e10vq

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

For the quarterly period ended March 25, 2007


o		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		(I.R.S. Employer Identification No.)
organization)

21700 Barton Road
Colton, California		92324

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code		(909) 783-5000

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 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. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ.

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 May 9, 2007, there were issued and outstanding
35,770 shares of the registrant’s Class A Common Stock.

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

STATER BROS. HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS


	Sept. 24,		Mar. 25,
	2006		2007
			(Unaudited)
Current assets
Cash and cash equivalents	$	198,545	$	228,169
Restricted cash		24,121		8,121
Short-term investments		26,849		—
Receivables, net of allowance of $936 and $817		35,310		40,718
Income tax receivables		3,863		—
Inventories		196,031		194,688
Prepaid expenses		8,513		8,832
Deferred income taxes		21,609		22,446


Total current assets		514,841		502,974

Property and equipment
Land		110,479		111,814
Buildings and improvements		323,805		370,207
Store fixtures and equipment		397,491		407,816
Property subject to capital leases		25,836		25,759

		857,611		915,596

Less accumulated depreciation and amortization		360,538		386,550

		497,073		529,046

Deferred debt issuance costs, net		15,972		14,444
Deferred income taxes, long-term		8,845		9,613
Long-term receivable		12,160		21,771
Goodwill		2,894		2,894
Other assets		6,307		6,597

		46,178		55,319

Total assets	$	1,058,092	$	1,087,339

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 (DEFICIT)


	Sept. 24,			Mar. 25,
	2006			2007
				(Unaudited)
Current liabilities
Accounts payable	$	155,827		$	153,431
Accrued payroll and related expenses		55,582			60,161
Accrued income taxes		—			5,752
Other accrued liabilities		69,098			59,312
Current portion of capital lease obligations		1,054			940


Total current liabilities		281,561			279,596

Long-term debt		700,000			700,000
Capital lease obligations, less current portion		7,294			6,807
Long-term portion of self-insurance and other reserves		33,112			33,681
Long-term deferred benefits		43,573			51,664
Other long-term liabilities		3,631			3,308


Total liabilities		1,069,171			1,075,056

Commitment and Contingencies
Stockholder’s equity (deficit)
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 – 36,895		—			—
Additional paid-in capital		9,382			9,382
Retained earnings (deficit)		(20,461	)		2,901

Total stockholder’s equity (deficit)		(11,079	)		12,283


Total liabilities and stockholder’s equity (deficit)	$	1,058,092		$	1,087,339

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	26 Weeks Ended
	Mar. 26,			Mar. 25,
	2006			2007
Operating activities:
Net income	$	9,508		$	23,362
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		27,354			29,866
Amortization of debt issuance costs		1,529			1,528
Deferred income taxes		(569	)		(1,605	)
Loss on disposals of assets		1,024			258
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash		(2,000	)		16,000
(Increase) decrease in receivables		5,799			(1,729	)
(Increase) decrease in income tax receivables		(3,749	)		3,863
(Increase) decrease in inventories		(8,839	)		1,343
Increase in prepaid expenses		(1,806	)		(319	)
(Increase) decrease in other assets		57			(301	)
Decrease in accounts payable		(10,852	)		(2,396	)
Increase in accrued income taxes		—			5,752
Decrease in other accrued liabilities		(7,609	)		(5,207	)
Increase in long-term reserves		3,725			8,337


Net cash provided by operating activities		13,572			78,752


Financing activities:
Principal payments on capital lease obligations		(513	)		(601	)
Stock redemption		(18,750	)		—


Net cash used in financing activities		(19,263	)		(601	)


Investing activities:
Decrease in short-term investments		—			26,849
Increase in store construction reimbursements		(3,406	)		(3,679	)
Increase in long-term receivable		—			(9,611	)
Purchase of property and equipment		(47,289	)		(62,121	)
Proceeds from sale of property and equipment		331			35


Net cash used in investing activities		(50,364	)		(48,527	)


Net increase (decrease) in cash and cash equivalents		(56,055	)		29,624
Cash and cash equivalents at beginning of period		263,397			198,545


Cash and cash equivalents at end of period	$	207,342		$	228,169


Interest paid	$	28,825		$	29,796
Income taxes paid	$	10,500		$	7,850

See accompanying notes to unaudited consolidated financial statements.

STATER BROS. HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
MARCH 25, 2007

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 March 25, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2007.

The consolidated balance sheet at September 24, 2006 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/A for the year ended September 24, 2006.

Note 2 – Reclassifications

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

Note 3 – Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 requires that a tax position meet a “more-likely-than-not” recognition threshold for the benefit of an uncertain tax position to be recognized in the financial statements, based on the technical merits of the position. Additionally, FIN 48 provides guidance on derecognition, measurement, classification, interest and penalties, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of FIN 48 on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 states that fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts and establishes a hierarchy that prioritizes the information used to develop fair value assumptions. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of SFAS No. 157 on its consolidated financial statements.

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” which requires an entity to (1) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the employer’s fiscal year end and (3) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS No. 158 has a two tiered effective date with recognition of funded status of defined benefit postretirement plan and disclosure requirements effective for fiscal years ending after June 15, 2007 for non-public entities and all other requirements effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 158 on its consolidated financial statements.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 25, 2007

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 – Restricted Cash

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

Note 6 – Retirement Plans

The Company has a noncontributory defined benefit pension plan covering substantially all non-union employees. The plan provides for benefits based on an employee’s compensation during the eligibility period while employed with the Company. The Company’s funding policy for this plan is to contribute annually at a rate that is intended to provide sufficient assets to meet future benefit payment requirements. Market value of plan assets is calculated using fair market values as provided by third-party trustees. The plan’s investments include cash, which earns interest, and governmental securities and other short-term investments, all of which have quoted market values.

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


	13 Weeks Ended						26 Weeks Ended
	Mar. 26,			Mar. 25,			Mar. 26,			Mar. 25,
	2006			2007			2006			2007
	(in thousands)						(in thousands)
Expected return on assets	$	(425	)	$	(519	)	$	(850	)	$	(1,038	)
Service cost		716			684			1,432			1,367
Interest cost		739			818			1,477			1,635
Amortization of prior service cost		—			—			(1	)		(1	)
Amortization of recognized losses		261			215			523			430

Net pension expense	$	1,291		$	1,198		$	2,581		$	2,393


Actuarial assumptions used to determine net pension expense were:
Discount rate		5.50	%		5.80	%		5.50	%		5.80	%
Rate of increase in compensation levels		3.00	%		3.00	%		3.00	%		3.00	%
Expected long-term rate of return on assets		5.00	%		5.00	%		5.00	%		5.00	%

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 25, 2007

Note 7 – Segment Information

The Company has three operating segments: Stater Bros. Markets (“Markets”), Super Rx, Inc. (“Super Rx”) and Santee Dairies, Inc. (“Santee”). Markets and Super Rx provide retail grocery, general merchandise and pharmaceutical products to customers through the Company’s supermarkets. Santee processes, packages and distributes milk, fruit drinks and other cultured milk products to Markets and other customers. As Markets and Super Rx have similar customers, regulatory requirements and delivery methods to customers, we aggregate Markets and Super Rx into a single reportable segment. Aggregating Markets and Super Rx results in two reportable segments for the Company: Retail and Dairy Manufacturing. Separate disclosures for the Dairy Manufacturing segment have not been made as sales, profits and total assets for this segment are less than 10% of consolidated sales, profits and total assets of the Company. Financial information for the Dairy Manufacturing segment is included in the “all other” category in the following tables.

The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and twenty-six week periods ended March 26, 2006:


	Thirteen Weeks							Twenty-six Weeks
	Retail		All Other			Total		Retail		All Other			Total
	(in thousands)							(in thousands)
Sales to external customers	$	838,407	$	25,344		$	863,751	$	1,678,405	$	52,512		$	1,730,917
Intersegment sales		—		19,020			19,020		—		39,033			39,033
Operating profit		22,185		1,257			23,442		38,538		2,496			41,034
Net income (loss)		14,015		(7,839	)		6,176		24,963		(15,455	)		9,508

Total net assets for the thirteen and twenty-six week periods ended March 26, 2006 amounted to $1.3 billion for the Retail segment and $(317.2) million for all other for a total of $1.0 billion in consolidated total assets.

The following table illustrates financial measurements relating to the Company’s reportable segments for the thirteen and twenty-six week periods ended March 25, 2007:


	Thirteen Weeks							Twenty-six Weeks
	Retail		All Other			Total		Retail		All Other			Total
	(in thousands)							(in thousands)
Sales to external customers	$	842,976	$	23,086		$	866,062	$	1,723,315	$	47,101		$	1,770,416
Intersegment sales		—		19,263			19,263		—		38,066			38,066
Operating profit		34,365		(691	)		33,674		62,936		(1,057	)		61,879
Net income (loss)		22,126		(8,666	)		13,460		40,782		(17,420	)		23,362

Total net assets for the thirteen and twenty-six week periods ended March 25, 2007 amounted to $1.5 billion for the Retail segment and $(390.2) million for all other for a total of $1.1 billion in consolidated total assets.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 25, 2007

Note 8 – Subsidiary Guarantee

The Company has $525.0 million of 8.125% Senior Notes due June 15, 2012 and $175.0 million of Floating Rate Senior Notes due June 15, 2010 collectively (“the Notes”).

The Notes are guaranteed by the Company’s subsidiaries Markets and Stater Bros. Development, Inc. (“Development”) and the Company’s indirect subsidiaries Super Rx and Santee (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.

Note 9 – Corporate Office and Distribution Facilities

The Company is currently in the process of constructing a new corporate offices and distribution center on a 160-acre site on the former Norton Air Force Base located in the City of San Bernardino, California. The new headquarters and distribution center will consolidate all of the Company’s corporate and distribution functions, other than dairy operations, in one location. The new facility will be located approximately eight miles from the Company’s current primary distribution facility and, as a result, there will be no appreciable change in the average distance between the new facility and its retail supermarkets.

The construction of the new corporate offices and distribution center is being undertaken in three components:

	•		Component 1: corporate offices and satellite buildings;

	•		Component 2: dry goods warehouse; and

	•		Component 3: refrigeration warehouse.

The Company acquired the principal project property making up the 160-acre site from the Inland Valley Development Agency, a joint powers agency (“IVDA”), in January 2006 and rough grading and site work on that property commenced in February 2006. Several smaller parcels making up the remaining project property were privately held. The Company completed the acquisition of the final privately held parcel in the 160-acre site in May 2006. Construction of the first component commenced in September 2006, with completion currently anticipated in September 2007; construction of the second component commenced in November 2006, with completion currently anticipated in January 2008; and construction of the third component is expected to commence in April 2007, with completion currently anticipated in August 2008.

Note 10 – Subsequent Events

New Senior Notes

On April 18, 2007, the Company completed the sale of $285 million in aggregate principal amount of 7 ³/4% Senior Notes due April 15, 2015 (the “New Notes”) in a private offering. The New Notes are unregistered and are unsecured obligations of the Company. The New Notes are guaranteed by Markets and Development and the Company’s indirect subsidiaries, Santee and Super Rx.

Note Redemption

On April 27, 2007, the Company announced that it will redeem its Floating Rate Senior Notes due 2010 on June 18, 2007 (the “Redemption Date”) at a price equal to 101% per $1,000 principal amount of the Notes, plus accrued and unpaid interest thereon to the Redemption Date.

STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 25, 2007

Note 10 – Subsequent Events (contd.)

Stock Redemption

On April 27, 2007 the Company redeemed 1,125 shares of its Class A Common Stock for $15.0 million.

Dividend

On April 27, 2007 the Company paid a $5.0 million dividend to La Cadena Investments, the sole shareholder of the Company.

New Credit Facility

On April 16, 2007, the Company and Markets entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A. (“Bank of America”), as sole and exclusive administrative agent and sole initial lender, consisting of a three-year unsecured revolving credit facility in a principal amount of up to $100 million (the “New Credit Facility”), which replaced Markets’ existing credit facility.

Markets is the borrower under the New Credit Facility. The New Credit Facility is guaranteed by the Company and all of its existing and future material subsidiaries, including Development, Super Rx and Santee (subject, in the case of Santee, to termination upon certain specified events). Subject to certain restrictions, the entire amount of the New Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and will be used for working capital, certain capital expenditures and other general corporate purposes. Letters of credit issued under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores, the construction of the new corporate office and distribution facilities and workers’ compensation insurance obligations. The availability of the loans and letters of credit is subject to certain borrowing restrictions.

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

The New Credit Facility will cease to be available and will be payable in full on May 31, 2010.

Santee Credit Facility

On April 16, 2007, Santee entered into a Second Amended and Restated Business Loan Agreement (Receivables) with Bank of America, as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving line of credit in a principal amount of up to $5 million (the “New Santee Revolver”), which replaced Santee’s current revolver. Markets has guaranteed the obligations of Santee under the New Santee Revolver. Under the New Santee Revolver, Santee may borrow up to $5.0 million, all of which may be used to secure letters of credit. Letters of credit under the New Santee Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the New Santee Revolver are secured by the receivables of Santee.

Loans under the New Santee Revolver bear interest at a rate based upon either (i) Bank of America’s prime rate plus 0.50%, or (ii) the “IBOR Rate” (defined as the interest rate at which Bank of America’s Cayman branch would offer U.S. dollar deposits for the applicable interest period to other banks, adjusted for the maximum reserve requirement for Eurocurrency funding), plus 1.75%. The applicable interest periods for IBOR rate loans will be between 30 and 180 days.

The New Santee Revolver will cease to be available and will be payable in full on May 31, 2010.

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

PART I — FINANCIAL INFORMATION (contd.)


Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

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 the our historical experience combined with management’s understanding of current facts and circumstances. We believe that the following critical accounting policies are the most important to our consolidated financial statement presentation and require the most difficult, subjective and complex judgments on the part of management.

Self-Insurance Reserves

We are primarily self-insured, subject to certain retention levels for workers’ compensation, automobile and general liability costs. We are covered by umbrella insurance policies for catastrophic events. We record our self-insurance liability based on the claims filed and an estimate of claims incurred but not yet reported. The estimates we use are based on our historical experiences as well as current facts and circumstances. We use third party actuarial analysis in making our estimates. Actuarial projections and our 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. Recent legislative actions within California and efforts we have made within our stores to reduce claims have somewhat limited the severity of workers’ compensation claims. However, no assurances can be given that future legislative events, medical expenses and other loss factors will not require a change in our estimates. We discounted our workers’ compensation, automobile and general liability insurance reserves at a discount rate of 5.8% and 5.5% for the thirteen weeks ended March 25, 2007 and March 26, 2006, respectively. The analysis of self-insurance liability is sensitive to the rate used to discount the anticipated future cash flows for the workers’ compensation, automobile and general liability insurance reserves. As of March 25, 2007, if the rate utilized to discount the reserves were increased or decreased by 1.0%, the reserves for self insurance would have been $1.2 million higher or $1.1 million lower.

Employee Benefit Plans

The determination of our obligation and expense for pension benefits is dependent, in part, on our selection of certain assumptions used by our actuaries in calculating these amounts. These assumptions are disclosed in Note 6 – Retirement Plans in the accompanying notes to the Consolidated Financial Statements contained herein and include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation changes. In accordance with U.S. generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in our actual experience or significant changes in the assumptions may materially affect our pension obligations and expense for pension benefits.

For the second quarter of fiscal 2007, the discount rate used to calculate the net periodic pension cost was 5.8%. If the rate used to discount the net periodic pension cost was 4.8%, net periodic pension cost would have been $416,000 higher than the cost calculated at a 5.8% discount rate. If the rate used to calculate the net periodic pension cost was 6.8%, net periodic pension cost would have been $351,000 lower than the cost calculated at the 5.8% discount rate.

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

CRITICAL ACCOUNTING POLICIES (contd.)

Employee Benefit Plans (contd.)

We also participate in various multi-employer defined contribution retirement plans for all of our employees represented by labor unions. We are required to make contributions to these plans in amounts established under collective bargaining agreements, generally based on the number of hours worked. Pension expenses for these plans are recognized as contributions are funded. While we expect contributions to these plans to continue to increase. The amount of increase or decrease will depend upon the outcome of collective bargaining, actions taken by trustees and the actual return on assets held in these plans. For these reasons, it is not practicable for us to determine the amount by which multi-employer pension contributions will increase or decrease.

Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When such events occur, we compare the carrying amount of the asset to the net undiscounted cash flows expected to result from the use and eventual disposition of the asset. These cash flows are based on our best estimate of future cash flow. If this comparison indicates that there is an impairment, we record an impairment loss for the excess of net book value over the fair value of the impaired asset. We estimate the fair value based on the best information available, including prices for similar assets and the results of other valuation techniques. We adjust the value of owned property and equipment associated with closed stores to reflect recoverable values based on our prior history of disposing of similar assets and current economic conditions.

Factors such as changes in economic conditions and changes in operating performance significantly affect our judgments and estimates related to the expected useful lives and cash flows of long-lived assets. Adverse changes in these factors could cause us to recognize a material impairment charge.

Income Taxes

We recognize deferred income tax assets and liabilities by applying statutory tax rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Deferred tax assets and liabilities are adjusted to reflect changes in tax laws or rates in the period that includes the enactment date. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.

Goodwill

We review goodwill for impairment annually on a reporting unit level or more frequently if impairment indicators arise. Our Retail reporting unit is the only reporting unit that has goodwill. We determine the fair value of the reporting unit by utilizing a discounted projected cash flows compared to its carrying value of the reporting unit for purposes of identifying impairment. Our evaluation of goodwill impairment requires extensive use of accounting judgment and financial estimates. Use of alternative assumptions such as projected sales and margins and anticipated future cash flows could provide significantly different results. The fair value of estimates could change in the future depending on internal and external factors including control of labor costs, actions of competitors and the effect of future collective bargaining agreements.

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

CRITICAL ACCOUNTING POLICIES (contd.)

Store Closing Costs

We provide liabilities related to store closures for the present value of the estimated remaining noncancellable lease payments and related ancillary costs after the closing date, net of estimated subtenant income. We estimate the net lease liabilities using a risk free discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities are usually paid over the lease terms.

Advertising Allowances

We receive co-operative advertising allowances from vendors for advertising specific vendor products over specific periods of time. We perform an analysis of the amount of co-operative advertising allowances received from our vendors compared to the cost of running the corresponding advertisement. Any amount of co-operative funds received in excess of the cost of advertising is recorded as a reduction in cost of goods sold. Determining the amount of advertising cost that corresponds to the co-operative advertising allowances received requires judgment on the part of management.

A significant portion of our advertising expenditures is in the form of twice weekly print advertisements. We distribute our print ads through inserts in local newspapers, in direct mailers and as handouts distributed in our stores. On a monthly basis, we estimate the costs of advertisements related to co-operative advertising allowances by dividing the direct out-of-pocket costs for printing and distributing our print ads by the product of total number of print ad pages run during the month and the number of individual ads in a typical twice weekly advertisement. We deem the dollar amount determined to be the fair value of our advertising costs. We then compare the fair value of our advertising costs to the amount of co-operative advertising we received during the month and we reduce cost of goods sold by the amount of any allowance received in excess of the fair value of our advertising costs.

Gift Cards and Certificates

We recognize a liability when gift cards or gift certificates are sold and recognize sales revenue when the gift cards or gift certificates are used to purchase our products. Gift cards do not have an expiration date and we do not charge any service fees that cause a decrement to customer balances. While we will indefinitely honor all redeemable gift cards presented for payment, we may determine the likelihood of redemption to be remote for unredeemed card balances due to, among other things, long periods of inactivity. In these circumstances, to the extent there is no requirement for remitting card balances to government agencies under unclaimed property laws, gift card balances may be recognized in other income.

Significant Accounting Policies

In addition to the critical accounting policies disclosed above, there are certain accounting policies that we have adopted that may differ from policies of other companies within the same industry. 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 consolidated financial statements contained herein and in our report on Form 10-K/A for the year ended September 24, 2006.

STATER BROS. HOLDINGS INC.
MANAGEMENTS 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 dated June 29, 2000, holds all of our issued and outstanding capital stock. Jack H. Brown, the Chairman of the Board, President and Chief Executive Office of Stater Bros., 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.

EXECUTIVE OVERVIEW

Stater Bros. is the largest privately owned supermarket chain in Southern California. Our revenues are generated primarily from retail sales through our supermarkets. Our supermarkets’ success is a result of our market strategy of offering everyday low prices while providing our customer with friendly and outstanding customer service on each of their visits to our stores.

During the second quarter of fiscal 2007, we completed five major remodels and were engaged in major remodels on five stores. As of March 25, 2007, we had two new stores under construction. We continually evaluate our stores for profitability, strategic positioning, impact of competition and sales growth potential and make store opening, store remodel and store closure decisions based on such evaluations.

In the second quarter of fiscal 2007, our sales grew 0.3% over the prior year. Our second quarter sales were negatively affected by the timing of Christmas day, the only day that our stores are closed. Christmas day fell in the second quarter in the current year and the first quarter of the prior year. Excluding the effect of Christmas day, we estimate that second quarter sales would have increased by 1.7%. Our sales for the twenty-six weeks ended March 25, 2007, increased 2.3% over the same period in the prior year. For the remainder of fiscal 2007, we anticipate that our sales will continue to grow as we plan to open an additional two supermarkets by the end of our fiscal year. We continue to focus on expansion of sales in our existing supermarkets. Our future growth strategy is to continue to construct supermarkets in core market areas and expand or remodel existing supermarkets based upon our review of marketing trends.

Our consolidated gross profit margin, as a percentage of sales, increased for both the thirteen and twenty-six week periods from the same periods in the prior year as a result of somewhat reduced competitive pricing pressures and by our efforts to reduce the level of promotion discounting. Our marketing area of Southern California continues to be highly competitive and in flux. We anticipate increased competition from new competitors moving into our marketing area. Additionally, the ultimate impact of Supervalu’s recent acquisition of the Albertson stores in Southern California remains unknown and, to date, we have not experienced any major change in their marketing format. Competition from the other two major national chains, as well as ethnic markets and “big box” retailers, will continue to be on-going.

Construction continues on schedule on our new corporate office and distribution facilities. Our corporate office, dry grocery warehouse and ancillary buildings are currently under construction and we anticipate beginning construction on our refrigerated building in April 2007. During fiscal 2007, we anticipate the completion of the corporate office and ancillary buildings, with the dry grocery building being completed in the first half of fiscal 2008 and the refrigerated building being completed by the end of fiscal 2008. Once completed, the new corporate office and distribution facilities will allow us to become even more efficient as we will be able to ship from one location rather than our current seven locations.

We have entered into a new collective bargaining agreement with the United Food and Commercial Workers Union (the “UFCW”). The new collective bargaining agreement became effective in March 2007 and is scheduled to expire in March 2010. The UFCW is currently in contract negotiations with each of our three major competitors. Our collective bargaining agreement with respect to benefits is subject to the terms the UFCW negotiates with our three major competitors. The financial terms of the collective bargaining agreement other than benefits negotiated by the UFCW with our competitors may be significantly different than what we have negotiated. Accordingly, we cannot presently determine the financial impact that the new collective bargaining agreement may have on our future operations.

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

RESULTS OF OPERATIONS


	13 Weeks Ended						Change
	Mar. 26,			Mar. 25,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%
Sales	$	863,751		$	866,062		$	2,311		0.27	%
Gross Profit	$	232,512		$	249,444		$	16,932		7.28	%
as a % of sales		26.92	%		28.80	%


	26 Weeks Ended						Change
	Mar. 26,			Mar. 25,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%
Sales	$	1,730,917		$	1,770,416		$	39,499		2.28	%
Gross Profit	$	459,227		$	491,334		$	32,107		6.99	%
as a % of sales		26.53	%		27.75	%

Sales

The sales increase in the thirteen and twenty-six weeks of fiscal 2007 over the same periods in fiscal 2006 is the result of the opening of new stores and an increase in like store sales. For the second quarter of fiscal 2007 over the same period of fiscal 2006, our sales increase was negatively impacted by the timing of Christmas day, the only day our stores are closed. Christmas day fell in the second quarter of fiscal 2007 and the first quarter of fiscal 2006.

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 periods, we only include the current year’s weekly sales that correspond to the weeks the stores were opened in the previous year. 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.

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

Comparison between second quarter fiscal 2007 and second quarter fiscal 2006 is affected by the timing of Christmas day. We estimate that the timing of Christmas day reduced second quarter sales by $12.1 million when compared to the second quarter of fiscal 2006. After taking into consideration the effect of Christmas day, like store sales increased $12.4 million or 1.5% over second quarter of fiscal 2006. We have opened three new stores since March 26, 2006. These newly opened stores added approximately $11.4 million of sales to the second quarter of fiscal 2007. While like store sales were positive for the second quarter of fiscal 2007, like store sales were impacted by recent new store openings. We estimate that newly opened stores drew $3.2 million of their second quarter 2007 sales from existing stores. Since March 26, 2006 we have closed three stores, which decreased fiscal 2007 sales by approximately $7.7 million when compared to the prior year.

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

RESULTS OF OPERATIONS (contd.)

Like Store Sales (contd.)

For the twenty-six week period of fiscal 2007, like store sales increased 1.45% when compared to the same period in fiscal 2006. We have opened four new stores since September 25, 2005, which added approximately $33.7 million of sales for the twenty-six week fiscal 2007. A portion of these sales came from sales taken from our existing stores. We estimate that new stores drew approximately $10.0 million of their twenty-six week fiscal 2007 sales from existing stores. We have closed three stores since September 26, 2005, which reduced fiscal 2007 sales by approximately $14.8 million when compared to fiscal 2006 sales.

Santee Sales

Santee sales decreased $2.3 million and $5.4 million in the second quarter and twenty-six week periods of fiscal 2007, respectively, when compared to the same periods of fiscal 2006. The decrease in sales is attributed to reductions in sales to Ralphs Grocery Co. and independent retailers and to reduced raw milk prices.

Gross Profit

The increase in gross profit margin, as a percentage of sales in the second quarter of fiscal 2007 over the same period for fiscal 2006 is attributed primarily to somewhat reduced competitive pricing pressures and to our efforts to reduce the level of promotional discounting as compared to the prior year.

Operating Expenses and Income


	13 Weeks Ended						Change
	Mar. 26,			Mar. 25,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%
Operating Expenses:
Selling, general and administrative expenses	$	198,011		$	203,685		$	5,674		2.87	%
as a % of sales		22.93	%		23.51	%

Depreciation and amortization	$	11,059		$	12,085		$	1,026		9.28	%
as a % of sales		1.28	%		1.40	%

Operating profit	$	23,442		$	33,674		$	10,232		43.65	%
as a % of sales		2.71	%		3.89	%


	26 Weeks Ended						Change
	Mar. 26,			Mar. 25,			2007 to 2006
*($ in thousands)*	2006			2007			Dollar		%
Operating Expenses:
Selling, general and administrative expenses	$	396,776		$	405,486		$	8,710		2.20	%
as a % of sales		22.92	%		22.90	%

Depreciation and amortization	$	21,417		$	23,969		$	2,552		11.92	%
as a % of sales		1.24	%		1.35	%

Operating profit	$	41,034		$	61,879		$	20,845		50.80	%
as a % of sales		2.37	%		3.50	%

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

RESULTS OF OPERATIONS (contd.)

Selling, General and Administrative Expenses

The increase, as a percentage of sales, in selling, general and administrative expenses in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006 is due primarily to an increase in option expense, as a percentage of sales, of 0.3% and an increase in electricity costs, as a percentage of sales, of 0.3%, partially offset by a reduction in other labor costs, as a percentage of sales of 0.2% and a reduction in advertising expense, as a percentage of sales of 0.3%. The increase in option expense, as a percentage of sales, is attributed to the increase in our net income in the second quarter of fiscal 2007 as compared to the same period in the prior year. The increase in electricity costs, as a percentage of sales, is due to an overall increase in electricity rates. Other labor costs, as a percentage of sales, decreased as union benefit obligations in the second quarter of fiscal 2007 were reduced from the same period of fiscal 2006. Such savings in union benefits may not be realized under the new contract. The full impact of the new union contract is not known at this time as the benefits portion of the new contract will be based on the benefits negotiated between the UFCW and our three major competitors. The reduction in advertising expense, as a percentage of sales is due to our efforts to reduce the number of pages in bi-weekly print ads.

Selling, general and administrative expenses, as a percentage of sales, in the twenty-six week period of fiscal 2007 compared to the same period of fiscal 2006 as a whole were relatively unchanged. While overall selling, general and administrative expenses remained unchanged, option expense, as a percentage of sales, increased 0.2%, management incentive bonuses, as a percentage of sales, increased 0.1% and an increase in electricity costs, as a percentage of sales, of 0.2%. These increases were offset by a reduction in other labor costs, as a percentage of sales, of 0.1% and reduction in advertising expense, as a percentage of sales of 0.2%. The increase in option expense and management incentive bonuses, as a percentage of sales, is attributed to increases in our net income. Other labor costs decreased, as a percentage of sales, as union benefit obligations in fiscal 2007 were reduced from fiscal 2006. Such savings in union benefits may not be realized under the new contract. The full impact of the new union contract is not known at this time as the benefits portion of the new contract will be based on the benefits negotiated between the UFCW and our three major competitors. The decrease in advertising expense, as a percentage of sales, is due to our efforts to reduce the number of pages in bi-weekly print ads.

The amount of salaries, wages and administrative costs associated with the purchase of our products included in selling, general and administrative expenses for the second quarters of fiscal 2007 and fiscal 2006 is $262,000 and $248,000, respectively and $526,000 and $478,000 for the twenty-six weeks ended March 25, 2007 and March 26, 2006, respectively.

Depreciation and Amortization

The increase in depreciation expense in fiscal 2007 compared to fiscal 2006 is due primarily to new store construction, store remodels and other capital expenditures. Included in cost of goods sold is $3.0 million of depreciation in both the second quarters of fiscal 2007 and 2006, and $5.9 million in both the twenty-six week periods of fiscal 2007 and fiscal 2006 related to dairy production and warehousing and distribution activities.

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

RESULTS OF OPERATIONS (contd.)

Interest Income

Interest income was $2.7 million and $2.4 million for the second quarters of fiscal 2007 and 2006, respectively, and $5.5 million and $4.9 million for the twenty-six week periods of fiscal 2007 and 2006, respectively. Interest income has increased due to improved interest rate realized on our short-term investments. We expect our interest income to decline in the future as cash on-hand is used in the construction of our new corporate office and distribution facilities.

Interest Expense

Prior to the effect of the amortization of capitalized interest, interest expense was $15.8 million and $15.5 million for the second quarter of fiscal 2007 and 2006, respectively, and $31.5 million and $30.6 million for the twenty-six week periods for fiscal 2007 and 2006, respectively. Capitalized interest was $2.0 million and $516,000 for the second quarter of fiscal 2007 and 2006, respectively, and $3.4 million and $1.0 million for the twenty-six week periods of fiscal 2007 and 2006, respectively. The increase in interest expense is attributed to the increased interest rate on the Floating Rate Senior Notes due 2010. The increase in capitalized interest in the fiscal 2007 second quarter over fiscal 2006 is attributed to the ongoing construction of the new corporate office and distribution facility.

Income Before Income Taxes

Income before income taxes amounted to $22.6 million and $10.2 million in the second quarters of fiscal 2007 and fiscal 2006, respectively. Income before income taxes amounted to $39.2 million and $15.7 million in the twenty-six week periods of fiscal 2007 and fiscal 2006, respectively.

Income Taxes

Income taxes amounted to $9.2 million and $4.1 million in the second quarters of fiscal 2007 and fiscal 2006, respectively, and $15.9 million and $6.2 million in the twenty-six week periods of fiscal 2007 and 2006, respectively. Our effective tax rate was 40.6% and 39.7% for the second quarters of fiscal 2007 and 2006, respectively, and 40.4% and 39.4% for the twenty-six week periods of fiscal 2007 and 2006, respectively. The change in effective tax rates is due primarily to more federal hiring tax credits being available in the prior year than were available in the current year.

Net Income

Net income for the second quarter of fiscal 2007 amounted to $13.5 million compared to $6.2 million in the second quarter of fiscal 2006. Net income for the twenty-six weeks ended March 25, 2007 amounted to $23.4 million compared to $9.5 million for the twenty-six weeks ended March 26, 2006.

LIQUIDITY AND CAPITAL RESOURCES

We historically fund our daily cash flow requirements through funds provided by operations and through borrowings from short-term revolving credit facilities. Markets’ credit agreement, as amended and restated on June 17, 2004 expires in May 2007 and consists of a revolving loan facility for working capital and letters of credit of $75.0 million. The letter of credit facility is maintained pursuant to our workers’ compensation and general liability self-insurance requirements. In addition, Santee’s revolving line of credit includes a credit line of $5.0 million all of which may be used to secure letters of credit. As of March 25, 2007, between Markets’ and Santee’s credit agreements, we had $50.4 million of outstanding letters of credit and we had $29.6 million available under the revolving loan facilities.

We had no short-term borrowings outstanding as of March 25, 2007 and did not incur short-term borrowings during the quarterly period.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The following table sets forth our contractual cash obligations and commercial commitments as of March 25, 2007.


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

8.125% Senior Notes due June 2012
Principal	$	525,000	$	—	$	—	$	—	$	525,000
Interest		234,609		42,656		85,313		85,313		21,327

		759,609		42,656		85,313		85,313		546,327

Floating Rate Senior Notes due June 2010⁽¹⁾
Principal	$	175,000	$	175,000	$	—	$	—	$	—
Call premiums		1,750		1,750		—		—		—
Interest		4,089		4,089		—		—		—

		180,839		180,839		—		—		—

Capital lease obligations ⁽²⁾
Principal	$	7,747	$	940	$	2,333	$	3,025	$	1,449
Interest		4,404		1,174		1,887		1,057		286

		12,151		2,114		4,220		4,082		1,735

Operating leases ⁽²⁾		260,931		37,644		52,066		35,533		135,688

Total contractual cash obligations	$	1,213,530	$	263,253	$	141,599	$	124,928	$	683,750


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

Standby letters of credit ⁽³⁾	$	50,433	$	50,433	$	—	$	—	$	—

Total other commercial commitments	$	50,433	$	50,433	$	—	$	—	$	—


⁽¹⁾		Interest on the Floating Rate Senior Notes (the “Floating Rate Notes”) is based on the Three-month LIBOR plus 3.50% and is set quarterly based on the Three-month LIBOR rate for the second London Banking Day preceding each interest period. The floating interest rate at March 25, 2007 was 8.85%. The redemption of the Floating Rate Notes have been accelerated due to the issuance on April 18, 2007 of $285 million of 7.75% Senior Notes due April 2015. The proceeds from these Notes will be used to repay all principal and accrued interest on the Floating Rate Notes in June 2007. The Floating Rate Notes will be redeemed on June 18, 2007 (the “Redemption Date”) at a price equal to 101% per $1,000 principal amount of the Floating Rate Notes, plus accrued and unpaid interest thereon to the Redemption Date.

⁽²⁾		We lease the majority of our retail stores, offices, warehouses and distribution facilities. 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 September 2007 and December 2007.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

Working capital amounted to $223.4 million at March 25, 2007 and $233.3 million at September 24, 2006, and our current ratio was 1.80:1 and 1.83:1, respectively. Fluctuations in working capital and current ratios are not unusual in our industry.

Net cash provided by operating activities for the twenty-six weeks ended March 25, 2007 was $78.8 million compared to $13.6 million provided by operating activities for the twenty-six weeks ended March 26, 2006. Significant sources of cash from operating activities in the second quarter of fiscal 2007 included a reduction in restricted cash needed to secure workers’ compensation obligations, an increase in long-term reserves related primarily to increased liability for long-term options and income from operations. Significant uses of cash from operations included decreases in short-term option liability due to the payment of options to retired participants.

Other significant uses of cash included $22.1 million of capital expenditures during the period for normal new store construction, store remodels and equipment purchases. Historically, new store construction costs, store remodels and equipment expenditures are financed through operating cash flows. In addition, we expended $49.6 million on the new corporate office and distribution facilities, of which $9.6 million has been classified as a long-term receivable related to a tax increment to be received in future years. We estimate that remaining fiscal 2007 expenditures for the new corporate office and distribution facilities will be $139.7 million. We are funding the new corporate office and distribution facilities from cash allocated from the proceeds from the issuance of the 8.125% Senior Notes and our New Senior Notes. At this time we believe that available financing options will be sufficient to complete the project. However, there can be no assurances that such financing options will be available in the future.

As of March 25, 2007, based upon our consolidated earnings since June 27, 2004 and the initial amount allowed of $25.0 million under the Credit Facility and the Notes’ indenture and, after taking into consideration payments previously made, we had the ability and right to pay a restricted payment of up to $42.4 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 operating leases or debt financing. There can be no assurance that such debt and lease financing will be available to us in the future.

The Credit Facilities

Existing Credit Facilities

On June 17, 2004, Markets entered into an amended and restated credit facility (the “Credit Facility”) with Bank of America N.A. (“Bank of America”) as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year revolving credit facility in a principal amount of up to $75.0 million, with the right to increase, under certain circumstances, the size of the Credit Facility to an aggregate principal amount of $100.0 million. The Credit Facility amended and restated the existing credit facility in its entirety. Subject to certain restrictions, the entire amount of the Credit Facility may be used for loans, letters of credit, or a combination thereof. Borrowings under the Credit Facility are unsecured and will be used for certain working capital, capital expenditures and other corporate purposes. Letters of credit under the letter of credit facility are expected to be used to support obligations incurred in connection with the construction of stores, construction of the new corporate office and distribution facilities and workers’ compensation insurance obligations. The availability of the loans and letters of credit are subject to certain borrowing restrictions.

The Credit Facility is guaranteed by Stater Bros. Holdings Inc. (“Holdings”) and all of its existing and future material subsidiaries, including Development and Holdings’ indirect subsidiaries, Super Rx and Santee (subject, in the case of Santee, to termination upon certain specified events).

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

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

The Credit Facility will cease to be available and will be payable in full on May 31, 2007. Notwithstanding such maturity date, at any time prior thereto Markets shall be entitled to request the issuance of standby letters of credit having a term which is up to one year following such maturity date, and commercial letters of credit having a term which is up to six months following such maturity date. Loans under the Credit Facility must be repaid for a period of ten consecutive days semi-annually.

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

The Credit Facility requires Markets to meet certain financial tests, including minimum net worth and other tests. The Credit Facility contains covenants which, among other things, limit the ability of Markets 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, and (iii) make restricted payments. The Credit Facility also contains covenants that apply to Holdings and its subsidiaries, and Holdings is a party to the Credit Facility for purposes of these covenants. These covenants, among other things, limit the ability of Holdings and its subsidiaries to incur indebtedness, make restricted payments, enter into transactions with affiliates, and make amendments to the Indenture governing the 8.125% Senior Notes due June 15, 2012 and the Floating Rate Senior Notes due June 15, 2010.

The Credit Facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults; invalidity of any guaranty; and change of control.

In November 2004, Santee entered into a revolving line of credit with Bank of America (“the Revolver”). Under the Revolver, Santee may borrow up to $5.0 million all of which may be used to secure letters of credit. Letters of credit under the Revolver are expected to be used for workers’ compensation insurance obligations and for general corporate purposes. Borrowings under the Revolver are secured by the receivables of Santee. The Revolver is scheduled to expire on May 31, 2007.

Advances under the Revolver bear interest at Bank of America’s prime rate plus 0.50% with interest due monthly or, if elected by Santee, at the Interbank Offered Rate plus 1.75%. The outstanding undrawn portion of the workers’ compensation letter of credit is subject to an annual commitment fee of 1.25%.

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

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

As of March 25, 2007, for purposes of the credit facilities with Bank of America, Santee, Markets and Holdings were in compliance with all restrictive covenants. We are also subject to certain covenants associated with our 8.125% Senior Notes due 2012 and our Floating Rate Senior Notes due 2010. As of March 25, 2007, we were in compliance with all such covenants. However, there can be no assurance that Santee, Markets or Holdings will be able to achieve the expected operating results or implement the capital expenditure strategy upon which future compliance with such covenants is based.

New Credit Facilities

Markets Credit Agreement

On April 16, 2007, the Company and Markets entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A. (“Bank of America”), as sole and exclusive administrative agent, and sole initial lender, consisting of a three-year unsecured revolving credit facility in a principal amount of up to $100 million (the “New Credit Facility”), which replaced Markets’ existing credit facility.

The New Credit Facility will cease to be available and will be payable in full on May 31, 2010. Notwithstanding such maturity date, at any time prior thereto Markets shall be entitled to request the issuance of standby letters of credit having a tenor which is up to one year following such maturity date, and commercial letters of credit having a tenor which is up to 180 days following such maturity date. Loans under the Credit Facility must be repaid for a period of ten consecutive days semi-annually.

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

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

The New Credit Facility requires Holdings and its subsidiaries to meet minimum shareholders equity and EBITDA tests. The New Credit Facility contains covenants which, among other things, limit the ability of Markets 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, and (iii) make restricted payments. The New Credit Facility also contains covenants that apply to Holdings and its subsidiaries, and Holdings is a party to the New Credit Facility for purposes of these covenants. These covenants, among other things, limit the ability of Holdings and its subsidiaries to incur indebtedness, make restricted payments, enter into transactions with affiliates, and make amendments to the Indenture governing the 8.125% Senior Notes due June 15, 2012 and the Floating Rate Senior Notes due June 15, 2010.

The New Credit Facility contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults; invalidity of any guaranty; and change of control.

Santee Credit Agreement

The New Santee Revolver will cease to be available and will be payable in full on May 31, 2010. Notwithstanding such maturity date, at any time prior thereto Santee shall be entitled to request the issuance of standby letters of credit having a tenor which is up to one year following such maturity date. Loans under the New Santee Revolver must be repaid for a period of thirty consecutive days semi-annually.

The loans under the New Santee Revolver may be prepaid at any time without penalty, subject to certain minimums and payment of any breakage and re-deployment costs in the case of loans based on the IBOR rate. Outstanding letters of credit under the New Santee Revolver are subject to a fee of 1.25% per annum on the face amount of such letters of credit, payable quarterly in advance. Santee will be required to pay standard fees charged by Bank of America with respect to the issuance, negotiation, and amendment of commercial letters of credit issued under the letter of credit facility.

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

LIQUIDITY AND CAPITAL RESOURCES (contd.)

The Credit Facilities (contd.)

The New Santee Revolver requires Santee to meet minimum tangible net worth and minimum EBITDA tests. The New Santee Revolver contains covenants which, among other things, limit the ability of Santee to (i) incur indebtedness, grant liens and guarantee obligations, and (ii) enter into mergers, consolidations, liquidations and dissolutions, asset sales, investments, leases and transactions with affiliates.

The New Santee Revolver contains customary events of default, including payment defaults; material inaccuracies in representations and warranties; covenant defaults; cross-defaults to certain other indebtedness; certain bankruptcy events; certain ERISA events; judgment defaults and material adverse change.

Labor Relations

We have entered into a new collective bargaining agreement with the UFCW, which represents a substantial number of our stores’ hourly union employees. The new collective bargaining agreement became effective in March 2007 and is scheduled to expire in March 2010. The UFCW members voted to accept the new collective bargaining agreement on January 17, 2007. The new collective bargaining agreement establishes a single-tier pay scale for our employees based on each employee’s seniority and provides for gradual increases in hourly wages over a three-year period. These scheduled increases range from a $0.20 increase in hourly wages for clerks to a $3.00 increase in hourly wages for pharmacists. The new collective bargaining agreement also provides for increased contributions by us toward employee health and pension benefits but, at our option, we will reduce these contributions to match any contract terms relating to benefits negotiated between the UFCW and each of our three major competitors, Vons Companies Inc., Albertsons Inc. and Ralphs Grocery Co., which have not yet completed negotiating new collective bargaining agreements with the UFCW. The financial terms of the collective bargaining agreements with respect to matters other than benefits negotiated with each chain may be significantly different from each other and could create either a financial advantage or disadvantage for us as compared to our major competitors. Accordingly, we cannot presently determine the financial impact that the new collective bargaining agreement may have on our future operations.

Santee’s collective bargaining agreement with the International Brotherhood of Teamsters (the “Teamsters”), which represents approximately 300 dairy operating employees, was renewed in March 2004 and expired in March 2007. Santee has had preliminary discussions with the Teamsters and anticipates negotiating a new collective bargaining agreement with them that is acceptable to all parties. However, at this time, we do not know what form such an agreement may take, nor the financial impact that it may have on our future operations.

We value our employees and believe our relationship with them is good and that employee loyalty and enthusiasm are key elements of our operating performance.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 requires that a tax position meet a “more-likely-than-not” recognition threshold for the benefit of an uncertain tax position to be recognized in the financial statements, based on the technical merits of the position. Additionally, FIN 48 provides guidance on derecognition, measurement, classification, interest and penalties, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of the adoption of FIN 48 on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 states that fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts and establishes a hierarchy that prioritizes the information used to develop fair value assumptions. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of the adoption of SFAS No. 157 on our consolidated financial statements.

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),” which requires an entity to (1) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the employer’s fiscal year end and (3) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS No. 158 has a two tiered effective date with recognition of funded status of defined benefit postretirement plan and disclosure requirements effective for fiscal years ending after June 15, 2007 for non-public entities and all other requirements effective for fiscal years ending after December 15, 2008. We are currently evaluating the impact of the adoption of SFAS No. 158 on our consolidated financial statements.

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.
MARCH 25, 2007

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 and floating rate debt obligations. Our fixed rate debt obligations are comprised of the 8.125% Senior Notes due June 2012 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. Our floating rate debt obligations are the Floating Rate Senior Notes due June 2010. The fair values of the 8.125% Senior Notes due June 2012 and Floating Rate Senior Notes due June 2010 are based upon quoted market prices. Although quoted market prices are not readily available on our capital lease obligations, we believe that stated values approximate the fair value of these obligations. 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

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the costs and benefits of such controls and procedures.

As of the quarter ended March 25, 2007, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on our evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that those controls and procedures were effective, at the reasonable assurance level, in ensuring that the information needed to make timely decisions regarding the required disclosures contained in this Report on Form 10-Q was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a timely manner to insure that the information required to be disclosed by us in this Report on Form 10-Q was recorded, processed, summarized and reported within the time period specified for filing of this Report on Form 10-Q.

During the quarter ended March 25, 2007, there were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

STATER BROS. HOLDINGS INC.
MARCH 25, 2007

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

For a description of legal proceedings, please refer to the footnote entitled “Litigation Matters” contained in the Notes to Consolidated Financial Statements section of the Company’s Form 10-K/A for the fiscal year ended September 24, 2006.

Item 1A. RISK FACTORS

Our performance is affected by inflation. In recent years the impact of inflation on our operations has been moderate. 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.

The supermarket industry is a highly competitive industry, which is characterized by low profit margins. Competitive factors typically include the price, quality and variety of products, customer service, and store location and condition. We believe that our competitive strengths include our service departments, everyday low prices, breadth of product selection, high product quality, one-stop shopping convenience, attention to customer service, convenient store locations, a long history of community involvement and established long-term customer base in the Inland Empire (consisting of San Bernardino and Riverside counties) and in the counties of Kern, Orange, San Diego and Los Angeles.

Given the wide assortment of products we offer, we compete with various types of retailers, including local, regional and national supermarket retailers, convenience stores, retail drug stores, national general merchandisers and discount retailers, membership clubs and warehouse stores. Our primary competitors include Vons, Albertson’s, Ralphs, and a number of independent supermarket operators. We also face competitive pressures from existing and new “big box” format retailers. In addition, we expect Von’s, Albertson’s and Ralphs 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 believe it is our everyday low prices, breadth of product offering, which includes approximately 40,000 items offered for sale in our stores, service departments and long-term customer relationships will assist and complement our ability to compete in this increased competitive environment. We monitor competitive activity and regularly review our marketing and business strategy and periodically adjust them to adapt to changes in our primary trading area.


		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 24, 2006 and March 25, 2007 (Unaudited)		3

	Consolidated Statements of Income (Unaudited) for the 13 weeks ended March 26, 2006 and March 25, 2007		5

	Consolidated Statements of Income (Unaudited) for the 26 weeks ended March 26, 2006 and March 25, 2007		6

	Consolidated Statements of Cash Flows (Unaudited) for the 13 weeks ended March 26, 2006 and March 25, 2007		7

	Notes to Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3.	Quantitative and Qualitative Disclosure about Market Risk		28

Item 4.	Controls and Procedures		28

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		29

Item 1A.	Risk Factors		29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 3.	Defaults Upon Senior Securities		30

Item 4.	Submission of Matters to a Vote of Security Holders		30

Item 5.	Other Information		30

Item 6.	Exhibits		30

SIGNATURES			31
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


(a)		Exhibits
31.1		Certification of Principal Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



Date: May 9, 2007	/s/ Jack H. Brown
	Jack H. Brown
	Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)



Date: May 9, 2007	/s/ Phillip J. Smith
	Phillip J. Smith
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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	13 Weeks Ended
	Mar. 26			Mar. 25,
	2006			2007
Sales	$	863,751		$	866,062
Cost of goods sold		631,239			616,618


Gross profit		232,512			249,444

Operating expenses
Selling, general and administrative expenses		198,011			203,685
Depreciation and amortization		11,059			12,085


Total operating expenses		209,070			215,770


Operating profit		23,442			33,674

Interest income		2,378			2,719
Interest expense		(14,964	)		(13,749	)
Other income (expenses), net		(617	)		3


Income before income taxes		10,239			22,647

Income taxes		4,063			9,187


Net income	$	6,176		$	13,460


Earnings per share	$	164.95		$	364.82


Average common shares outstanding		37,442			36,895


Shares outstanding at end of period		36,895			36,895