UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 28, 2004

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.

Not Applicable

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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [   ]   No [X].

As of May 12, 2004, there were issued and outstanding
38,301 shares of the registrant’s Class A Common Stock.

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STATER BROS. HOLDINGS INC.
MARCH 28, 2004

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

ASSETS

See accompanying notes to unaudited consolidated financial statements

3

STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

See accompanying notes to unaudited consolidated financial statements

4

STATER BROS. HOLDINGS INC.

See accompanying notes to unaudited consolidated financial statements

5

STATER BROS. HOLDINGS INC.

See accompanying notes to unaudited consolidated financial statements

6

STATER BROS. HOLDINGS INC.

See accompanying notes to unaudited consolidated financial statements

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STATER BROS. HOLDINGS INC.

Note 1 - Basis of Presentation

     In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of Stater Bros. Holdings Inc. (the “Company”) and its subsidiaries as of September 28, 2003 and March 28, 2004, and the results of its operations and cash flows for the twenty-six and thirteen weeks ended March 30, 2003 and March 28, 2004. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s latest annual report filed on Form 10-K. The operating results for the twenty-six and thirteen weeks ended March 28, 2004 are not necessarily indicative of the results of operations for a full year.

Note 2 - Reclassifications

     Certain amounts in the prior period have been reclassified to conform to the current period financial statements presentation.

Note 3 - Use of Estimates

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

     Note 4 – Restricted Cash

     Restricted cash represents cash that has been contractually set aside as collateral for certain workers’ compensation and general liability self-insurance reserves. Interest earned on the restricted cash is controlled by the Company and is included in cash and cash equivalents.

Note 5 - Income Taxes

     The provision for income taxes for the twenty-six weeks ended March 30, 2003 and March 28, 2004 consists of the following:

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2004

Note 6 - Retirement Plans

     The Company has a noncontributory defined benefit pension plan covering substantially all non-union employees. The plan provides for benefits based on an employee’s compensation during the eligibility period while employed with the Company. The Company’s funding policy for this plan is to contribute annually at a rate that is intended to provide sufficient assets to meet future benefit payment requirements.

Net periodic pension cost included the following components:

Note 7 - Santee

     In 1997, in connection with the construction of a new dairy facility in City of Industry, California, Stater Bros. Markets (“Markets”) and Hughes Markets (“Hughes”), the owners of Santee Dairies, Inc. (“Santee”) contributed the outstanding shares of Santee to a new entity Santee Dairies, LLC (“SDL”) with each company owning 50% of SDL. Markets and Hughes each entered into separate product purchase agreements (“PPA”) with Santee for the purchase of fluid milk and other products. Financing for the new dairy was provided through the issuance of $80 million Senior Secured 9.36% Notes due 2008 (“Santee Notes”). One of the covenants of the Santee Notes was a covenant that required the payment of the outstanding Santee Notes in the event of change in control of Santee.

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2004

Note 7 – Santee (contd.)

     Certain disagreements arose regarding the PPA’s and other matters between Markets and Ralphs and Ralphs and Santee. In order to settle the resulting litigation, Markets, Hughes, Santee and SDL entered into three separate but interconnected agreements “Settlement Agreement and Release of all Claims”, “Dissolution and Transfer Agreement” and “Assignment and Assumption Agreement” all three agreements collectively known as the “Settlement Agreement” . Under the Settlement Agreement, the Ralphs Guaranty was terminated, a new purchase of products schedule for Ralphs was established, Hughes agreed to pay $1,550,000 to Markets, SDL was dissolved and the shares of Santee, previously held by SDL, were transferred equally to Markets and Hughes. Concurrently with this transfer, Hughes immediately transferred Hughes’ Santee shares to Santee for cancellation and retirement.

     Through the Settlement Agreement, Hughes relinquished its interest in Santee to Markets. The consideration received by Markets under the Settlement Agreement was $1,550,000 in cash and the value of the additional 50% ownership interest in Santee. The value assigned to the additional 50% interest in Santee is $21.8 million which was determined by Management based upon the present value of the most probable future cash flows. The Settlement Agreement’s effective date was the close of business on February 6, 2004. In the second quarter of fiscal 2004, the Company incurred legal fees of $500,000 related to the Settlement Agreement. In addition, the Company, through Santee, made payments, aggregating $500,000, to four Directors of Santee who had been named by Hughes as defendants in litigation settled by the Settlement Agreement. Three of the four Directors are related parties to the Company. The net consideration received by the Company under the Settlement Agreements was $22.4 million which was recorded as a gain in the Consolidated Statements of Income (unaudited) under the line item “Selling, general and administrative expenses.”

     The following table is a condensed balance sheet that discloses the value assigned to the Santee assets acquired and the liabilities assumed as a result of the Settlement Agreement:

As of February 6, 2004:
(in thousands)

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2004

Note 7 – Santee (contd.)

     Previously, Markets accounted for Santee under the equity method of accounting as Markets owned 50% of the stock and did not exercise control over Santee. The dissolution of SDL and the retirement of the Hughes’ shares gave Markets 100% direct ownership of Santee and caused a change in control of Santee. The change in control triggered the early payment requirement of the Santee Notes, which included a make whole provision. In order to finance the payment of the Santee Notes and the make whole payment, Markets loaned Santee $55.0 million. On February 6, 2004, Santee redeemed $53.5 million of Santee Notes, all the notes outstanding, and paid a make whole fee of $8.5 million. The make whole fee has been recorded as a component of interest expense in the Consolidated Statements of Income (unaudited) of the Company.

     Santee has been included in the consolidated financial statements of the Company as a wholly-owned subsidiary as of the effective date of the Settlement Agreement. The following table provides supplemental pro forma results of operations presented as though Santee had been consolidated as of the beginning of the reporting periods.

Condensed Pro Forma Results of Operations
(in thousands, except per share amounts)

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STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 28, 2004

Note 8 – Corporate Office and Warehouse Facilities

     Stater Bros. Markets is currently in negotiations to acquire approximately 161 acres located on the former Norton Air Force Base in the City of San Bernardino, California. The Company has reached an agreement with the Inland Valley Development Agency (“IVDA”), which is the entity responsible for the redevelopment of the former Norton Air Force Base, on an Owner Participation Agreement. The IVDA owns approximately 91 acres of the project property and is negotiating with another governmental agency for an additional 46.6 acres that would ultimately be transferred under lease to the Company with a purchase option. The agreement with the IVDA requires the Company to acquire those parcels not owned by the IVDA, to relocate all tenants and other business owners requiring relocation, to commit to construct and complete the corporate and warehouse facilities and to obtain all City of San Bernardino building permits and entitlements required for the facility. The Company has reached an agreement with Hillwood/San Bernardino LLC (“Hillwood”), the master developer of the former Norton Air Force Base for infrastructure improvements. Under the Hillwood agreement, upon closing, the Company will share costs associated with the infrastructure improvements for water, sewer, streets and utilities which will be required by the City of San Bernardino. The Company, after completion of the acquisition of the project property, will secure its commitment with Hillwood for infrastructure improvements by the posting of either cash or letters of credits in the amount of $10.8 million. The agreements with the IVDA and Hillwood are contingent upon the Company successfully negotiating the acquisition of all needed property.

     This site will be used to relocate and consolidate the Company’s corporate headquarters and all warehousing and distribution facilities to a single integrated facility from the 13 warehouse buildings at 7 different locations currently in use. This site is located within eight miles of the main distribution facility in Colton and therefore there will be no change in the average distance between the new facility and the Stater Bros. Markets retail supermarkets. The facility will consist of approximately 1,900,000 square feet and will include Stater Bros. Markets corporate headquarters, truck maintenance and other support facilities required for consolidation of all of its Southern California office, warehousing, distribution and maintenance operations. The projected cost of the facility is approximately $190 million and completion of the construction of the facility is planned for the fall of 2006.

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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

The Company’s discussion and analysis of financial condition and results of operations are based upon the Company’s unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the use of estimates and judgements on the part of management. The Company based its estimates on the Company’s historical experience combined with management’s understanding of current facts and circumstances. The Company believes that the following critical accounting policies are the most important to the Company’s consolidated financial statements presentation and require the most difficult, subjective and complex judgements on the part of management.

Revenue Recognition

Markets, the Company’s principal operating entity, recognizes revenue from the sale of its products at the point of sale to the customer. Sales are recognized net of any discounts given to the customer. Santee recognizes revenue as shipments are received by its customers. Sales are recognized net of promotional discounts.

Cost of Goods Sold

Included in cost of goods sold are all manufacturing cost, direct product purchase costs, except for certain salary, wages and administration cost associated with the procurement of purchased products; all in-bound freight costs; all direct receiving and inspection costs; all quality assurance costs; all warehousing costs and all costs associated with transporting goods from the Company’s warehouses to its stores, net of earned vendor rebates and allowances. The Company recognizes, as a reduction to cost of goods sold, certain rebates and allowances (“allowances”) from its vendors as the allowances are earned. Allowances are earned by promoting certain products or by purchasing specified amounts of product. The Company records a liability for allowance funds that have been received but not yet earned.

Within the supermarket industry, there are a wide range of differences in the disclosure of costs related to the purchasing and distribution of products sold. Some companies include all of their purchasing and distribution costs in cost of goods sold while others include a portion of the costs in selling, general and administrative expenses. Therefore, the Company’s gross margins and selling, general and administrative expenses may not be comparable to those of other companies within the supermarket industry.

Inter-Company Eliminations

Markets is a significant customer of Santee, which supplies Markets with a significant portion of its fluid milk and dairy products. Santee pays interest and principal payments to Markets on a $55.0 million 5.25% Inter-Company Note due 2008. All inter-company transactions are eliminated in consolidation.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES (contd.)

Selling, General and Administrative Expenses

Included in selling, general and administrative expenses are all store operating costs which includes all store labor costs associated with receiving, displaying and selling the Company’s products at the store level; all advertising costs, net of the portion of co-operative advertising allowances directly related to the fair value of the advertising; certain salary, wages and administrative costs associated with the purchasing of the Company’s products and all security, management information services, accounting and corporate management costs.

As noted under “Cost of Goods Sold”, the Company includes all purchasing and distribution costs to deliver the product for sale to its stores in cost of goods sold, except for certain salary, wages and administrative costs associated with the procurement of purchased products. As certain salary, wages and administrative cost associated with the purchase of the Company’s products is included in selling, general and administrative expenses, the Company’s gross margin and selling, general and administrative expenses may not be comparable to companies who disclose these costs differently.

Vendor Rebates and Allowances

The Company receives certain allowances from its vendors that relate to the purchase and promotion of certain products. All allowances, except for advertising allowances described under “Advertising Allowance”, are recognized as a reduction in cost of goods sold as the performance is completed and inventory sold. Allowances, such as slotting fees, which are tied to the promotion of certain products, are recognized as reductions in cost of goods sold as the Company meets the required performance criteria. Allowances that are based upon purchase or sales volumes are recognized as reductions in cost of goods sold as the products are sold. The Company receives lump-sum payments from vendors for the promotion or purchase of products over multi-year periods. The Company records a liability for unearned allowances and recognizes, as a reduction in cost of goods sold, these allowances over time as the criteria of these contracts are met.

Advertising Allowances

The Company receives co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. The Company recognizes the portion of co-operative advertising allowances directly related to the fair value of the advertising as a reduction in advertising costs. A significant portion of the Company’s advertising expenditures is in the form of twice weekly print advertisements. The Company distributes its print ads through inserts in local newspapers, in direct mailers and as handouts distributed in its stores. The Company analyzes, on a monthly basis, the direct out-of-pocket costs for printing and distributing its print ads. Using the number of ads in a typical twice weekly advertisement, the actual direct cost of an individual advertisement is determined. The cost determined is deemed to be the fair value of advertising. The amount of co-operative advertising allowances in excess of the direct fair value of the advertising is recognized as a reduction in cost of goods sold.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES (contd.)

Advertising

The Company’s advertising costs, net of vendor allowances for co-operative advertising, are recognized in the period the advertising is incurred and are included in selling, general and administrative expenses.

Leases

Certain of the Company’s operating leases provide for minimum annual payments that change over the life of the lease. The aggregate minimum annual payments are expensed on a straight-line basis over the minimum lease term. The Company recognizes a liability for minimum step rents when the amount of straight-line rent expense exceeds the actual lease payment and it reduces the step rent liability when the actual lease payment exceeds the amount of straight-line rent expense.

Self-Insurance Reserves

The Company is primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. The Company is covered by umbrella insurance policies for catastrophic events. The Company records its self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates used by management are based on the Company’s historical experiences as well as current facts and circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial projections and the Company’s estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in compensation benefits structure. In recent years, the Company and employers within the State of California as a whole have seen significant increases in the severity of workers’ compensation claims. While the Company has factored these increases into its estimates of ultimate loss, no assurance can be given that future events will not require a change in these estimates. The Company discounts its workers’ compensation, automobile and general liability insurance reserves at a discount rate of approximately 7.5%.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Management believes that its inventory turns and inventory controls are sufficient and that reserves are not needed for excess, obsolete or discontinued inventory.

Deferred Debt Issuance Costs

Direct costs incurred as a result of financing transactions are capitalized and amortized to expense over the term of the applicable debt agreements.

Deferred Income Taxes

Although there can be no assurances as to future taxable income of the Company, the Company believes that its expectations of future taxable income, when combined with the income taxes paid in prior years, will be adequate to realize its deferred tax assets.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES (contd.)

Phantom Stock Plan

It is the Company’s policy to expense phantom stock units to the extent that they vest and appreciate during the accounting period.

OWNERSHIP OF THE COMPANY

La Cadena Investments (“La Cadena”) is the sole shareholder of the Company and holds all of the shares of the Company’s Class A Common Stock. La Cadena is a California General Partnership whose partners include Jack H. Brown, Chairman of the Board, President and Chief Executive Officer of the Company and a former member of Senior Management of the Company. Jack H. Brown has a majority interest in La Cadena and is the managing general partner with the power to vote the shares of the Company held by La Cadena.

RESULTS OF OPERATIONS

The following table sets forth certain income statement components expressed as a percent of sales for the thirteen and twenty-six weeks ended March 28, 2004 and March 30, 2003.

As of February 6, 2004, the results of Santee Dairies, Inc. (“Santee”), previously accounted for under the equity method of accounting, have been consolidated in the Company’s results of operations and all inter-company transactions have been eliminated (see Notes to Consolidated Financial Statements (unaudited) of the Company contained in this report on Form 10-Q).

Throughout Managements’ discussion and analysis of financial condition and results of operations for the twenty-six weeks and quarter ended March 28, 2004 is the pervasive and over-riding impact of the recent labor dispute in Southern California, as described below, on the Company’s financial condition and results of operations.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Beginning October 11, 2003 and continuing until February 29, 2004, there was a labor dispute between the Company’s three major competitors Vons, Albertson’s and Ralphs and the United Food and Commercial Workers Union (“UFCW”). The Company and its three major competitors had the same collective bargaining agreement with the UFCW that expired in October of 2003. On April 14, 2003, the Company signed an agreement with the UFCW which stated that the Company would accept the same contract terms that the UFCW negotiates with Vons, Albertson’s and Ralphs. In return, the UFCW agreed not to strike the Company. The April 14, 2003 agreement extended the expiring collective bargaining agreement until a new collective bargaining agreement was negotiated. The Company was not a party to the contract negotiations between the UFCW and Vons, Albertson’s and Ralphs.

On October 11, 2003, the UFCW declared a strike against Vons; in turn, Albertson’s and Ralphs locked out all of their UFCW employees (“the labor dispute”). Initially, the UFCW placed picket lines at all Vons, Albertson’s and Ralphs stores in Southern California. Subsequently, the UFCW removed the picket lines at most of the Ralphs stores.

Many of the former Vons, Albertson’s and Ralphs customers chose to honor the picket lines and took their business to Stater Bros. Markets and other grocery retailers. Subsequent to the labor dispute, the Company has been able to retain some of these additional customers. The labor dispute had both a significant and material effect on the Company’s sales volume, results of operations and financial position.

The increased sales volume has had a positive effect on results of operations as the Company has been able to realize some economics of scale from the increased sales volume. As a result, cost of goods sold, labor and other operating expenses, as a percentage of sales, have decreased for the twenty-six weeks ended March 28, 2004 when compared with the corresponding period of fiscal 2003.

The impact of the labor dispute on the Company was unprecedented and is not expected to be repeated in the future. As of March 28, 2004, the Company had been able to retain some of the increased volume gained during the labor dispute. Management has taken steps through price promotions, customer service and attention to detail to retain as much of the increased volume as possible. Management anticipates that some of the retained volume realized to date will be lost as its major competitors take marketing steps of their own to win back the business lost during the labor dispute. The ultimate amount of increased volume retained, if any, cannot be forecast with any degree of certainty.

Sales for the thirteen weeks ended March 28, 2004, the second quarter of fiscal 2004, increased $312.2 million or 46.11% and amounted to $989.4 million compared to $677.2 million for the same period in the prior year. Sales for the twenty-six weeks ended March 28, 2004, increased $657.3 million or 48.37% and amounted to $2.016 billion compared to $1.359 billion for the same period in the prior year. The increase in sales for both the thirteen weeks and twenty-six weeks ended March 28, 2004 over the same periods in the prior year is due primarily to the effect of the labor dispute and the retention, after the labor dispute, of some of the customers gained during the labor dispute.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Like store sales are calculated 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, only the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year are used. All of the current year’s replacement stores’ sales are included in the like store sale calculation.

For the portion of the second quarter of fiscal 2004 during the labor dispute, like store sales increased $244.9 million or 52.09% compared to the same time frame in fiscal 2003. For the portion of the fiscal 2004 second quarter after the labor dispute, like store sales increased $41.1 million or 19.84% over the same time frame of the previous year. The consolidation of Santee’s sales contributed approximately $16.4 million of additional sales over the prior year quarter. In total, like store sales increased $286.0 million or 42.23% for the second quarter of fiscal 2004. In the twenty-six weeks ended March 28, 2004, total like store sales increased $622.0 million or 45.78%. For the portion of the twenty-six week period prior to the labor dispute, like store sales increased $4.7 million or 4.93% over the same time frame in the prior year. For the portion of the twenty-six week period during the labor dispute, like store sales increased $576.2 million or 54.52% over the same time frame of fiscal 2003. For the portion of the twenty-six week period after the labor dispute, like store sales increased $41.1 million or 19.84% over the same time frame of fiscal 2004. The consolidation of Santee’s sales contributed approximately $16.4 million of additional sales over the prior year twenty-six weeks. The remaining sales increase for the thirteen and twenty-six weeks is due to a store opened in the third quarter of fiscal 2003 in Corona, California and a store added in the second quarter of fiscal 2004 in Moreno Valley, California.

Gross profit for the thirteen weeks ended March 28, 2004, amounted to $296.3 million or 29.95% of sales compared to $188.1 million or 27.77% of sales in the same period of the prior year. Gross profit for the twenty-six weeks ended March 28, 2004, amounted to $601.2 million or 29.82% of sales compared to $372.8 million or 27.44% of sales in the same period of the prior year. Gross profit, as percentage of sales, increased 2.18% and 2.38% for the thirteen weeks and twenty-six weeks, respectively. The increase in gross profit, as a percentage of sales, is due in part to improvement of approximately 1.03% and 0.95% for the thirteen weeks and twenty-six weeks, respectively, from increased efficiencies in labor and facilities usage within the warehouse and distribution operations resulting from the increased sales volume. The remaining improvement in gross profit, as a percentage of sales, is due primarily to reduced inventory shrink in the stores’ perishable departments resulting from increased inventory turns.

Operating expenses include selling, general and administrative expenses, and depreciation and amortization. For the thirteen weeks ended March 28, 2004, selling, general and administrative expenses amounted to $215.9 million or 21.82% of sales compared to $162.2 million or 23.95% of sales for the thirteen weeks ended March 30, 2003. For the twenty-six weeks ended March 28, 2004, selling, general and administrative expenses amounted to $442.8 million or 21.96% of sales compared to $323.2 million or 23.79% of sales for the twenty-six weeks ended March 30, 2003.

18

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Included in selling, general and administrative expenses for the thirteen week and twenty-six week fiscal 2004 is a $22.4 million gain from a settlement agreement reached with Hughes (see Notes to Consolidated Financial Statements (unaudited) of the Company contained in this report on Form 10-Q). The gain from litigation settlement reduced selling, general and administrative expenses, as a percentage of sales, by 2.26% and 1.11% for the thirteen week and twenty-six week fiscal 2004.

Included in the twenty-six week fiscal 2004 selling, general and administrative expenses is $34.0 million, of which $26.9 million was expensed in the second quarter of fiscal 2004, for one time special payments related to the labor dispute and contract ratification. The Company made one time payments of approximately $29.3 million to UFCW union trust funds to bring the funds up to levels negotiated during collective bargaining contract negotiations. Under the new negotiated collective bargaining agreement, future union insurance payments by the Company are proscribed at specified hourly rates. In addition, the Company paid approximately $4.7 million to UFCW union members as a contract ratification bonus. The reduction in selling, general and administrative expenses, as a percentage of sales, is also attributed to the Company being able to leverage direct labor cost and fixed facility cost over the increased sales volume resulting from the labor dispute.

As the reduction in selling, general and administrative expenses, as a percentage of sales, was caused by the gain from litigation settlement and by a material change in sales volume resulting from the labor dispute, Management does not foresee that the reduction in selling general and administrative expenses, as a percentage of sales, will continue now that the litigation has been settled and the labor dispute resolved.

The amount of salaries, wages and administrative costs associated with the purchase of the Company’s products included in selling, general and administrative expenses for the fiscal second quarters of fiscal 2004 and fiscal 2003 is $269,000 and $226,000, respectively, and the amount in the twenty-six week fiscal 2004 and fiscal 2003 is $522,000 and $441,000, respectively.

Depreciation and amortization expenses amounted to $7.8 million for the thirteen weeks ended March 28, 2004 and $6.4 million for the thirteen weeks ended March 30, 2003. Depreciation and amortization expense was $15.2 million and $12.7 million for the twenty-six week periods ended March 28, 2004 and March 30, 2003, respectively. The increase in depreciation and amortization expense in fiscal 2004 was primarily due to an increase in fixed assets. Included in cost of goods sold is $2.5 million and $1.9 million of depreciation in the second quarters of fiscal 2004 and fiscal 2003, respectively, and $4.1 million and $3.7 million of depreciation in the twenty-six week fiscal 2004 and fiscal 2003, respectively, related to warehousing and distribution activities.

19

STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Operating profit for the second quarter of 2004 amounted to $72.7 million or 7.35% of sales compared to $19.4 million or 2.87% of sales for the second quarter of 2003. Operating profit for the fiscal year-to-date of 2004 amounted to $143.3 million or 7.11% of sales compared to $36.8 million or 2.71% of sales for the fiscal year-to-date of 2003.

Interest expense amounted to $21.7 million for the second quarter of 2004 compared to $13.3 million for the second quarter of 2003. For the fiscal year-to-date of 2004 and 2003, interest expense amounted to $34.8 million and $26.6 million, respectively. Interest expense for the thirteen weeks and twenty-six weeks of fiscal 2004 includes a make whole payment by Santee of $8.5 million related to Santee’s redemption of all outstanding Santee Notes (see Notes to Consolidated Financial Statements (unaudited) of the Company contained in this report on Form 10-Q).

The Company’s equity in earnings from unconsolidated affiliate, amounted to $303,000 for the second quarter of fiscal 2004 compared to $233,000 in the second quarter of the prior year. For the fiscal year-to-date periods of 2004 and 2003, the Company’s equity in earnings from unconsolidated affiliate amounted to $929,000 and $979,000, respectively. On February 6, 2004, the Company acquired 100% ownership of Santee as part of a litigation settlement and Santee has been consolidated into the Company’s results of operations subsequent to that date.

Income before income taxes amounted to $51.5 million and $6.4 million for the second quarter of 2004 and 2003, respectively. Income before income taxes amounted to $109.5 million and $11.2 million for the twenty-six weeks year-to-date periods of 2004 and 2003, respectively.

Net income for the second quarter amounted to $30.3 million and $3.8 million for 2004 and 2003, respectively. Net income for the fiscal year-to-date periods amounted to $64.9 million and $6.8 million for 2004 and 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has funded its daily cash flow requirements through funds provided by operations and through borrowings from short-term revolving credit facilities. Markets’ credit agreement, as amended, became effective August 6, 1999 and expires in March 2005 and consists of a revolving loan facility for working capital of $75.0 million which includes a Letter of Credit Sublimit with a maximum availability of $50 million. As of March 28, 2004, Markets had $46.9 million of outstanding letters of credit and had $28.1 million available under the revolving loan facility. The letter of credit facility is maintained pursuant to the Company’s workers’ compensation and general liability self-insurance requirements and as security for certain rent obligations. Santee’s credit agreement, as amended, became effective December 1999 and expires in September 2004 and consist of a revolving loan facility for working capital of $5.0 million of which $2.0 million may be used to secure letters of credit. As of March 28, 2004, Santee had $1.4 million of outstanding letters of credit and had $3.6 million available under the revolving loan facility.

20

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 the Company’s contractual cash obligations and commercial commitments as of March 28, 2004.

⁽¹⁾ The Company leases the majority of its retail stores, offices, warehouses and distribution facilities. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.

⁽²⁾ Standby letters of credit are committed as security for workers’ compensation obligations and as security for current rent obligations. Outstanding letters of credit expire between September 2004 and February 2005.

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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 $139.6 million at March 28, 2004 and $124.5 million at September 28, 2003, and the Company’s current ratios were 1.50:1, and 1.60:1, respectively. Fluctuations in working capital and current ratios are not unusual in the industry.

Net cash provided by operating activities in the twenty-six weeks ended March 28, 2004 amounted to $125.9 million compared to $43.1 million for the twenty-six weeks ended March 30, 2003. Fluctuations in net cash provided by operating activities are not unusual in the industry. Cash provided by operating activities in fiscal 2004 of $125.9 million consisted of a $55.1 million increase in accrued liabilities, self-insurance reserves and other liabilities, a $12.5 million increase in income taxes payable, an increase of $17.3 million in accounts payable, a $11.9 million decrease in other assets and $19.3 million of depreciation and amortization; offset by a $20.0 million increase in restricted cash, a $21.4 million increase in inventory and a $22.4 million gain from litigation settlement. Cash provided by operating activities in fiscal 2003 of $43.1 million consisted of a $6.3 million increase in accrued liabilities, self-insurance reserves and other liabilities, a decrease of $6.2 million in income tax receivables, a decrease of $5.7 million in inventory, a decrease in receivables of $2.8 million, a decrease in other assets of $1.7 million and $16.4 million of depreciation and amortization offset by an increase in prepaid expenses of $1.6 million.

Net cash used in investing activities for the twenty-six weeks ended March 28, 2004, amounted to $34.7 million compared to $24.7 million for the twenty-six weeks ended March 30, 2003. The difference in net cash used in investing activities between the comparable periods is due to the Company’s capital expenditures during such periods, net of proceeds from asset disposals. Capital expenditures amounted to $34.7 million in the fiscal year-to-date of 2004 compared to $24.7 million in the fiscal year-to-date of 2003.

Net cash used by financing activities amounted to $53.6 million and $0.6 million for the twenty-six weeks ended March 28, 2004 and March 30, 2003, respectively. In the twenty-six weeks fiscal 2004, the Company redeemed $53.5 million of outstanding Santee Notes (see Notes to Consolidated Financial Statements (unaudited) of the Company contained in this report on Form 10-Q), executed a new capital lease for $0.5 million and had payments on capitalized leases of $0.6 million. The cash used in financing activities in the twenty-six week fiscal 2003 of $0.6 million consisted of payments on the Company’s capitalized lease obligations.

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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 Credit Facilities

The Company’s principal operating subsidiary, Markets, entered into a credit facility, as amended, with Bank of America N.A. on August 6, 1999 (“the credit facility”). The credit facility provides for (i) a $75.0 million revolving loan facility and (ii) a “Letter of Credit Sublimit” which is defined as an amount equal to the lesser of (a) the Revolving Loan Commitment and (b) $50,000,000. The Letter of Credit Sublimit is part of, and not in addition to, the Revolving Loan Commitment. Borrowings under the revolving loan facility are unsecured and expected to be used for certain working capital and corporate purposes. Letters of credit under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores, workers’ compensation insurance obligations and as security for certain rent obligations.

The availability of the loans and letters of credit are subject to certain sublimits and other borrowing restrictions. Indebtedness of Markets under the credit facility is guaranteed by Stater Bros. Development, Inc., a subsidiary of the Company, and any subsidiaries that Markets or Stater Bros. Development, Inc. acquires or forms after the date of the credit facility.

Loans under the credit facility bear interest at a rate based upon either (i) the “Base Rate” (defined as the higher of (a) the federal funds rate plus 0.50% and (b) the rate of interest publicly announced by Bank of America as its “reference rate”), plus 1.00%, or (ii) the “Offshore Rate” (defined as the average British Bankers Association Interest Settlement Rate for deposits in dollars, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. For Offshore Rate Loans, the Offshore Rate will be applied in consecutive periods of the earlier of (a) the maturity date of the loan or (b) periods, as selected by Markets of one, two, three or six months.

The revolving loan facility will cease to be available and will be payable in full on March 31, 2005. Letters of credit under the credit facility can be issued until March 31, 2006. The loans under the revolving loan facility must be repaid for a period of ten consecutive days semi-annually.

Loans under the revolving loan facility may be repaid and re-borrowed. The loans under the revolving loan facility may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the offshore rate. The commitments under the credit facility may be reduced by Markets. Markets will be required to pay a commitment fee equal to 0.25% per annum on the actual daily unused portion of the revolving loan facility and the letter of credit facility, payable quarterly in arrears. Outstanding letters of credit under the credit facility are subject to a fee of 1.25% per annum on the face amount of such letters of credit, payable quarterly in arrears. Markets will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of credit facility.

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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 Credit Facilities (contd.)

Availability of the loans and letters of credit under the credit facility is subject to a monthly borrowing base test based on inventory. The credit facility requires Markets to meet certain financial tests, including minimum net worth and minimum EBITDA tests. The credit facility contains covenants which, among other things, will limit indebtedness, liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, asset sales, leases, investments, loans and advances, transactions with affiliates, sale and leasebacks, other matters customarily restricted in such agreements and modifications to the holding company status of the Company.

The credit facility also contains covenants that apply to the Company and the Company is a party to the credit facility for purposes of these covenants. These covenants, among other things, limit dividends and other payments in respect to the Company’s capital stock, prepayments and redemptions of the exchange notes and other debt, and limit indebtedness, investments, loans and advances by the Company.

The credit facility requires the Company and Markets to comply with certain covenants intended to ensure that their legal identities remain separate.

The credit facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgments; defaults; invalidity of any guaranty; failure of Jack H. Brown to be Chairman of the Board and Chief Executive Officer of Stater Bros. Markets; and change of control.

In December 1999, Santee entered into a revolving line of credit with Bank of America N.A. which (“the Revolver”) was amended in 2002. Under the Revolver, Santee may borrow up to $5.0 million of which $2.0 million may be used to secure letters of credit issued to support workers’ compensation liabilities. The Revolver is limited to a borrowing base equivalent to 75% of Santee’s outstanding accounts receivable, excluding balances owed by Markets and Ralphs, less the total amount of outstanding letters of credit. Borrowings under the Revolver are secured by the receivables of Santee. The Revolver is scheduled to expire September 1, 2004.

Advances under the Revolver bear interest at Bank of America’s prime rate plus 0.5% with interest due monthly or, if elected by Santee, at the Interbank Offered Rate plus 1.75%. The outstanding undrawn portion of the workers’ compensation letter of credit is subject to an annual commitment fee of 1.25%.

Under the Revolver, Santee is required to comply with certain financial covenants, which include certain financial ratios.

As of March 28, 2004, for purposes of the credit facilities with Bank of America, Santee, Markets and the Company were in compliance with all restrictive covenants. The Company is also subject to certain covenants associated with its 10.75% Senior Notes due 2006. As of March 28, 2004, the Company was in compliance with all such covenants. However, there can be no assurance that Santee, Markets or the Company will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.

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STATER BROS. HOLDINGS INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Labor Relations

The Company’s collective bargaining contract with the UFCW was ratified during the second quarter of fiscal 2004 and extends through March 2007. The Company’s collective bargaining agreement with the International Brotherhood of Teamsters was renewed in September 2002 and expires in September 2005. Santee’s collective bargaining agreement with the International Brotherhood of Teamsters was renewed in March 2004 and expires in March 2007. Management believes it has good relations with its employees

EFFECT OF INFLATION AND COMPETITION

The Company’s performance is affected by inflation. In recent years the impact of inflation on the operations of the Company has been moderate. As inflation has increased expenses, the Company has 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 the Company to become more cost efficient as its ability to recover increases in expenses through price increases is diminished. The future results of operations of the Company will depend upon the ability of the Company to adapt to the current economic environment as well as the current competitive conditions.

The Company conducts business in one industry segment, the operation of retail food supermarkets, which offer for sale to the public most merchandise typically found in supermarkets. The supermarket industry is highly competitive and is characterized by low profit margins. The Company’s primary competitors include Vons, Albertson’s, Ralphs and a number of independent supermarket operators. Competitive factors typically include the price, quality and selection of products offered for sale, customer service, and the convenience and location of retail facilities. The Company monitors competitive activity and Senior Management regularly reviews the Company’s marketing and business strategy and periodically adjusts them to adapt to changes in the Company’s primary trading area.

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 the Company’s 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 the Company) 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 the Company. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, seasonal and weather fluctuations, expansion and other activities of competitors, changes in federal or state laws and the administration of such laws and the general condition of the economy.

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STATER BROS. HOLDINGS INC.
MARCH 28, 2004

PART I - FINANCIAL INFORMATION (contd.)

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

Item 4. CONTROLS AND PROCEDURES

As of the quarter ended March 28, 2004, the Company carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that those controls and procedures were effective in making known to them, on a timely basis, the material information needed for the preparation of this Report on Form 10-Q. During the quarter and fiscal year-to-date periods ended March 28, 2004, there were no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect the internal control over financial reporting since the date of their evaluation, nor did they find any significant deficiencies or material weaknesses that would have required corrective actions to be taken.

26

STATER BROS. HOLDINGS INC.
MARCH 28, 2004

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Various legal actions and claims are pending against the Company in the ordinary course of business. In the opinion of management and its general legal counsel, the ultimate resolution of such pending legal actions and claims will not have a material adverse effect on the Company’s consolidated financial position or its results of operations.

For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of the Company’s Form 10-K for the fiscal year ended September 28, 2003.

On February 6, 2004, a final settlement agreement became effective between Markets and Hughes to resolve litigation matters and control of Santee. For a description of the Settlement Agreement see the footnote entitled “Santee” in the notes to the Consolidated Financial Statements (unaudited) contained in this Report on Form 10-Q.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Item 5. OTHER INFORMATION

31.1		Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)		Exhibits
		None
(b)		Reports on Form 8-K
		Current Report on Form 8-K dated February 2, 2004.

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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.

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