UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

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

     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 þ No o.

     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 þ No o.

     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.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller Reporting Company o.
				(Do not check if a smaller reporting company)

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

As of February 8, 2011, there were issued and outstanding
34,552 shares of the registrant’s Class A Common Stock.

 

 

STATER BROS. HOLDINGS INC.
December 26, 2010

INDEX

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 26, 2010 and December 26, 2010 (Unaudited)			3
Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 27, 2009 and December 26, 2010			5
Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 27, 2009 and December 26, 2010			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			21
Item 4. Controls and Procedures			21
PART II OTHER INFORMATION
Item 1. Legal Proceedings			21
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 3. Defaults Upon Senior Securities			23
Item 4. Submission of Matters to a Vote of Security Holders			23
Item 5. Other Information			23
Item 6. Exhibits			23
SIGNATURES			24
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

		Sept. 26,				Dec. 26,
		2010				2010
						(Unaudited)
Current assets
Cash and cash equivalents		$	325,005			$	218,179
Restricted cash			3,121				3,121
Receivables, net of allowance of $1,219 and $1,231			35,614				42,132
Income tax receivables			—				190
Inventories			203,702				237,065
Prepaid expenses			12,678				13,240
Deferred income taxes			27,428				25,413
Current portion of long-term receivable			16,001				16,001
Total current assets			623,549				555,341
Property and equipment
Land			97,770				100,671
Buildings and improvements			559,500				562,693
Store fixtures and equipment			438,306				439,243
Property subject to capital leases			9,983				9,983
			1,105,559				1,112,590
Less accumulated depreciation and amortization			461,495				474,290
			644,064				638,300
Deferred income taxes, long-term			38,272				39,929
Deferred debt issuance cost, net			8,074				12,510
Other assets			8,828				8,828
			55,174				61,267
Total assets		$	1,322,787			$	1,254,908

See accompanying notes to unaudited consolidated financial statements.

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

LIABILITIES AND STOCKHOLDER’S EQUITY

		Sept. 26,				Dec. 26,
		2010				2010
						(Unaudited)
Current liabilities
Accounts payable		$	135,642			$	168,122
Accrued payroll and related expenses			85,404				86,200
Accrued interest			21,845				6,234
Other accrued liabilities			40,196				35,705
Accrued income taxes			527				—
Current portion of capital lease obligations			1,562				1,625
Current portion of long-term debt			132,250				50,549
Total current liabilities			417,426				348,435
Capital lease obligations, less current portion			2,206				1,776
Long-term debt, less current portion			677,750				679,562
Long-term portion of self-insurance and other reserves			40,565				45,145
Long-term deferred benefits			75,634				74,091
Other long-term liabilities			36,073				36,502
Total liabilities			1,249,654				1,185,511
Commitments and contingencies
Stockholder’s equity
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 0			—				—
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 34,552			—				—
Additional paid-in capital			8,786				8,786
Accumulated other comprehensive loss			(18,926	)			(18,926	)
Retained earnings			83,273				79,537
Total stockholder’s equity			73,133				69,397
Total liabilities and stockholder’s equity		$	1,322,787			$	1,254,908

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(In thousands, except per share and share amounts)

		13 Weeks Ended
		Dec. 27,				Dec. 26,
		2009				2010
Sales		$	923,864			$	899,037
Cost of goods sold			685,714				660,264
Gross profit			238,150				238,773
Operating expenses
Selling, general and administrative expenses			205,288				203,518
Gain on sale of dairy assets			(7,950	)			—
Depreciation and amortization			12,666				12,444
Total operating expenses			210,004				215,962
Operating profit			28,146				22,811
Interest income			59				259
Interest expense			(17,189	)			(19,198	)
Interest expense related to debt purchase			—				(1,775	)
Other expenses, net			(11	)			(92	)
Income before income taxes			11,005				2,005
Income taxes			4,294				741
Net income		$	6,711			$	1,264
Earnings per average common share outstanding		$	190.91			$	36.58
Average common shares outstanding			35,152				34,552
Shares outstanding at end of period			35,152				34,552

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		13 Weeks Ended
		Dec. 27,				Dec. 26,
		2009				2010
Operating activities:
Net income		$	6,711			$	1,264
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			15,528				15,297
Amortization of debt issuance costs			803				4,007
Premium on early retirement of debt			—				1,775
(Increase) decrease in deferred income taxes			(6,205	)			358
Gain on sale of dairy assets			(7,950	)			—
Loss on disposals of assets			13				92
Changes in operating assets and liabilities:
Increase in receivables			(4,945	)			(6,518	)
(Increase) decrease in income tax receivables			4,049				(190	)
Increase in inventories			(24,905	)			(33,363	)
Increase in prepaid expenses			(2,122	)			(562	)
Decrease in assets held for sale			215				—
Decrease in other assets			796				—
Increase in accounts payable			3,917				26,009
Increase (decrease) in income taxes payable			6,450				(527	)
Increase in liabilities held of sale			1,014				—
Decrease in other accrued liabilities			(17,789	)			(21,081	)
Increase in long-term reserves			2,430				3,466
Net cash used in operating activities			(21,990	)			(9,973	)
Financing activities:
Proceeds from issuance of long-term debt			—				400,000
Debt issuance cost			—				(6,972	)
Principal payments on long-term debt			—				(479,889	)
Principal payments on capital lease obligations			(315	)			(367	)
Dividend paid			(5,000	)			—
Net cash used in financing activities			(5,315	)			(87,228	)
Investing activities:
Proceeds from sale of dairy assets, net of fees			84,294				—
Purchase of property and equipment			(11,666	)			(9,766	)
Proceeds from sale of property and equipment			10				141
Net cash provided by (used in) investing activities			72,638				(9,625	)
Net increase (decrease) in cash and cash equivalents			45,333				(106,826	)
Cash and cash equivalents at beginning of period			196,914				325,005
Cash and cash equivalents at end of period		$	242,247			$	218,179
Interest paid		$	32,588			$	30,803
Income taxes paid		$	—			$	1,100

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010

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 26, 2010 are not necessarily indicative of the results that may be experienced for the year ending September 25, 2011.

     The consolidated balance sheet at September 26, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

     For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s report on Form 10-K for the year ended September 26, 2010.

Note 2 — Principles of Consolidation

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

Note 3 — Subsequent Events

     The Company has evaluated the impact of subsequent events and determined that, other than the call on January 14, 2011 of all of its remaining outstanding $525.0 million 8.125% Senior Notes in the amount of $45.1 million and a dividend payment of $5.0 million on December 28, 2010, it did not have any subsequent events that needed to be disclosed in its consolidated financial statements.

Note 4 — Use of Estimates

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

Note 5 — Income Taxes

     The Company establishes deferred tax liabilities for anticipated tax timing differences where payment of tax is anticipated. Such amounts represent a reasonable provision for taxes ultimately expected to be paid, and the amounts may be adjusted over time as additional information becomes known.

     The Company does not have any material tax positions that did not meet a “more-likely-than-not” recognition threshold. As such, the Company has not recorded any liabilities for uncertain tax positions. During the thirteen weeks ended December 26, 2010, 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 2007 through fiscal 2010 tax returns. During the first quarter of fiscal 2011, the State of California Franchise Tax Board (“FTB”) concluded their audit of the Company’s fiscal 2007 state return and made no significant changes to the Company’s reported taxes. For state tax purposes, the Company is subject to review of its fiscal 2008 through fiscal 2010 state tax returns. The Company has been notified that the FTB intends to audit its fiscal 2008 and fiscal 2009 state tax returns. To date, the FTB has only made a request to schedule the audit for those years.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010

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. Market value of Plan assets is calculated using fair market values as provided by a third-party trustee. The Plan’s investments include cash, which earns interest, and governmental securities and corporate bonds and securities.

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

		Dec. 27,				Dec. 26,
		2009				2010
		(in thousands)
Expected return on assets		$	(866	)		$	(971	)
Service cost			826				944
Interest cost			1,001				1,072
Amortization of prior service cost			(1	)			1
Amortization of recognized losses			349				392
Net pension expense		$	1,309			$	1,438
Actuarial assumptions used to determine net pension expense were:
Discount rate			5.50	%			5.00	%
Rate of increase in compensation levels			3.00	%			3.00	%
Expected long-term rate of return on assets			6.50	%			6.50	%

The Company made approximately $0.6 million of contributions to the Plan in the thirteen weeks ended December 26, 2010 and the Company expects to contribute an additional $2.0 million during the remainder of fiscal 2011.

Note 7 — Asset Sale

     On October 11, 2009, the Company sold substantially all of the assets of Dairies to subsidiaries of Dean Foods (“Dean Foods”) for $88.0 million in cash, subject to a working capital adjustment, and the assumption by Dean Foods of certain liabilities including substantially all of Dairies’ current liabilities, which included accounts payable. In the second quarter of fiscal 2010, the purchase price was adjusted upward by approximately $1.5 million due to an adjustment made for working capital. Dairies’ assets which were sold consisted primarily of accounts receivable, inventory and property and equipment. The Company incurred approximately $3.8 million in transaction and other fees related to the transaction and recognized a gain, net of tax, of approximately $5.6 million. The pre-tax gain from the sale of Dairies’ assets is included in “Gain on sale of dairy assets” within the unaudited consolidated statements of income. Dairies retained responsibility for all workers compensation claims through the date of the transaction.

     Also on October 11, 2009, the Company entered into a ten year Product Purchase Agreement (the “PPA”) with Dean Foods to purchase substantially all of its milk products sold in its supermarkets from Dean Foods. The purchase prices under the PPA are deemed to approximate market pricing.

     As of October 11, 2009, the Company ceased all dairy manufacturing operations.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010

Note 8 — New Debt Issuance and Early Extinguishment of Debt

     Issuance of New Notes

     On November 29, 2010, the Company issued $255.0 million in aggregate principal amount of 7.375% Senior Notes due November 15, 2018 (the “New Notes”) in a private offering. The New Notes are unregistered and unsecured obligations of the Company. The Company incurred approximately $6.4 million of debt issuance costs related to the issuance of the New Notes of which $5.4 million was paid as of December 26, 2010. These costs will be amortized to interest expense over the term of the New Notes.

     Issuance of New Credit Facility

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

     The Term Loan bears interest at 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% in each of the first two years of the agreement and 10.0% in each of the years three and four of the agreement. The Term Loan also includes additional mandatory principal payments on the Term Loan based on a percentage of “excess cash flow” as defined in the Credit Facility. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the Credit Facility is held until the Term Loan is paid in full. The Company incurred approximately $2.0 million of debt issuance cost related to the Term Loan of which approximately $1.5 million was paid as of December 26, 2010. These costs will be amortized to interest expense over the term of the Term Loan.

     As of December 26, 2010, the Company’s interest rates on the Term Loan were based on the Eurodollar Rate and consisted of a ninety day rate of approximately 2.800% on approximately $5.4 million of outstanding principal amount and a twelve month rate of approximately 3.287% on approximately $139.6 million.

     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 is 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 26, 2010

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

Issuance of New Credit Facility (contd.)

The Credit Facility requires the Company 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 8.125% Senior Notes, 7.375% Senior Notes and 7.75% Senior Notes (“Notes Indentures”). Markets and the Company’s other direct and indirect subsidiaries are not limited in their ability to transfer assets in the form of loans, advances or cash dividends to the Company. As of December 26, 2010, the Company was in compliance with all restrictive covenants under the Credit Facility.

     The Company had no short-term borrowings outstanding under the Revolving Credit Facility as of December 26, 2010 and the Company did not incur any short-term borrowings under the Revolving Credit Facility during the quarter ended December 26, 2010.

     Early Extinguishment of Debt

     The Company used the proceeds from the New Notes and the new Term Loan and cash on hand to purchase and early retire all of its $525.0 million 8.125% Senior Notes due June 15, 2012 (“Retired Notes”). On November 29, 2010, the Company paid approximately $479.2 million to purchase and make a tender payment on approximately $477.5 million outstanding balance of Retired Notes that had been validly tendered as of that date. The payment included a tender premium of approximately $1.8 million that has been recorded under “Interest expense related to debt purchase” in the Company’s consolidated financial statements. On December 13, 2010, the Company paid approximately $2.4 million to purchase approximately $2.4 million of outstanding Retired Notes that had been tendered as of that date. In the first quarter of fiscal 2011, the Company recorded to “Interest expense” approximately $3.3 million in unamortized deferred offering costs related to the Retired Notes. Subsequent to December 26, 2010, the Company, on January 14, 2011, called all remaining outstanding Retired Notes and paid approximately $45.1 million to retire the remaining notes. In the second quarter of fiscal 2011, the Company will record approximately $0.3 million to interest expense for the remaining unamortized deferred offering costs on the Retired Notes called on January 14, 2011.

Note 9 — Subsidiary Guarantee

     As of December 26, 2010, the Company had $285.0 million of 7.75% Senior Notes due April 15, 2015, $255.0 million of unregistered 7.375% Senior Notes due November 15, 2018 and $45.1 million of Retired 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.

     The Company called and retired the remaining $45.1 million of Retired Notes on January 14, 2011.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010

Note 10 — Litigation Matters

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

     In December 2008, an action by Dennis M. O’Connor, et al. was filed in the Los Angeles Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. On September 23, 2010 following mediation, the case was settled. Under the settlement agreement, the settlement amount will be paid pursuant to procedures for filing and approval of claims for members of the certified class with a portion of any unclaimed amounts returned to SBM Dairies, Inc. The full settlement amount was recorded in the Company’s consolidated financial statements for the fiscal year ended September 26, 2010.

Note 11 — Long-Term Receivable

     The Company has approximately $16.0 million due from the Inland Valley Development Agency (the “IVDA”) for tax increment reimbursement related to the construction of the Company’s Distribution Center. In fiscal 2010, $17.7 million which represented the net present value of the future tax increments was converted to a cash payment of approximately $1.7 million and a note of $16.0 million from the IVDA which was due December 31, 2010. The IVDA requested and the Company granted an extension of the due date on the IVDA note to March 31, 2011. The IVDA note bears an annual interest rate of 5.0%.

Note 12 — Dividend

     On November 17, 2009, the Company paid a $5.0 million dividend to La Cadena Investments (“La Cadena”), the sole shareholder of the Company. On December 20, 2010, the Company declared a $5.0 million dividend to La Cadena. Subsequent to December 26, 2010, the dividend was paid on December 28, 2010.

     After the Company’s $5.0 million dividend payment on December 28, 2010 and taking into consideration its financial results as of December 26, 2010, the Company had the ability to make restricted payments, including dividends, of $33.7 million.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
DECEMBER 26, 2010

Note 13 — 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.

     Current Portion of Long-Term Receivable

     Although market quotes for the fair value of the Company’s long-term receivable are not readily available, the Company valued its long-term receivable based on a discounted cash flow approach applying a discount rate that approximates long-term market rates.

     Long-Term Debt and Capital Lease Obligations

     The fair value of the 8.125% Senior Notes, the 7.75% Senior Notes and the 7.375% Senior Notes are based on quoted market prices. Although market quotes for the fair value of the Company’s Term Loan and capitalized lease obligations are not readily available, the Company believes the stated value approximates fair value.

     The estimated fair values of the Company’s financial instruments are as follows:

		As of
		December 26, 2010
		(In thousands)
		Carrying				Fair
		Amount				Value
Cash and cash equivalents		$	218,179			$	218,179
Receivables		$	42,322			$	42,322
Current portion of long-term receivable		$	16,001			$	16,001
Capital lease obligations		$	3,401			$	3,401
Long-term debt		$	730,111			$	734,649

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 26, 2010.

Our discussion and analysis of financial condition and results of operations are based upon our unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. The preparation of the financial statements requires the use of estimates and judgments on the part of management. We base our estimates on our historical experience combined with management’s understanding of current facts and circumstances.

SIGNIFICANT ACCOUNTING POLICIES

There are certain accounting policies that we have adopted that may differ from policies of other companies within our industry and other companies as a whole. Such differences in the treatment of these policies may be important to the readers of our report on Form 10-Q and our unaudited consolidated financial statements contained herein. For further information regarding our accounting policies, refer to the significant accounting policies included in the notes to the unaudited consolidated financial statements contained herein and in our report on Form 10-K for the year ended September 26, 2010.

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, holds all of our issued and outstanding capital stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of the Company, is the Managing General Partner of La Cadena with the power to vote the shares of our capital stock held by La Cadena on all matters, including with respect to the election of our Board of Directors, and any other matters requiring shareholder approval.

AVAILABLE INFORMATION

We file quarterly and annual reports electronically with the Security and Exchange Commission (“SEC”) under forms 10-Q and 10-K and we file current reports on form 8-K and amendments to these reports. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. These electronic files can be found at the SEC’s website at http://www.sec.gov. The public may read and copy any of our reports filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. The public may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330.

EXECUTIVE OVERVIEW

We are the largest privately owned supermarket chain in Southern California. Our revenues are generated primarily from retail sales through our supermarkets. Our success is a result of our marketing strategy of offering everyday low prices while providing our customers with friendly and outstanding service on each of their visits to our stores which has been a seventy-five year Stater Bros.’ tradition.

As a result of the continued decline of the economy in our primary marketing area, we anticipate that our fiscal 2011 sales will be lower than our fiscal 2010 sales. Our strategy in the near term is to retain customer counts during these challenging economic times by continuing to provide exceptional customer service and provide value to our customers on their purchases from our supermarkets.

Our marketing area of Southern California continues to be highly competitive and in flux. With the current economic conditions, our marketing area has seen job losses and business closures which has put and will continue to put pressure on our gross margin as we endeavor to retain our customer base. We anticipate continued competitive pressures from “big box” format competitors including Walmart, Costco, Target and Winco and from our traditional grocery format competitors Vons, Albertsons and Ralphs and from independent supermarket operators.

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Sales and Cost of Goods Sold

		Fiscal Period Ended								Change
		Dec. 27,				Dec. 26,				2011 to 2010
(in thousands)		2009				2010				Dollar				%
Sales		$	923,864			$	899,037			$	(24,827	)			(2.69	)%
Gross Profit		$	238,150			$	238,773			$	623				0.26	%
as a % of sales			25.78	%			26.56	%

Sales

Sales in our supermarkets decreased 2.31% or $21.3 million for the first quarter of fiscal 2011 compared to the same period in fiscal 2010. Prior to our sale of our Dairy operations in October 2009, the Dairy had fiscal 2010 sales of $3.5 million that are not present in our fiscal 2011 sales.

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 period, we only include the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year period. For stores that have been closed, we only include the prior year’s weekly sales that correspond to the weeks the stores were opened in the current year. Replacement store sales are included in like store sales. We have had no new store openings nor any store closures in either fiscal 2010 or fiscal 2011.

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

Like store sales decreased $21.3 million or 2.31% from the first quarter of fiscal 2010.

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 2011 increased 0.78% to 26.56% from 25.78% in fiscal 2010. The increase in our first quarter margin is attributed to a special produce promotion that occurred during a portion of the first quarter of fiscal 2010 that was not present in fiscal 2011 and to more focused promotional efforts in fiscal 2011. During the first quarter of fiscal 2011, we have begun to see increased prices in commodity prices of oils, sugar, coffee and other commodity pricing and we expect to see additional price increases in the products we sell. We anticipate that the current economic conditions and continued competitive pressures will limit our ability to pass on price increases which will put pressure on our gross margin in the foreseeable future.

Operating Expenses and Operating Profit

		Fiscal Period Ended								Change
		Dec. 27,				Dec. 26,				2011 to 2010
(in thousands)		2009				2010				Dollar				%
Operating Expenses:
Selling, general and
administrative expenses		$	205,288			$	203,518			$	(1,770	)			(0.86	)%
as a % of sales			22.22	%			22.64	%
Gain on sale of assets		$	(7,950	)		$	—			$	7,950				—
as a % of sales			(0.86	)%			0.00	%
Depreciation and amortization		$	12,666			$	12,444			$	(222	)			(1.75	)%
as a % of sales			1.37	%			1.38	%
Operating profit		$	28,146			$	22,811			$	(5,335	)			(18.95	)%
as a % of sales			3.05	%			2.54	%

Selling, General and Administrative Expenses

The increase, as a percentage of sales, in selling, general and administrative expenses in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 is due primarily to increases, as a percentage of sales, in payroll related expenses. Our payroll cost, as a percentage of sales, increased 0.59% and includes increases in union insurance cost of 0.55%, as a percentage of sales.

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 2011 and fiscal 2010 is $299,000 and $314,000, respectively.

Gain on Sale of Dairy Assets

Gain on sale of dairy assets, in fiscal 2010, comprises approximately $8.0 million of pre-tax gain from the sale of our dairy assets. The Dairy transaction is described in “Note 7 — Asset Sale” to our unaudited consolidated financial statements contained herein.

Depreciation and Amortization

Depreciation and amortization expense in the first quarter of fiscal 2011 was comparable to fiscal 2010. Included in both the first quarters of fiscal 2011 and fiscal 2010 cost of goods sold is $2.9 million of depreciation and amortization related to our warehousing and distribution activities.

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS (contd.)

Interest Income

Interest income was $259,000 and $59,000 for the first quarters of fiscal 2011 and fiscal 2010, respectively.

Interest Expense

Interest expense was $19.2 million for the first quarter of fiscal 2011 and $17.2 million in the first quarter of fiscal 2010. Interest expense for the first quarter of fiscal 2011 includes approximately $3.3 million from the write-off of unamortized deferred offering costs from the early retirement of approximately $479.9 million of our $525.0 million 8.125% Senior Notes with the remaining outstanding portion being retired on January 14, 2011. With our reduction in outstanding debt of approximately $125.0 million and the lower interest rates on our new long-term debt, we anticipate we will incur less interest expense in fiscal 2011 than in fiscal 2010.

Interest Expense Related to Debt Purchase

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

Income Before Income Taxes

Income before income taxes amounted to $2.0 million and $11.0 million in the first quarters of fiscal 2011 and fiscal 2010, respectively.

Income Taxes

Income taxes amounted to $0.7 million and $4.3 million in the first quarters of fiscal 2011 and fiscal 2010, respectively. Our effective tax rate was 37.0% and 39.0% for the first quarters of fiscal 2011 and fiscal 2010, respectively. The lower effective rate for fiscal 2011 is due primarily to tax credits being applied against lower taxable income in the current year versus the prior year.

Net Income

Net income for the first quarter of fiscal 2011 amounted to $1.3 million compared to $6.7 million in the first quarter of fiscal 2010.

LIQUIDITY AND CAPITAL RESOURCES

We historically fund our daily cash flow requirements through funds provided by operations. We have the ability to borrow under our short-term revolving credit facility. Our credit facility expires in November 2014 and includes a revolving credit facility for working capital and letters of credit of $100.0 million. The letters of credit are maintained pursuant to our workers’ compensation and general liability self-insurance requirements.

As of December 26, 2010, we had approximately $49.8 million of outstanding letters of credit and we had approximately $50.2 million available under the revolving credit facility.

We had no short-term borrowings outstanding under our revolving credit facility as of December 26, 2010. We did not incur any short-term borrowings under our revolving credit facility in the first quarter of fiscal 2011.

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 26, 2010.

		Contractual Cash Obligations
		(in thousands)
						Less than												After
		Total				1 Year				1-3 Years				4-5 Years				5 Years
8.125% Senior Notes called January 2011
Principal		$	45,111			$	45,111			$	—			$	—			$	—
Interest			295				295				—				—				—
			45,406				45,406				—				—				—
Term Loan due November 2014 (1)
Principal			145,000				5,438				19,938				119,624				—
Interest			17,073				4,752				8,654				3,667				—
			162,073				10,190				28,592				123,291				—
7.75% Senior Notes due April 2015
Principal			285,000				—				—				285,000				—
Interest			99,394				22,088				44,175				33,131				—
			384,394				22,088				44,175				318,131				—
7.375% Senior Notes due November 2018
Principal			255,000				—				—				—				255,000
Interest			149,720				18,075				37,613				37,613				56,419
			404,720				18,075				37,613				37,613				311,419
Capital lease obligations (2)
Principal			3,401				1,625				1,649				127				—
Interest			834				470				359				5				—
			4,235				2,095				2,008				132				—
Operating leases (2)			343,615				38,284				67,171				51,940				186,220
Total contractual cash obligations		$	1,344,443			$	126,735			$	179,559			$	531,107			$	507,042
		Other Commercial Commitments
		(in thousands)
						Less than												After
		Total				1 Year				1-3 Years				4-5 Years				5 Years
Standby letters of credit (3)		$	49,762			$	49,762			$	—			$	—			$	—
Total other commercial commitments		$	49,762			$	49,762			$	—			$	—			$	—

(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.)

Working capital amounted to $206.9 million at December 26, 2010 and $206.1 million at September 26, 2010, and our current ratios were 1.59:1 and 1.49:1, 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 26, 2010 was $10.0 million and was $22.0 million for the thirteen weeks ended December 27, 2009. Significant uses of cash for operating activities in the first quarter of fiscal 2011 included increases in inventory levels, to meet holiday sales demand as well as additional forward buys in anticipation of price increases, and a decrease in accrued interest due to the timing of interest payments. Uses of cash were partially offset by an increase in accounts payable.

In the first quarter of fiscal 2011, we had cash used in financing activities of $87.2 million which resulted from the early retirement of $479.9 million of our $525.0 million 8.125% Senior Notes offset by new debt issuance of $400.0 million comprised of $255.0 million 7.375% Senior Notes due 2018 and our $145.0 million Term Loan due 2014.

After taking into consideration our $5.0 million dividend payment on December 28, 2010 and based on our financial results as of December 26, 2010, we had the ability and right to pay a restricted payment, including dividends, of up to $33.7 million.

We believe that operating cash flows and current cash reserves will be sufficient to meet our currently identified operating needs and scheduled capital expenditures. However, we may elect to fund some capital expenditures through capital leases, operating leases or debt financing. There can be no assurance that such debt and lease financing will be available to us in the future.

Labor Relations

Our collective bargaining agreements with the UFCW were renewed in March 2007 and extend through March 2011. 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.

STATER BROS. HOLDINGS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 26, 2010

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 26, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 26, 2010. There were no material changes in our internal control over financial reporting during the first quarter of fiscal 2011.

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

In December 2008, an action by Dennis M. O’Connor, et al. was filed in the Los Angeles Superior Court against Santee Dairies, Inc., dba Heartland Farms (now SBM Dairies, Inc.) seeking individual and potential class action monetary damages for time spent by non-exempt hourly paid employees for changing into and out of sanitary uniforms. On September 23, 2010, following mediation the case was settled. Under the settlement agreement, the settlement amount will be paid pursuant to procedures for filing and approval of claims for members of the certified class with a portion of any unclaimed amounts returned to SBM Dairies, Inc. The full settlement amount has been recorded in our consolidated financial statements for our fiscal year ended September 26, 2010.

STATER BROS. HOLDINGS INC.
DECEMBER 26, 2010

Item 1A. RISK FACTORS

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

Our principal competitors include traditional grocery format operators; “big box” format retailers, including Walmart, Target, Costco and Winco and regional markets which compete with us on the basis of location, quality of products, service, price, product variety and store condition. Our competitors maintain market share through high levels of promotional activities and discount pricing, which creates a difficult environment in which to consistently increase year-over-year sales gains. We expect our competitors to continue to apply pricing and other competitive pressures as they expand the number of their stores in our market area and as they continue to take steps to both maintain and grow their customer counts.

We face competitive pressure from existing competitors and from smaller format stores such as convenience stores, drug stores and discount stores that carry traditional grocery format items. Some of our competitors have greater resources than us and are not unionized resulting in 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 26, 2010

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

(a)

Exhibits

31.1

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

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.

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.