Executive Overview

Spartan Stores is a leading regional grocery distributor and grocery retailer, operating principally in Michigan and Indiana.

We operate two reportable business segments: Distribution and Retail. Our Distribution segment provides a full line of grocery, general merchandise, health and beauty care, frozen and perishable items to approximately 350 independently owned grocery stores and our 97 corporate owned stores. Our Retail segment operates 97 retail supermarkets in Michigan under the banners Glen's Markets, Family Fare Supermarkets, D&W Fresh Markets, Felpausch Food Centers and VG's Food and Pharmacy and 23 fuel centers/convenience stores, included at our supermarket locations, under the banners Glen's Quick Stop, Family Fare Quick Stop, D&W Fresh Markets Quick Stop and Felpausch Quick Stop. Our retail supermarkets have a "neighborhood market" focus to distinguish them from supercenters and limited assortment stores.

Our sales and operating performance vary with seasonality. Our first and fourth quarters are typically our lowest sales quarters and therefore operating results are generally lower during these two quarters. Additionally, these two quarters can be affected by the timing of the Easter holiday, which results in a strong sales week. Many northern Michigan stores are dependent on tourism, which is affected by the economic environment and seasonal weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months. All quarters are 12 weeks, except for our third quarter, which is 16 weeks and includes the Thanksgiving and Christmas holidays.

In fiscal 2010, we continued with the integration of the VG's retail store acquisition. We are using the additional insight gained during the integration process to further refine our product offerings and services in these markets to address the current economic environment.

We have launched two retail programs in fiscal 2010 that are intended to enhance the value delivered to consumers. As part of our emphasis on consumer health and wellness, we began a major nutrition guide program in our D&W and Family Fare retail stores early in the third quarter. Although consumers are looking for good value, our research indicates that they also want to eat healthy foods. Our program introduces new shelf tags that clearly and simply identify the health and nutrition benefits on approximately 16,000 products. The labels are color coded by FDA category, and we believe are easy to understand, simple to follow and help consumers to quickly identify the health and nutrition attributes of the food they buy. We also launched our Michigan's Best initiative which clearly identifies and promotes 2,400 products grown, made or processed in Michigan. Consumers in our market have a strong desire to support their state.

We also began the implementation of our new rewards-based customer loyalty program late in the first quarter. When complete, we believe that the new customer loyalty program will provide better and more sophisticated understanding of our customers' purchasing behavior, which we will use to improve the effectiveness of our promotions, marketing and merchandising programs. We also expect the program will help solidify our long-term customer loyalty, improve our sales growth opportunities and further strengthen our market position.

We also continued execution of our capital investment program by completing one store relocation, completing four major store remodels, substantially completing an additional major store remodel late in the second quarter and opening two new fuel centers.

We expect the economic climate in markets where we operate to continue to weaken in the near term due to a rising unemployment rate and lower levels of tourism in northern Michigan. We will continue to make tactical adjustments to our marketing, merchandising and pricing strategies to make them more effective in the current economic environment. We will also remain focused on completing the integration of our VG's acquisition and continuing with our capital investment program. We believe these steps will position our company to benefit when the economy recovers.

Results of Operations

          The following table sets forth items from our Consolidated Statements
of Earnings as a percentage of net sales and the year-to-year percentage change
in dollar amounts:

(Unaudited)
                                       Percentage of Net Sales                Percentage Change
                            ---------------------------------------------   ---------------------
                               12 Weeks Ended          24 Weeks Ended       12 Weeks    24 Weeks
                                                  -                       -   Ended   -   Ended
                            ---------------------   ---------------------   ---------   ---------
                            Sept. 12,   Sept. 13,   Sept. 12,   Sept. 13,   Sept. 12,   Sept. 12,
                              2009    -   2008    -   2009    -   2008    -   2009    -   2009
                            ---------   ---------   ---------   ---------   ---------   ---------
Net sales                       100.0       100.0       100.0       100.0        (2.6 )      (0.6 )
Gross margin                     22.3        20.3        22.1        20.0         6.7         9.9
Selling, general and             18.9        16.7        19.1        16.9         9.5        12.1
administrative
  expenses
Provision for asset                 -           -           -           -           -           *
impairments and             ---------   ---------   ---------   ---------   ---------   ---------
  exit costs
Operating earnings                3.4         3.6         3.0         3.1        (6.7 )      (3.8 )
Other income and expenses         0.6         0.5         0.6         0.5        24.1        21.0
                            ---------   ---------   ---------   ---------   ---------   ---------
Earnings before income            2.8         3.1         2.4         2.6       (11.4 )      (8.6 )
taxes
  and discontinued
operations
Income taxes                      1.1         1.3         1.0         1.0       (14.1 )     (10.2 )
                            ---------   ---------   ---------   ---------   --------- - --------- -
Earnings from continuing          1.7         1.8         1.4         1.6        (9.5 )      (7.5 )
  operations
(Loss) earnings from             (0.0 )      (0.1 )      (0.0 )       0.1           *           *
discontinued                --------- - --------- - --------- - ---------   ---------   ---------
  operations, net of taxes
Net earnings                      1.7         1.7         1.4         1.7        (1.9 )     (14.1 )
                            ---------   ---------   ---------   ---------   --------- - --------- -

* Percentage change is not meaningful

Net Sales - Net sales for the quarter ended September 12, 2009 ("second quarter") decreased $16.6 million, or 2.6 percent, from $626.8 million in the quarter ended September 13, 2008 ("prior year second quarter") to $610.2 million. Net sales for the year-to-date period ended September 12, 2009 ("current year-to-date") decreased $7.3 million, or 0.6 percent, from $1,213.5 million in the prior year-to-date period ended September 13, 2008 ("prior year-to-date") to $1,206.2 million.

Net sales for the second quarter in our Retail segment increased $36.7 million, or 11.3 percent, from $323.5 million in the prior year second quarter to $360.2 million. Net sales for the year-to-date period increased $90.8 million, or 14.8 percent, from $612.1 million in the prior year-to-date period to $702.9 million. The second quarter increase was primarily due to incremental sales from the recently acquired VG's retail stores of $64.4 million, partially offset by lower fuel sales of $9.3 million due to significantly lower retail fuel prices, a loss of sales of $4.9 million relating to the closures or sale of two retail stores and the temporary closing of one store that underwent a major remodel and a 5.1 percent decline in comparable store sales (excluding the effect of fuel sales). The year-to-date increase was primarily due to incremental sales from the recently acquired VG's retail stores of $133.0 million, partially offset by lower fuel sales of $17.4 million due to significantly lower retail prices, a loss of sales of $9.6 million relating to the closures or sale of three retail stores and the temporary closing of one store that underwent a major remodel and a 3.5 percent decline in comparable store sales (excluding the effect of fuel sales and the Easter holiday in the current year).

The majority of the comparable store sales decrease was due to price deflation in three of our high-volume product categories and competitive openings. The economic uncertainty, which is causing changes in consumer purchasing behavior, such as a shift to lower priced private label products, and unseasonably cool summer weather in Northern Michigan markets that are influenced by tourism also contributed to the decrease. There was no Easter

holiday during fiscal 2009. We define a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), and we include remodeled, expanded and relocated stores in comparable stores.

We expect retail comparable sales to be in the negative low to mid single digit range for the remainder of fiscal 2010 due to the prolonged economic weakness and its effect on Michigan industry, product price deflation, lower state tourism business, competitive openings in fiscal 2010 and their comparison to strong comparable store sales in last years third quarter. We also expect distribution sales, excluding the effect of the VG's acquisition, to decline at a rate similar to the retail segment.

Net sales for the second quarter in our Distribution segment decreased $53.3 million, or 17.6 percent, from $303.3 million in the prior year second quarter to $250.0 million. Net sales for the current year-to-date period decreased $98.0 million, or 16.3 percent, from $601.4 million in the prior year-to-date period to $503.4 million. The second quarter decrease was primarily due to the elimination of sales to VG's stores of $33.3 million (due to the acquisition), lower sales to existing customers of $16.4 million, partially driven by price deflation, and lower sales in our pharmacy distribution program of $2.5 million, partially offset by new business of $4.5 million. The year-to-date decrease was due to the elimination of sales to VG's stores of $67.6 million, lower sales to existing customers of $20.4 million and lower sales in our pharmacy distribution program of $10.2 million, partially offset by new business of $7.7 million. The current year-to-date period includes approximately $2.0 million of Easter holiday sales versus none in the prior year due to the timing of the Easter holiday.

Gross Margin - Gross margin represents sales less cost of sales, which include purchase costs and promotional allowances. Vendor allowances that relate to our buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for our merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.

Gross margin for the second quarter increased $8.5 million, or 6.7 percent, from $127.5 million in the prior year second quarter to $136.0 million. As a percent of net sales, gross margin for the second quarter increased to 22.3 percent from 20.3 percent. Gross margin for the year-to-date period increased $24.0 million, or 9.9 percent, from $243.0 million in the prior year-to-date period to $267.0 million. As a percent of net sales, gross margin for the year-to-date period increased to 22.1 percent from 20.0 percent. For the second quarter and year-to-date period, the increase in the gross margin rate was driven by an increase in the mix of higher margin retail sales as a percentage of consolidated sales resulting from the acquisition of VG's.

Operating Expenses - Operating expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, utilities, equipment rental, depreciation and other administrative costs.

Operating expenses for the second quarter increased $10.0 million, or 9.5 percent, from $105.0 million in the prior year second quarter to $115.0 million. As a percent of net sales, operating expenses were 18.9 percent for the second quarter compared to 16.7 percent in the prior year second quarter. Operating expenses for the year-to-date period increased $24.8 million, or 12.1 percent, from $205.5 million in the prior year-to-date period to $230.3 million. As a percent of net sales, operating expenses were 19.1 percent for the current year-to-date period compared to 16.9 percent in the prior year-to-date period.

The net increase in second quarter operating expenses was primarily due to the following:
• Added operating costs associated with the acquired VG's retail stores of $15.9 million.
• Decreased compensation and benefits of $2.5 million due to reductions in store labor, incentive compensation and other cost containment initiatives.
• Decreased transportation fuel costs of $1.1 million.
• Decreased operating costs associated with three closed/sold stores of $1.1 million.

The net increase in year-to-date operating expenses was primarily due to the following:

• Added operating costs associated with the acquired VG's retail stores of $32.4 million.
• Decreased compensation and benefits of $2.1 million due to reductions in store labor, incentive compensation and other cost containment initiatives.
• Decreased operating costs associated with four closed/sold stores of $2.1 million.
• Decreased transportation fuel costs of $2.0 million.
• Costs related to the introduction of a new customer loyalty program and of $0.6 million.

Asset Impairment and Exit Costs - Asset impairment and exit costs of $0.6 million were incurred in the first quarter related to the closing of one underperforming retail store.

Interest Expense - Interest expense increased $0.6 million from $3.1 million in the prior year second quarter to $3.7 million. Interest expense increased $1.1 million from $6.3 million in the prior year-to-date period to $7.4 million. The increases were due to higher average outstanding borrowings due to the acquisition of VG's.

On January 2, 2009, we entered into an interest rate swap agreement. The interest rate swap is considered to be a cash flow hedge of interest payments on $45.0 million of borrowings under our senior secured revolving credit facility by effectively converting a portion of the variable rate debt to a fixed rate basis. Under the terms of the agreement, we have agreed to pay the counterparty a fixed interest rate of 3.33 percent and the counterparty has agreed to pay Spartan Stores a floating interest rate based upon the 1-month LIBOR plus 1.25 percent (1.52 percent at September 12, 2009) on a notional amount of $45 million. The interest rate swap agreement expires concurrently with the senior secured revolving credit facility on December 24, 2012.

Effective March 29, 2009 we adopted FSP No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP No. APB 14-1). In short, this requires that we recognize non-cash interest expense on our $110.0 million convertible senior notes. FSP No. APB 14-1 must be applied on a retrospective basis; therefore, upon adoption we retroactively recorded additional non-cash interest expense of approximately $0.7 million and $1.4 million, pre-tax, in the prior year second quarter and year-to-date period.

Income Taxes - The effective tax rate is 39.5% and 39.8% for the second quarter and current year-to-date period, respectively. The difference from the statutory rate is primarily due to State of Michigan income taxes.

Discontinued Operations

Certain of our retail and grocery distribution operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the condensed consolidated financial statements for all periods presented, unless otherwise noted.

In the first and second quarters of fiscal 2009, we completed the closure and disposition of the prescription files of The Pharm stores, allowing us to concentrate efforts and resources on business opportunities with the best long-term growth potential and focus more on core distribution and conventional supermarket operations. Cash proceeds of $13.8 million were received. Asset impairment charges and exit costs of $6.4 million were recognized.

Liquidity and Capital Resources

          The following table summarizes our consolidated statements of cash
flows for the year-to-date and prior year-to-date periods:

(In thousands)

                                                        September 12,         September 13,
                                                            2009                  2008
                                                       ---------------       ---------------
Net cash provided by operating activities               $       40,868        $       23,334
Net cash used in investing activities                          (23,997 )             (24,468 )
Net cash used in financing activities                          (15,073 )              (3,997 )
Net cash (used in) provided by discontinued operations          (1,571 )              13,741
                                                       -- ------------ -     -- ------------
Net increase in cash and cash equivalents                          227                 8,610
Cash and cash equivalents at beginning of period                 6,519                19,867
                                                       -- ------------       -- ------------
Cash and cash equivalents at end of period              $        6,746        $       28,477
                                                       -- ------------       -- ------------

Net cash provided by operating activities increased from the prior year-to-date period primarily due to improved inventory leverage and working capital management.

Net cash used in investing activities decreased during the current fiscal year primarily due to a decrease in capital expenditures of $2.2 million to $22.7 million, of which our Retail and Distribution segments utilized 82 percent and 18 percent, respectively. Expenditures were used for new stores, store remodels and refurbishments, new fuel centers and new equipment and software. Under the terms of our senior secured revolving credit facility, should our available borrowings fall below certain levels, our capital expenditures would be restricted each fiscal year. Our current available borrowings are over $117 million above these limits as of September 12, 2009 and we do not expect to fall below these levels. We expect capital expenditures to range from $48.0 million to $52.0 million for fiscal 2010.

Net cash used in financing activities includes cash paid and received related to our long-term borrowings, dividends paid, tax benefits of stock compensation and proceeds from the issuance of common stock. Payments on long-term borrowings were $14.3 million and $4.7 million for the current year-to-date period and prior year-to-date period, respectively. Cash dividends of $1.1 million were paid in each year-to-date period. Although we currently expect to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the board of directors to declare future dividends. Each future dividend will be considered and declared by the board of directors in its discretion. Whether the board of directors continues to declare dividends depends on a number of factors, including our future financial condition and profitability and compliance with the terms of our credit facilities. Our current maturities of long-term debt and capital lease obligations at September 12, 2009 are $3.9 million. Our ability to borrow additional funds is governed by the terms of our credit facilities.

On January 2, 2009, Spartan Stores entered into an interest rate swap agreement. The interest rate swap is considered to be a cash flow hedge of interest payments on $45.0 million of borrowings under Spartan Stores' senior secured revolving credit facility by effectively converting a portion of the variable rate debt to a fixed rate basis. Under the terms of the agreement, Spartan Stores has agreed to pay the counterparty a fixed interest rate of 3.33 percent and the counterparty has agreed to pay Spartan Stores a floating interest rate based upon the 1-month LIBOR plus 1.25 percent (1.52 percent at September 12, 2009) on a notional amount of $45 million. The interest rate swap agreement expires concurrently with the senior secured revolving credit facility on December 24, 2012.

Net cash (used in) provided by discontinued operations contains the net cash flows of our discontinued operations and consists primarily of the proceeds from the sale of assets and the payment of store exit cost reserves, insurance run-off claims and other liabilities. Included in the prior year cash flows from discontinued operations are proceeds on the disposal of assets of $13.8 million. We expect cash used in our discontinued operations will be approximately $4.0 million to $5.0 million in fiscal 2010.

Our principal sources of liquidity are cash flows generated from operations and our senior secured revolving credit facility. Interest on our convertible senior notes is payable on May 15 and November 15 of each year. The revolving credit facility matures December 2012, and is secured by substantially all of our assets. As of September 12, 2009, our revolving credit facility had outstanding borrowings of $52.5 million, available borrowings of $137.2 million and maximum availability of $147.2 million, which exceeds the minimum excess availability levels, as defined in the credit agreement. We believe that cash generated from operating activities and available borrowings under the credit facility will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future. However, there can be no assurance that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our credit facility.

Our current ratio increased to 1.14:1.00 at September 12, 2009 from 1.13:1.00 at March 28, 2009 and our investment in working capital was $27.1 million at September 12, 2009 versus $21.0 million at March 28, 2009, primarily due to a reduction in our incentive compensation liability. Our debt to total capital ratio at September 12, 2009 was 0.42:1.00 versus 0.44:1.00 at March 28, 2009. The improvement in the debt to capital ratio is due to net earnings and a reduction in outstanding borrowings.

For information on contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended March 28, 2009. At September 12, 2009, there have been no material changes to our significant contractual obligations outside the ordinary course of business.

Indebtedness and Liabilities of Subsidiaries

On May 30, 2007, the Company sold $110 million aggregate principal amount of 3.375% Convertible Senior Notes due 2027 (the "Notes"). The Notes are general unsecured obligations and rank equally in right of payment with all of the Company's other existing and future obligations that are unsecured and unsubordinated. Because the Notes are unsecured, they are structurally subordinated to our subsidiaries' existing and future indebtedness and other liabilities and any preferred equity issued by our subsidiaries. We rely in part on distributions and advances from our subsidiaries in order to meet our payment obligations under the notes and our other obligations. The Notes are not guaranteed by our subsidiaries. Many of our subsidiaries serve as guarantors with respect to our existing credit facility. Creditors of each of our subsidiaries, including trade creditors, and preferred equity holders, generally have priority with respect to the assets and earnings of the subsidiary over the claims of our creditors, including holders of the Notes. The Notes, therefore, are effectively subordinated to the claims of creditors, including trade creditors, judgment creditors and equity holders of our subsidiaries. In addition, our rights and the rights of our creditors, including the holders of the notes, to participate in the assets of a subsidiary during its liquidation or reorganization are effectively subordinated to all existing and future liabilities and preferred equity of that subsidiary. The Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing such indebtedness and to existing and future indebtedness and other liabilities of our subsidiaries (including subsidiary guarantees of our senior credit facility).

The following table shows the indebtedness and other liabilities of our subsidiaries as of September 12, 2009:

                        Spartan Stores Subsidiaries Only
                                 (In thousands)

                                                               September 12,
                                                                   2009
                                                              ---------------
         Current Liabilities
           Accounts payable                                    $      128,344
           Accrued payroll and benefits                                27,240
           Other accrued expenses                                      19,723
           Current portion of exit costs                                9,859
           Current maturities of long-term debt and capital             3,900
         lease obligations                                    -- ------------
           Total current liabilities                                  189,066

         Long-term Liabilities
           Postretirement benefits                                     26,457
           Other long-term liabilities                                 18,537
           Exit costs                                                  32,120
           Long-term debt and capital lease obligations                46,557
                                                              -- ------------
           Total long-term liabilities                                123,671
                                                              -- ------------

         Total Subsidiary Liabilities                                 312,737
         Operating Leases                                             160,476
                                                              -- ------------
         Total Subsidiary Liabilities and Operating Leases     $      473,213
                                                              -- ------------
. . .