The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, other parts of this report and other Company filings are forward-looking statements. These statements discuss, among other things, future sales, operating results and financial condition. Such statements may be identified by such words as "anticipate," "expect," "may," "believe," "could," "estimate," "project," and similar words or phrases. Forward-looking statements reflect the Company's current plans and expectations regarding important risk factors and are based on information currently known to the Company. The Company cautions readers that any forward-looking statements contained in this report or made by the management of the Company involve risks and uncertainties, and are subject to change based on various important factors. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors," in the Company's Annual Report on Form 10-K for the year ended January 3, 2009. The risks described in the Company's Annual Report on Form 10-K are not the only risks it faces. Additional risks and uncertainties not currently known to the Company or that it currently deems to be not material could also have an adverse effect on the Company's future sales, operating results or financial position. The Company does not undertake any obligation to update forward-looking statements.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that may affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Management has established accounting policies that they believe are appropriate in order to reflect the accurate reporting of the Company's operating results, financial position and cash flows. The Company applies these accounting policies in a consistent manner. Management bases their estimates on historical experience, current and expected economic conditions and various other factors that management believes to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Future events and their effects cannot be determined with absolute certainty, and therefore actual results may differ from estimates. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2009, management considers its policies on accounting for inventories, impairment of long-lived assets, insurance reserves, cost of sales, vendor allowances and share-based compensation to be the most critical in the preparation of the Company's financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Overview

Arden Group, Inc. is a holding company which conducts operations through its first and second tier wholly-owned subsidiaries, Arden Mayfair, Inc. and Gelson's Markets, respectively. Gelson's operates 18 full-service supermarkets in Southern California. Gelson's caters to the upscale customer who expects superior quality, service and merchandise selection. In addition to the customary supermarket offerings, Gelson's offers specialty items such as imported foods, unusual delicatessen items and organic and natural

food products. All Gelson's stores include the typical service departments such as meat, seafood, delicatessen, floral, sushi, cheese and bakery. In addition, some stores offer further services including fresh pizza, coffee bars, hot bars, gelato bars and carving carts offering cooked meats.

The Company's management focuses on a number of performance indicators in evaluating financial condition and results of operations. Same store sales, gross profit and labor costs are some of the key factors that management considers. Both sales and gross profit are significantly influenced by competition in our trade area. Gelson's faces competition from regional and national supermarket chains (most of which have greater resources and a larger market share than Gelson's), stores specializing in natural and organic foods, specialty and gourmet markets and grocery departments in mass merchandise and club stores. The recent downturn in economic conditions has led to even greater competition in the grocery industry. As discretionary income declines, some consumers are reducing their spending and making more value conscious decisions.

Labor and other related payroll costs are the second largest expense (after product cost) incurred by Gelson's, and thus is a financial measure which is carefully monitored by management. As of fiscal 2008 year end, Gelson's had approximately 1,324 full-time and 967 part-time store, warehouse and office employees. The majority of Gelson's employees are members of the UFCW. The Company's current contract with the UFCW expires March 6, 2011. The agreement that the three major retailers in our trade area reached with the UFCW provides for hourly wage rates based on job classification and experience that, in some cases, are less than those agreed to by Gelson's. This could affect our ability to compete with grocery retailers whose hourly rates are less than our own. In addition, annual increases in wages provided under our contract will negatively impact the Company's profitability unless it is able to offset the increased expense through a combination of sales growth, increased gross margin, management of labor hours, decreased labor turnover and cost savings in other areas. Current economic conditions make it difficult to achieve significant sales growth and increased profit margins.

The Company contributes to a multi-employer health care and pension plan trust on behalf of its employees who are members of the UFCW. All employers who participate in a multi-employer plan are required to contribute at the same hourly rate based on straight time hours worked in order to fund the plan. The Company's health and welfare contribution rate was scheduled to increase effective with hours worked during March 2009 and after; however, the Company was recently notified by the Trust that the increase has been suspended for the six month period beginning March 2009 and ending August 2009. The Trust will review the contribution rate again in August 2009.

Current economic conditions and the turmoil in the financial markets could significantly impact the future funded status of the health care and pension plans in which the Company participates. Many factors influence the funded status of the plans including changes in the cost of health care, the return on investments of funds held by the plan, changes to benefits offered under the plan and government regulations. The Company anticipates that both health care and pension benefits will be important topics in future negotiations. If, in the future, the Company and other participating employers are unable to negotiate an acceptable agreement with the union concerning employee benefits, a labor dispute could result or the negotiations could result in a new agreement requiring higher contribution rates. In addition, if any of the participating employers in the plan withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to cover the underfunded liabilities associated with its participants, the Company may be required to make additional contributions. Each of these scenarios could negatively impact the Company's financial condition and results of operations.

Another component of labor related expense is the cost of workers' compensation. For claims incurred prior to July 1, 2006, the Company is primarily self-insured through the use of a high deductible policy which provides the Company with stop-loss coverage to limit its exposure on a per claim basis and provides coverage for qualifying costs in excess of per claim limits. Effective July 2006, the Company purchased a one-year fully insured guaranteed cost workers' compensation insurance policy to replace the high deductible program for losses occurring after June 30, 2006. The guaranteed cost program eliminates the Company's risk against claims occurring after June 30, 2006 and has resulted in lower workers' compensation expense compared to the high deductible program. The Company has continued to renew the guaranteed cost policy annually. The Company continues to maintain an accrual for claims incurred prior to July 2006 under the high deductible program. That accrual is based on both undeveloped reported claims and an estimate of claims incurred but not reported. While the Company devotes substantial time and commitment to maintaining a safe work environment, the ultimate cost of workers' compensation is highly dependent upon legal and legislative trends, the inflation rate of health care costs and the Company's ability to manage claims.

In the past, the Company's quarterly results have reflected significant fluctuations in operating income as a result of adjustments recorded to reflect the change in the fair value of SARs that have been granted to non-employee directors and certain employees. Each SAR entitles the holder to receive cash upon exercise equal to the excess of the fair market value of a share of the Company's Class A Common Stock, as determined in accordance with the SARs agreement, on the date of exercise over the fair market value of such share on the date granted. Fluctuations in the market price of the Company's Class A Common Stock from the end of the previous period impact the recognition or reversal of SARs compensation expense in the period being reported upon. Since the Company cannot predict future fluctuations in the market price of its stock, it also cannot forecast future SARs compensation expense adjustments and the extent to which operating income will be impacted. Volatility in the stock market makes this harder than ever to predict.

Results of Operations

First Quarter Analysis

Same store sales from the Company's 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges were $108,847,000 during the first quarter of 2009. This represents a decrease of 8.4% from the first quarter of 2008, when sales were $118,816,000. Sales during 2009 were negatively impacted by economic conditions and increased competition in our trade area. In addition, the first quarter of 2008 included sales from Easter which did not occur until the second quarter in 2009. The Company recorded $454,000 of revenue related to gift card breakage during the first quarter of 2009 of which $432,000 was related to prior periods. The decrease in sales during the first quarter of 2009 compared to the same period of the prior year would have been slightly greater if not for the revenue from gift card breakage. See Note 1 under Notes to Condensed Consolidated Financial Statements for further information regarding gift cards and certificates.

The Company's gross profit as a percent of sales was 39.4% in the first quarter of 2009 compared to 38.3% in the same period of 2008. The increase in gross profit as a percent of sales reflects a reduction in costs and gift card breakage income as discussed above. As there are no product costs associated with gift card breakage, 100% of the income flows through to gross profit. In calculating gross profit, the Company deducts product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs. Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since there may be differences in recording certain costs as cost of sales or as SG&A expense.

SG&A expense as a percent of sales was 30.4% in the first quarter of 2009 compared to 29.6% in the same period of the prior year. The increase in SG&A expense as a percent of sales is primarily due to an increase in UFCW hourly wage rates effective early March 2008 and 2009 in accordance with the current collective bargaining agreement. To a lesser extent, SG&A expense was also impacted by hourly wage rate increases under collective bargaining agreements with unions other than the UFCW. These increases were partially offset by lower SARs compensation expense in the first quarter of 2009 compared to the prior year. During the first quarter of 2009, the Company reversed $192,000 of SARs compensation expense recognized in prior periods due to a reduction in the fair value of SARs during the period partially offset by additional vesting. The Company recognized $98,000 of SARs compensation expense during the same period of 2008.

Interest and dividend income was $103,000 in the first quarter of 2009 compared to $619,000 for the same period in 2008. The decrease is partially due to significantly lower interest rates as a result of the current financial crisis. In addition, the Company's cash available for investment was significantly lower during the first quarter of 2009 compared to the same period of the prior year due to a special cash dividend paid on December 8, 2008 totaling approximately $79,000,000.

CAPITAL EXPENDITURES/LIQUIDITY

The Company's current cash position, including investments and net cash provided by operating activities, are the primary sources of funds available to meet the Company's capital expenditure and liquidity requirements. The Company's cash position, including investments, at the end of the first quarter of 2009 was $28,632,000. The Company's cash position was reduced by approximately $79,000,000 on December 8, 2008 when the Company paid its special cash dividend of twenty-five dollars ($25) per share on the Company's Class A Common Stock. During the thirteen weeks ended April 4, 2009, the Company generated $11,549,000 of cash from operating activities compared to $11,223,000 in the same period of 2008.

Cash not required for the immediate needs of the Company is temporarily invested in U.S. Treasury Bills, commercial paper and marketable securities. Since the financial crisis began, the Company has shifted its investments, as they matured, primarily into U.S. Treasury Bills and agency notes. The Company is continually investigating opportunities for the use of these funds including new locations and the expansion and remodel of existing stores. The Company recently completed the conversion of its remaining Mayfair store to the Gelson's name and format as part of a major remodel. All of the Company's 18 stores are now operated under the Gelson's name.

The Company also has two revolving lines of credit totaling $23,000,000 available for standby letters of credit, funding operations and expansion. There were no outstanding borrowings against either of the revolving lines as of April 4, 2009. The Company currently maintains four standby letters of credit aggregating $9,569,000 pursuant to the Company's lease requirements and general and auto liability and workers' compensation self-insurance programs. The standby letters of credit reduce the available borrowings under its revolving lines.

The following table sets forth the Company's contractual cash obligations and commercial commitments as of April 4, 2009:

                                          Contractual Cash Obligations (In Thousands)
                                               Less Than                                  After
                                  Total         1 Year       1-3 Years     4-5 Years     5 Years

7% Subordinated Income
Debentures Due
September 2014 Including
Interest                       $     1,701    $        86   $       172   $       172   $   1,271

Operating Leases                   128,422         10,696        20,148        18,695      78,883

Total Contractual Cash
Obligations (1)                $   130,123    $    10,782   $    20,320   $    18,867   $  80,154




                                                   Other Commercial Commitments (In Thousands)
                                                   Less Than                                            After
                                    Total           1 Year          1-3 Years        4-5 Years         5 Years

Standby Letters of Credit (2)   $       9,569    $       9,569    $           0    $           0    $            0

The Company had the following other contractual cash obligations at April 4, 2009. The Company is unable to include these liabilities in the tabular disclosure of contractual cash obligations as the exact timing and amount of payments are unknown.

Self-Insurance Reserves

The Company is primarily self-insured for losses related to general and auto liability claims and for all open years prior to July 1, 2006 for workers' compensation. The Company maintains stop-loss coverage to limit its loss exposure on a per claim basis. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience and regression analysis. Accruals are based on reported claims and an estimate of claims incurred but not reported. While the ultimate amount of claims incurred is dependent on future developments, in management's opinion recorded reserves are adequate to cover the future payment of claims. The Company's workers' compensation and liability insurance reserves for reported claims and an estimate of claims incurred but not reported at April 4, 2009 totaled $4,516,000. For workers' compensation claims incurred after June 30, 2006, the Company is fully insured under guaranteed cost insurance policies.

Employment Agreement

The Company has an employment agreement with a key executive officer that provides for annual retirement compensation for the remainder of his lifetime equal to 25% of his average base salary and bonus earned in the last three fiscal years prior to the cessation of his employment plus certain other benefits. The Company had accrued $2,091,000 under the terms of the employment agreement as of April 4, 2009.

Property, Plant and Equipment Purchases

As of April 4, 2009, management had authorized expenditures on incomplete projects for the purchase of property, plant and equipment which totaled approximately $1,244,000. The Company has an ongoing program to remodel existing supermarkets and to add new stores. During the first quarter of 2009, capital expenditures were $1,251,000.

(2) Standby Letters of Credit

The Company's letters of credit renew automatically each year unless the issuer notifies the Company otherwise. The amount of each letter of credit held pursuant to the Company's workers' compensation and general and auto liability insurance programs is adjusted annually based upon the outstanding claim reserves as of the renewal date. Each letter of credit obligation supporting insurance claims will cease when all claims for the particular policy year are closed or the Company negotiates a release.

On April 20, 2009, the Company paid a regular quarterly cash dividend of $0.25 per share of Class A Common Stock totaling approximately $790,000 to stockholders of record on March 31, 2009.