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The Company and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Sep. 29, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Description of Business

Description of Business

Stater Bros. Holdings Inc. (the “Company”) is engaged primarily in the operation of retail supermarkets. As of September 29, 2013, the Company operated 166 retail grocery supermarkets under the name “Stater Bros. Markets.” The Company’s supermarkets are located in the Southern California counties of San Bernardino, Riverside, Los Angeles, Orange, San Diego and Kern. The Company through its predecessor companies has operated retail grocery stores under the “Stater Bros. Markets” name in Southern California since 1936.

Ownership of the Company

Ownership of the Company

La Cadena Investments (“La Cadena”), a California general partnership whose sole voting partner is the Jack H. Brown Revocable Trust (the “Trust”), holds all of the Company’s issued and outstanding capital stock. Mr. Jack H. Brown, the Chairman of the Board, President and Chief Executive Officer of the Company, as Trustee of the Trust, is the Managing General Partner of La Cadena.

Principles of Consolidation and Subsequent Events

Principles of Consolidation

The 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.

Reclassifications

Reclassifications

Certain amounts for fiscal 2011 and fiscal 2012 have been reclassified to conform to the fiscal 2013 financial statement presentation. The Company reclassified approximately $0.1 million and $1.0 million, in fiscal 2011 and fiscal 2012, respectively, from "Other income, net" to "Gain on sale of property and equipment" in the Consolidated Statement of Income and Comprehensive Income. As a result, the Company's operating profit increased by $0.1 million and $1.0 million for fiscal 2011 and fiscal 2012, respectively.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Fiscal Year

The Company’s fiscal year ends on the last Sunday in September. The fiscal years ended September 25, 2011 and September 29, 2013 were 52-week fiscal years while the fiscal year ended September 30, 2012 was a 53-week fiscal year.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents are reflected at cost, which approximates their fair value, and consist primarily of overnight repurchase agreements and money market funds with maturities of less than three months when purchased.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.

Receivables

Receivables are stated, net of allowance for doubtful accounts. The Company provides specific reserves for accounts deemed to be uncollectable and provides additional reserves based on historical experiences. The carrying amount reported in the balance sheets for receivables approximates their fair value.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost and are depreciated or amortized, principally on the straight-line basis, over the estimated useful lives of the assets. Leasehold improvements placed in service at the commencement of the lease are amortized over the lesser of their economic useful lives or the initial term of the lease. Other leasehold improvements are amortized over the lesser of their economic useful lives or the remaining lease term including any option period that is reasonably assured of being exercised. Assets under capital leases are amortized over the lesser of their estimated economic useful life or the initial lease term.

The estimated economic lives are as follows:



	Range		Most Prevalent
Buildings and improvements	5 - 40 Years		20 Years
Store furniture and equipment	3 - 10 Years		8 Years
Property subject to capital leases	Life of Lease		20 Years

Long-Lived Assets

Long-Lived Assets

The Company reviews the recoverability of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the estimated future, undiscounted cash flows from the use of an asset are less than its carrying value, a write-down is recorded to reduce the related asset to estimated fair value.

Deferred Debt Issuance Costs

Deferred Debt Issuance Costs

Direct costs incurred as a result of financing transactions are capitalized and amortized to interest expense over the terms of the applicable debt agreements using the effective interest method.

Deferred Compensation Plan

Deferred Compensation Plan

The Company maintains the Stater Bros Holdings Inc. Phantom Stock Plan (the “deferred compensation plan”). It is the Company’s policy to expense awarded units under the deferred compensation plan to the extent that they vest and appreciate during the accounting period.

Self-Insurance Reserves

Self-Insurance Reserves

The Company is primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. The Company is covered by umbrella insurance policies for catastrophic events. The Company records its self-insurance liabilities based on the claims filed and an estimate of claims incurred but not yet reported. The estimates used by management are based on the Company’s historical experiences as well as current facts and circumstances. The Company uses third party actuarial analysis in making its estimates. Actuarial projections and the Company’s estimate of ultimate losses are subject to a high degree of variability. The variability in the projections and estimates are subject to, but not limited to, such factors as judicial and administrative rulings, legislative actions, and changes in compensation benefits structure. The Company discounted its workers’ compensation, automobile and general liability insurance reserves at a discount rate of 2.50% in fiscal 2012 and 2.00% in fiscal 2013. The Company is self-insured, subject to certain retention levels, for health care costs of eligible non-bargaining unit employees. Such health care reserves are not discounted.

Income Taxes

The Company provides for deferred income taxes as timing differences arise between income and expenses recorded for financial and income tax reporting purposes. The Company records a valuation allowance to reflect the estimated amount of deferred tax assets that more-likely-than-not will not be realized. The Company did not record any valuation allowances in fiscal 2012 or fiscal 2013.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue from the sale of its products at the point of sale to the customer. Sales are recognized net of any promotional discounts given to the customer. Sales taxes are recorded in Other current liabilities and are not recorded as sales. Prescription sales are recognized when prescriptions are adjudicated by the third party insurer and when co-payment is received. The Company recognizes a liability when Stater Bros.’ gift cards (“gift cards”) are sold and recognizes sales revenue when the gift cards are used to purchase its products. Gift cards do not have an expiration date and gift card balances do not reduce because of inactivity or time. The Company does not charge service fees on the gift cards. Gift cards whose likelihood of redemption is deemed to be remote, due primarily to periods of inactivity, are recognized into income.

Cost of Goods Sold

Cost of Goods Sold

Included in cost of goods sold are direct product purchase costs, in-bound freight costs, direct receiving and inspection costs, quality assurance costs, warehousing and transportation costs including depreciation and amortization, net of earned vendor rebates and allowances. The Company recognizes, as a reduction to cost of goods sold, certain rebates and allowances (“allowances”) from its vendors as the allowances are earned. Allowances are earned by promoting certain products or by purchasing specified amounts of product. The Company records a liability for allowance funds that have been received but not yet earned. Included as a reduction in cost of goods sold for fiscal 2011, fiscal 2012 and fiscal 2013 is $2.1 million, $1.4 million and $0.4 million, respectively, of advertising reimbursement in excess of the fair value of the co-operative advertising.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses

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

Vendor Rebates and Allowances

Vendor Rebates and Allowances

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

Advertising

The Company’s advertising costs, net of vendor allowances for co-operative advertising, are recognized in the period the advertising is incurred and are included in selling, general and administrative expenses. Advertising costs, net of vendor allowances, were $18.3 million, $18.9 million and $17.8 million in fiscal 2011, fiscal 2012 and fiscal 2013, respectively.

Advertising Allowances

Advertising Allowances

A significant portion of the Company’s advertising expenditures is in the form of print advertisements. The Company distributes its print ads through inserts in local newspapers, in direct mailers and as handouts distributed in its stores. The Company receives co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. The Company recognized the portion of co-operative advertising allowances directly related to the fair value of advertising as a reduction in advertising costs. The Company analyzes, on a monthly basis, the direct out-of-pocket costs for printing and distributing its print ads. Using the number of ads in a typical twice weekly advertisement, the actual direct costs of an individual advertisement is determined. The cost determined is deemed to be the fair value of advertising. The amount of co-operative advertising allowance recognized as a reduction in advertising expense was $1.3 million in fiscal 2011, $0.7 million in fiscal 2012 and $0.3 million in fiscal 2013. The amount of advertising reimbursement in excess of the fair value of advertising is recorded as a reduction in cost of goods sold.

Leases

Certain of the Company’s operating leases provide for minimum annual payments that change over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for minimum step rents when the amount of rent expense exceeds the actual lease payments and it reduces the deferred rent liability when the actual lease payments exceeds the amount of straight-line rent expense. Rent holidays and tenant improvement allowances for store remodels are amortized on the straight-line basis over the initial term of the lease and any option period that is reasonably assured of being exercised.