward-Looking Statements

          The matters discussed in this Quarterly Report on Form 10-Q include "forward-looking statements" about our plans, strategies, objectives, goals or expectations. These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores or management "expects," "anticipates," "projects," "plans," "believes," "estimates," "intends," is "optimistic" or "confident" that a particular occurrence "may result," "could result" or "will likely result" or that a particular event "may occur," "could occur," or "will likely occur" in the future or similarly stated expectations. Accounting estimates, such as those used to determine insurance reserves, are inherently forward-looking. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarte rly Report. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q, Spartan Stores' Annual Report on Form 10-K for the year ended March 30, 2002 and other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause actual results to differ materially. Our ability to strengthen our Ohio retail-store performance; improve sales growth; increase profit margin; reduce operating cost structures; and implement the other plans, strategies, objectives, goals or expectations described in this Quarterly Report will be affected by, among other factors, those discussed below, as well as changes in economic conditions generally or in the markets and geographic areas that we serve and adverse effects of the changing food and distribution industries.

          Anticipated future sales are subject to competitive pressures from many sources. Our retail grocery and grocery and convenience distribution businesses compete with many warehouse discount stores, supermarkets, pharmacies and product manufacturers. Additionally, future sales will be dependent on the number of retail stores that we own and operate and competitive pressures in the retail industry generally and our geographic markets specifically. Sales volumes in our convenience distribution segment may continue to be negatively impacted by increased cigarette prices. Competitive pressures in these and other business segments may result in unexpected reductions in sales volumes, product prices or service fees.

          Our operating and administrative expenses may be adversely affected by unexpected costs associated with, among other factors: the integration of the business operations of our retail acquisitions and retail and distribution operations; future business acquisitions, including additional retail stores; difficulties in the operation of the current business segments; difficulties in the assimilation of acquired personnel, operations, systems or procedures; inability to realize synergies in the amounts or within the time frame expected by management; adverse effects on existing business relationships with independent

retail grocery store customers; difficulties in the retention or hiring of employees for the acquired businesses; labor shortages, stoppages or disputes; business divestitures; increased transportation or fuel costs; current or future lawsuits and administrative proceedings; and loss of customers or suppliers.

          Our future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings necessary for retail store acquisitions and operations; changes in the interest rate environment; cigarette inventory levels; retail property sales; and the amount of fees received on delinquent accounts. The availability of our senior secured credit facility depends on continued compliance with the credit facility.

          Furthermore, acts of violence or war create considerable economic and political uncertainties which could have adverse effects on consumer buying behavior, fuel costs, shipping and transportation, product imports and other factors affecting our company and the grocery industry generally.

          This section is intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information obtained after the date of this Report.

          There were no material changes in market risk of Spartan Stores in the period covered by this Report.

PART II
OTHER INFORMATION

There were no material changes in legal proceedings involving Spartan Stores or its subsidiaries in the period covered by this Report.

          (a)          Exhibits: The following documents are filed as exhibits to this Quarterly Report on Form 10-Q: