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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 25, 2011

OR

 

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

For the transition from              to             

Commission file number 001-13222

 

 

STATER BROS. HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware   33-0350671

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

301 S. Tippecanoe Avenue  
San Bernardino, California   92408
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (909) 733-5000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer    ¨      Accelerated filer   ¨
  Non-accelerated filer    x      Smaller Reporting Company   ¨

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

As of February 7, 2012, there were issued and outstanding 33,837 shares of the registrant’s Class A Common Stock.

 

 

 


Table of Contents

STATER BROS. HOLDINGS INC.

December 25, 2011

INDEX

 

          Page
PART I   FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of September 25, 2011 and December 25, 2011 (Unaudited)

   3
 

Consolidated Statements of Income (Unaudited) for the 13 weeks ended December 26, 2010 and December 25, 2011

   5
 

Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended December 26, 2010 and December 25, 2011

   6
 

Notes to Consolidated Financial Statements (Unaudited)

   7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   13

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

   20

Item 4.

 

Controls and Procedures

   20
PART II   OTHER INFORMATION   

Item 1.

 

Legal Proceedings

   20

Item 1A.

 

Risk Factors

   21

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   22

Item 3.

 

Defaults Upon Senior Securities

   22

Item 4.

 

Submission of Matters to a Vote of Security Holders

   22

Item 5.

 

Other Information

   22

Item 6.

 

Exhibits

   22

SIGNATURES

   23

 

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

 

     Sept. 25,
2011
     Dec. 25,
2011
 
            (Unaudited)  

Current assets

     

Cash and cash equivalents

   $ 235,784       $ 231,337   

Restricted cash

     3,121         —     

Receivables, net of allowance of $984 and $1,000

     32,166         40,142   

Inventories

     231,121         260,690   

Prepaid expenses

     11,705         14,820   

Deferred income taxes

     30,994         32,785   

Note receivable, current portion

     600         600   
  

 

 

    

 

 

 

Total current assets

     545,491         580,374   

Property and equipment

     

Land

     105,039         108,688   

Buildings and improvements

     573,625         575,385   

Store fixtures and equipment

     448,845         454,331   

Property subject to capital leases

     9,983         10,707   
  

 

 

    

 

 

 
     1,137,492         1,149,111   

Less accumulated depreciation and amortization

     512,069         525,631   
  

 

 

    

 

 

 
     625,423         623,480   

Deferred income taxes, long-term

     40,241         43,358   

Deferred debt issuance costs, net

     10,690         10,124   

Note receivable, less current portion

     2,165         1,961   

Other assets

     8,757         8,764   
  

 

 

    

 

 

 
     61,853         64,207   
  

 

 

    

 

 

 

Total assets

   $ 1,232,767       $ 1,268,061   
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS (contd.)

(In thousands, except share amounts)

LIABILITIES AND STOCKHOLDER’S EQUITY

 

     Sept. 25,     Dec. 25,  
     2011     2011  
           (Unaudited)  

Current liabilities

    

Accounts payable

   $ 141,030      $ 167,813   

Accrued payroll and related expenses

     106,023        107,585   

Accrued interest

     17,768        7,520   

Other accrued liabilities

     34,004        34,875   

Accrued income taxes

     6,732        10,403   

Current portion of capital lease obligations

     1,107        1,051   

Current portion of long-term debt

     38,798        36,435   
  

 

 

   

 

 

 

Total current liabilities

     345,462        365,682   

Capital lease obligations, less current portion

     1,099        1,417   

Long-term debt, less current portion

     642,577        643,128   

Long-term portion of self-insurance and other reserves

     41,553        49,019   

Long-term deferred benefits

     75,853        77,512   

Other long-term liabilities

     45,459        46,529   
  

 

 

   

 

 

 

Total liabilities

     1,152,003        1,183,287   

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 - 33,837

     —          —     

Additional paid-in capital

     8,604        8,604   

Accumulated other comprehensive loss

     (23,045     (23,045

Retained earnings

     95,205        99,215   
  

 

 

   

 

 

 

Total stockholder’s equity

     80,764        84,774   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 1,232,767      $ 1,268,061   
  

 

 

   

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share and share amounts)

 

     13 Weeks Ended  
     Dec. 26,     Dec. 25,  
     2010     2011  

Sales

   $ 899,037      $ 960,724   

Cost of goods sold

     660,264        701,043   
  

 

 

   

 

 

 

Gross profit

     238,773        259,681   

Operating expenses

    

Selling, general and administrative expenses

     200,856        221,871   

Depreciation and amortization

     12,444        11,412   
  

 

 

   

 

 

 

Total operating expenses

     213,300        233,283   
  

 

 

   

 

 

 

Operating profit

     25,473        26,398   

Interest income

     259        36   

Interest expense

     (19,198     (11,949

Interest expense related to purchase of debt

     (1,775     —     

Other income (expenses), net

     (92     639   
  

 

 

   

 

 

 

Income before income taxes

     4,667        15,124   

Income taxes

     1,826        6,114   
  

 

 

   

 

 

 

Net income

   $ 2,841      $ 9,010   
  

 

 

   

 

 

 

Earnings per average common share outstanding

   $ 82.22      $ 266.28   
  

 

 

   

 

 

 

Average common shares outstanding

     34,552        33,837   
  

 

 

   

 

 

 

Shares outstanding at end of period

     34,552        33,837   
  

 

 

   

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     13 Weeks Ended  
     Dec. 26,
2010
    Dec. 25,
2011
 
    

Operating activities:

    

Net income

   $ 2,841      $ 9,010   

Adjustments to reconcile net income to net cashprovided by (used in) operating activities:

    

Depreciation and amortization

     15,297        14,105   

Amortization of debt issuance costs

     4,007        566   

Premium on early retirement of debt

     1,775        —     

(Increase) decrease in deferred income taxes

     358        (4,908

(Gain) loss on disposals of assets

     92        (639

Changes in operating assets and liabilities:

    

Decrease in restricted cash

     —          3,121   

Increase in receivables

     (6,518     (7,976

Decrease in income tax receivables

     895        —     

Increase in inventories

     (33,363     (29,569

Increase in prepaid expenses

     (562     (3,115

Increase in other assets

     —          (7

Increase in accounts payable

     26,009        26,783   

Increase (decrease) in income taxes payable

     (527     3,671   

Decrease in other accrued liabilities

     (24,169     (7,815

Increase in long-term reserves

     3,892        10,195   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (9,973     13,422   
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from issuance of long-term debt

     400,000        —     

Debt issuance cost

     (6,972     —     

Proceeds from capital lease financing

     —          724   

Principal payments on long-term debt

     (479,889     (1,812

Principal payments on capital lease obligations

     (367     (462

Dividend paid

     —          (5,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (87,228     (6,550
  

 

 

   

 

 

 

Investing activities:

    

Decrease in note receivable

     —          204   

Purchase of property and equipment

     (9,766     (12,558

Proceeds from sale of property and equipment

     141        1,035   
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,625     (11,319
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (106,826     (4,447

Cash and cash equivalents at beginning of period

     325,005        235,784   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 218,179      $ 231,337   
  

 

 

   

 

 

 

Interest paid

   $ 30,803      $ 21,728   

Income taxes paid

   $ 1,100      $ 7,350   

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2011

 

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 25, 2011 are not necessarily indicative of the results that may be experienced for the year ending September 30, 2012.

The consolidated balance sheet at September 25, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s report on Form 10-K for the year ended September 25, 2011.

Note 2 – Principles of Consolidation

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

Note 3 – Subsequent Events

The Company has evaluated the impact of subsequent events and determined, that other than the settlement of a litigation matter as disclosed in “Note 9 – Litigation Matters”, 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 25, 2011, 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 2008 through fiscal 2011 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 2011 state tax returns. During the third quarter of fiscal 2011, the FTB began their audit of the Company’s fiscal 2008 and fiscal 2009 state tax returns. Nothing has come to the attention of the Company that would indicate any material findings by the FTB as a result of their audits.

 

7


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2011

 

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:

 

     13 Weeks Ended  
     Dec. 26,     Dec. 25,  
     2010     2011  
     (in thousands)  

Expected return on assets

   $ (955   $ (995

Service cost

     883        1,034   

Interest cost

     1,047        1,109   

Amortization of prior service cost

     1        1   

Amortization of recognized losses

     384        522   
  

 

 

   

 

 

 

Net pension expense

   $ 1,360      $ 1,671   
  

 

 

   

 

 

 

Actuarial assumptions used to determine net pension expense were:

    

Discount rate

     5.00     4.50

Rate of increase in compensation levels

     3.00     3.00

Expected long-term rate of return on assets

     6.50     6.50

The Company expects to contribute $7.5 million during the remainder of fiscal 2012 which includes an additional contribution of $5.4 million above the Company’s funding requirement.

 

8


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2011

 

Note 7 – Debt Issuance and Early Extinguishment of Debt

Issuance of Notes

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

Issuance of Credit Facility

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

The Term Loan bears interest at the Eurodollar Rate plus 2.50% or the Base Rate plus 1.50% (as defined in the Credit Facility) and the interest under the Term Loan is payable quarterly in arrears and includes mandatory quarterly principal payments of 5.0%, of the original outstanding balance, in each of the first two years of the agreement and 10.0%, of the original outstanding balance, in each of the years three and four of the agreement. The Term Loan also includes additional mandatory principal payments on the Term Loan based on a percentage of “excess cash flow” as defined in the Credit Facility. The Term Loan is due November 29, 2014 with any remaining outstanding principal amounts under the Term Loan due as of that date. The security held under the Credit Facility is held until the Term Loan is paid in full. The Company incurred approximately $2.0 million of debt issuance costs related to the Term Loan, which will be amortized to interest expense over the term of the Term Loan.

As of December 25, 2011, the interest rate on the Term Loan was based on the Eurodollar Rate and consisted of a twelve month rate of approximately 3.287% on approximately $139.6 million of outstanding principal amount.

Subject to certain restrictions, the entire amount of the Revolving Credit Facility may be used for loans, letters of credit or a combination thereof. Borrowings under the Revolving Credit Facility are secured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the Revolving Credit Facility are expected to be used for workers’ compensation insurance obligations and may be used for new store construction and certain other corporate purposes. The availability of the loans and letters of credit are subject to certain borrowing restrictions.

Loans under the Revolving Credit Facility bear interest at a rate based upon either (i) the “Base Rate” (defined as the higher of (a) the federal funds rate plus 0.50% and (b) the Bank of America “prime rate”), plus 1.50%, or (ii) the “Eurodollar Rate” (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.

 

9


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2011

 

Note 7 – Debt Issuance and Early Extinguishment of Debt (contd.)

Issuance of Credit Facility (contd.)

 

The Credit Facility requires the Company and Markets to meet certain financial tests, including minimum net worth and the maintenance of minimum earnings levels. The Credit Facility contains covenants which, among other things, limit the ability of the Company and its subsidiaries to (i) incur indebtedness, grant liens and guarantee obligations, (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates, (iii) make restricted payments and (iv) make certain amendments to the Indentures governing the 7.375% Senior Notes and 7.75% Senior Notes (“Notes Indentures”). Markets and the Company’s other direct and indirect subsidiaries are not limited in their ability to transfer assets in the form of loans, advances or cash dividends to the Company. As of December 25, 2011, the Company and Markets were 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 25, 2011 and the Company did not incur any short-term borrowings under the Revolving Credit Facility during the quarter ended December 25, 2011.

Early Extinguishment of Debt

The Company used the proceeds from the 7.375% Senior Notes and the Term Loan and cash on hand to purchase and retire early its $525.0 million 8.125% Senior Notes due June 15, 2012 (“Retired Notes”). On November 29, 2010, the Company paid approximately $479.2 million to purchase and make a tender payment on approximately $477.5 million outstanding balance of Retired Notes that had been validly tendered as of that date. The payment included a tender premium of approximately $1.8 million that has been recorded under “Interest expense related to purchase of debt” in the Company’s consolidated statements of income for fiscal 2011. On December 13, 2010, the Company paid approximately $2.4 million to purchase approximately $2.4 million of outstanding Retired Notes that had been tendered as of that date. 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.

Note 8 – Subsidiary Guarantee

As of December 25, 2011, the Company had $285.0 million of 7.75% Senior Notes due April 15, 2015 and $255.0 million of 7.375% Senior Notes due November 15, 2018, collectively (the “Notes”).

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

 

10


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2011

 

Note 9 – Litigation Matters

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

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

In May of 2011, Markets was served with an Action filed in the Superior Court of the State of California for the County of Riverside (“Harold F. Lunsford et al. v. Stater Bros. Markets”) seeking individual and potential class action damages including associated penalties for Markets’ alleged failure to provide meal periods, rest periods or compensation in lieu thereof and alleged failure to pay certain wages for terminated employees. On January 26, 2012, following a mediation, this case was settled subject to court approval of the settlement and the full settlement amount has been recorded in the Company’s consolidated financial statements for the fiscal quarter ended December 25, 2011.

Note 10 – Note Receivable

During the construction of the Company’s corporate offices and distribution center, the Company paid for certain construction costs at the Company’s Support Services building which were the responsibility of the Inland Valley Development Agency (the “IVDA”). These costs, which included the construction of an exterior wall of the building and asbestos removal, were needed before the building was habitable. The Company agreed to expend the funds on behalf of the IVDA with the understanding that the IVDA would reimburse these funds after the completion of construction. During the second quarter of fiscal 2011, the amount of reimbursement was agreed to by the IVDA and the Company reclassified approximately $3.0 million from building and improvements to long-term notes receivable on its consolidated balance sheets. The note bears an interest rate of 4.0% per annum and has a maturity date of April 2015 and includes quarterly principal and interest payments.

Note 11 – Dividend

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

As of December 25, 2011, the Company had the ability and right to make restricted payments, including dividends, of $32.0 million.

 

11


Table of Contents

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

DECEMBER 25, 2011

 

Note 12 – Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short-term maturity of these instruments.

Receivables

The carrying amount approximates fair value because of the short-term maturity of these instruments.

Note Receivable

Although market quotes for the fair value of the Company’s note receivable are not readily available, the Company believes the stated value approximates fair value.

Long-Term Debt and Capital Lease Obligations

The fair value of 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 25, 2011
 
     (In thousands)  
     Carrying
Amount
     Fair
Value
 

Cash and cash equivalents

   $ 231,337       $ 231,337   

Receivables

   $ 40,142       $ 40,142   

Note receivable

   $ 2,561       $ 2,561   

Capital lease obligations

   $ 2,468       $ 2,468   

Long-term debt

   $ 679,563       $ 700,076   

 

 

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Table of Contents

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 25, 2011.

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

SIGNIFICANT ACCOUNTING POLICIES

There are certain accounting policies that we have adopted that may differ from policies of other companies within our industry and other companies as a whole. Such differences in the treatment of these policies may be important to the readers of our report on Form 10-Q and our unaudited consolidated financial statements contained herein. For further information regarding our accounting policies, refer to the significant accounting policies included in the notes to the unaudited consolidated financial statements contained herein and in our report on Form 10-K for the year ended September 25, 2011.

 

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Table of Contents

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-six year Stater Bros.’ tradition.

Our strategy in the near term is to retain customer counts during these challenging economic times by continuing to provide exceptional customer service and 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.

 

 

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Table of Contents

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. 26,      Dec. 25,      2012 to 2011  
(in thousands)    2010      2011      Dollar      %  

Sales

     $899,037         $960,724       $ 61,687         6.86%   

Gross Profit

     $238,773         $259,681       $ 20,908         8.76%   

as a % of sales

     26.56%         27.03%         

Sales

Sales in our supermarkets increased 6.86% or $61.7 million for the first quarter of fiscal 2012 compared to the same period in fiscal 2011.

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. In the fourth quarter of fiscal 2011, we opened a replacement store in Grand Terrace, California that replaced an existing older store. We have had no new store openings nor any store closures in either fiscal 2011 or fiscal 2012.

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

Like store sales increased $61.7 million or 6.86% from the first quarter of fiscal 2011.

 

 

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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 2012 increased 0.47% to 27.03% from 26.56% in fiscal 2011. We attribute the increase in gross profit margin to being able to pass on some of the cost inflation we have been experiencing and to more focused marketing promotions in the first quarter of fiscal 2012 compared to the first quarter of 2011. We anticipate that the current economic conditions and continued competitive pressures could limit our ability to pass on price increases which could put pressure on our gross margin in the foreseeable future.

Operating Expenses and Operating Profit

 

     Fiscal Period Ended      Change  
     Dec. 26,      Dec. 25,      2012 to 2011  
(in thousands)    2010      2011      Dollar      %  

Operating Expenses:

           

Selling, general and administrative expenses

     $200,856         $221,871         $21,014         10.46%   

as a % of sales

     22.35%         23.09%         

Depreciation and amortization

     $12,444         $11,412         $(1,032)         (8.29)%   

as a % of sales

     1.38%         1.19%         

Operating profit

     $25,472         $26,398         $926         3.64%   

as a % of sales

     2.83%         2.75%         

Selling, General and Administrative Expenses

The increase, as a percentage of sales, in selling, general and administrative expenses in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 is due primarily to increases, as a percentage of sales, in payroll related expenses. Our payroll costs, as a percentage of sales, increased 0.38% and includes increases in union insurance costs of 0.39%, as a percentage of sales and we had a settlement of a lawsuit related to a class action labor claim (see “Part II, Item 1. Legal Proceedings” for further discussion of this claim). These increases in costs were somewhat offset by a 0.12% decrease, as a percentage of sales, in electricity costs. Our electricity costs have decreased as a result of our energy efficiency programs and as a result of decreased electricity rates.

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 2012 and fiscal 2011 is $293,000 and $299,000, respectively.

Depreciation and Amortization

Depreciation and amortization expense in the first quarter of fiscal 2012 was $11.4 million compared to $12.4 million for the first quarter of fiscal 2011. Included in the first quarters of fiscal 2012 and fiscal 2011 cost of goods sold is $2.7 million and $2.9 million, respectively, of depreciation and amortization related to our warehousing and distribution activities.

 

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Table of Contents

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 $36,000 and $259,000 for the first quarters of fiscal 2012 and fiscal 2011, respectively.

Interest Expense

Interest expense was $11.9 million for the first quarter of fiscal 2012 and $19.2 million in the first quarter of fiscal 2011. Interest expense for the first quarter of fiscal 2011 included 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. Also, we had overlapping interest for a portion of the first quarter of fiscal 2010 as we had interest on both the 8.125% Senior Notes until retirement and our 7.375% Senior Notes and Term Loan.

Interest Expense Related to Purchase of Debt

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

Income Before Income Taxes

Income before income taxes amounted to $15.1 million and $4.7 million in the first quarters of fiscal 2012 and fiscal 2011, respectively.

Income Taxes

Income taxes amounted to $6.1 million and $1.8 million in the first quarters of fiscal 2012 and fiscal 2011, respectively. Our effective tax rate was 40.4% and 39.1% for the first quarters of fiscal 2012 and fiscal 2011, respectively. The lower effective rate for fiscal 2011 is due primarily to tax credits being applied against lower taxable income in the prior year versus the current year.

Net Income

Net income for the first quarter of fiscal 2012 amounted to $9.0 million compared to $2.8 million in the first quarter of fiscal 2011.

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 25, 2011, we had approximately $57.4 million of outstanding letters of credit and we had approximately $42.6 million available under the revolving credit facility.

We had no short-term borrowings outstanding under our revolving credit facility as of December 25, 2011. We did not incur any short-term borrowings under our revolving credit facility in the first quarter of fiscal 2012.

 

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Table of Contents

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 25, 2011.

 

     Contractual Cash Obligations  
     (in thousands)  
     Total      Lessthan
1 Year
     1-3 Years      4-5 Years      After
5 Years
 

Term Loan due November 2014 (1)

              

Principal

   $ 139,563       $ 36,435       $ 103,128       $ —         $ —     

Interest

     10,650         3,825         6,825         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     150,213         40,260         109,953         —           —     

7.75% Senior Notes due April 2015

              

Principal

     285,000         —           —           285,000         —     

Interest

     77,307         22,088         44,175         11,044         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     362,307         22,088         44,175         296,044         —     

7.375% Senior Notes due November 2018

              

Principal

     255,000         —           —           —           255,000   

Interest

     131,645         18,806         37,613         37,613         37,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     386,645         18,806         37,613         37,613         292,613   

Capital lease obligations (2)

              

Principal

     2,468         1,051         1,331         86         —     

Interest

     446         294         151         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,914         1,345         1,482         87         —     

Operating leases (2)

     343,656         39,235         66,347         53,180         184,894   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 1,245,735       $ 121,734       $ 259,570       $ 386,924       $ 477,507   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Other Commercial Commitments  
     (in thousands)  
     Total      Less than
1 Year
     1-3 Years      4-5 Years      After
5 Years
 

Standby letters of credit (3)

   $ 57,358       $ 57,358       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other commercial commitments

   $ 57,358       $ 57,358       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

As of December 25, 2011, interest on our Term Loan is based on the Eurodollar Rate plus 2.500% and consisted of a ninety day rate of 2.746% and a twelve month rate of 3.287% on approximately $139.6 million. For purposes of contractual cash obligations shown here, we have assumed the 90 day and twelve month interest rates as of December 25, 2011 for the respective assumed short-term and long-term portions of our Term Loan. Included in our term loan principal payments of less than one year is $29.2 million of excess cash payment under the agreement that was paid on December 30, 2011.

(footnotes continued on following page)

 

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Table of Contents

STATER BROS. HOLDINGS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

LIQUIDITY AND CAPITAL RESOURCES (contd.)

 

(2)

We lease the majority of our retail stores. We have subleased our former headquarters building and certain former distribution facilities located in Colton, California under an initial 15 year term for an amount equal to our lease payment. For purposes of contractual cash obligations shown here, minimum lease payments on this lease are shown without sub-lease offsets. Certain of our operating leases provide for minimum annual payments that change over the primary term of the lease. For purposes of contractual cash obligations shown here, contractual step increases or decreases are shown in the period they are due. Certain leases provide for additional rents based on sales. Primary lease terms range from 3 to 55 years and substantially all leases provide for renewal options.

 

(3) 

Standby letters of credit are committed as security for workers’ compensation obligations. Outstanding letters of credit expire between December 2011 and October 2012.

Working capital amounted to $214.7 million at December 25, 2011 and $200.0 million at September 25, 2011, and our current ratios were 1.59:1 and 1.58:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash provided by operating activities for the thirteen weeks ended December 25, 2011 was $13.4 million and net cash used in operating activities was $10.0 million for the thirteen weeks ended December 26, 2010. Significant sources of cash from operating activities in the first quarter of fiscal 2012 included an increase in accounts payable offset by increases in inventory levels, to meet holiday sales demand, and a decrease in accrued interest due to the timing of interest payments.

As of December 25, 2011, we had the ability and right to pay a restricted payment, including dividends, of up to $32.0 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 October 2011 and expire in March 2014. Our collective bargaining agreement with the International Brotherhood of Teamsters was renewed in October 2010 and expires in September 2015. We believe we have good relations with our employees.

CAUTIONARY STATEMENT FOR PURPOSES OF “SAFE HARBOR PROVISIONS” OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained in our filings with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) includes statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of Holdings. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, seasonal and weather fluctuations, labor unrest, expansion and other activities of competitors, changes in federal or state laws and the administration of such laws and the general condition of the economy.

 

 

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Table of Contents

STATER BROS. HOLDINGS INC.

DECEMBER 25, 2011

 

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 25, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 25, 2011. There were no material changes in our internal control over financial reporting during the first quarter of fiscal 2012.

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

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

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

In May of 2011, Markets was served with an Action filed in the Superior Court of the State of California for the County of Riverside (“Harold F. Lunsford et al. v. Stater Bros. Markets”) seeking individual and potential class action damages including associated penalties for Markets’ alleged failure to provide meal periods, rest periods or compensation in lieu thereof and alleged failure to pay certain wages for terminated employees. On January 26, 2012, following a mediation, this case was settled subject to court approval of the settlement and the full settlement amount has been recorded in our consolidated financial statements for the fiscal quarter ended December 25, 2011.

 

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Table of Contents

STATER BROS. HOLDINGS INC.

DECEMBER 25, 2011

 

Item 1A. RISK FACTORS

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

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

We face competitive pressure from existing competitors and from smaller format stores such as convenience stores, drug stores and discount stores that carry traditional grocery format items. Some of our competitors have greater resources than us and are not unionized resulting in lower labor cost. These competitors could use their resources to take measures which could adversely affect our competitive position.

Our marketing area in Southern California continues to be highly competitive and in flux. Our market changes frequently as competitors open and close supermarket locations and introduce new pricing strategies. We anticipate increased competition from “big box” format retailers, our traditional grocery format competitors and other smaller format competitors.

Our performance is affected by inflation and deflation. In recent periods, we have experienced increases in transportation costs and the cost of products we sell in our stores. Our costs fluctuate for increases and decreases in commodities such as fuel, plastic and other product categories. As inflation has increased expenses, we have recovered, to the extent permitted by competition, the increase in expenses by increasing prices over time. However, the economic and competitive environment in Southern California continues to challenge us to become more cost efficient as our ability to recover increases in expenses through price increases is diminished. Our future results of operations will depend upon our ability to adapt to the current economic environment as well as the current competitive conditions.

 

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STATER BROS. HOLDINGS INC.

DECEMBER 25, 2011

 

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.
101.INS    -XBRL Instance Document.
101.SCH    -XBRL Taxonomy Extension Schema Document.
101.CAL    -XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    -XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    -XBRL Taxonomy Extension Lable Linkbase Document.
101.PRE    -XBRL Taxonomy Extension Presentation Linkbase Document.

 

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Table of Contents

STATER BROS. HOLDINGS INC.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: February 7, 2012

      

/s/ Jack H. Brown

    Jack H. Brown
    Chairman of the Board, President,
    and Chief Executive Officer
    (Principal Executive Officer)

Date: February 7, 2012

   

/s/ Phillip J. Smith

    Phillip J. Smith
    Executive Vice President
    and Chief Financial Officer
    (Principal Financial Officer)
    (Principal Accounting Officer)

 

 

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