There is still intense competition in the US grocery industry, with no one grocer dominating the market. While Whole Foods Market's (NASDAQ:WFM) first quarter wasn't a perfect one, it wasn't a bad one, either. Let's analyze Whole Foods and see where it is heading in comparison to its rivals Safeway (NYSE:SWY) and SUPERVALU (NYSE:SVU).

First-quarter results
In the fiscal first quarter, Whole Foods' per-share earnings grew 8% to $0.42 compared to $0.39 in the year-ago quarter. Sales rose 10% to slightly more than $4.2 billion. But, both earnings and sales missed the consensus estimates of $0.44 and nearly $4.3 billion, respectively.

Comparable sales growth dipped by 50 basis points and fell to 5.4%; last year's comps growth was 7.2%. The company's gross profit margin improved by 6 basis points to 35%, while its gross profit increased by 10% to about $1.5 billion; this was largely attributed to declines in occupancy costs. The operating profit jumped by 8.6% and was backed by strong top-line growth during the quarter.

What is Whole Foods up to?
During the quarter, Whole Foods spent $219 million on capital expenditures, including $122 million on new store openings. The company generated $337 million in cash from operations, while its free cash flow was $118 million. This shows that despite the ongoing investments, Whole Foods' cash flow remained strong. Therefore, it repurchased common stock worth $62 million and also paid quarterly dividends of $37 million. The current buyback authorization stands at $738 million.

Whole Foods continued expanding as it opened 10 new stores in the first quarter, taking its total store count to 373. In the early part of the second quarter, it opened two more stores; a third will be functional in two months time. The company has also acquired leases for 21 new locations across the country totaling 920,000 square feet. The acquired locations in Chicago are those which were previously operated as Dominick's stores. These stores are expected to be operational under Whole Foods' brand name by 2015. 

The company has plans of opening 13 stores in the first half of fiscal 2014, while in the second half it will open 20 to 25 stores. In 2015, it will add another 38 to 45 stores, which is in-line with its long-term goal of reaching a store base of 500 by 2017. The company's aggressive approach of expanding itself shows that it is confident about its future growth prospects; hence, it's investing heavily in its new store openings. However, these investments will increase the company's operating costs, due to which its earnings will take a slight hit in the coming quarters.

Whole Foods doesn't want consumers to see it as a high-priced grocer. For this reason, the company is adding more store-branded foods alongside conventional fruits/vegetables. Additionally, it is running promotional deals on the organic food items as well. These moves will let the company enjoy more traffic, but its margins will be squeezed. As a result, the company's gross margin is expected to be slightly lower in the next few quarters.

Whole Foods has trimmed its profit and sales guidance as low consumer spending continues to pressure all retailers. Also, big retailers like Wal-Mart and Target are increasing their focus on groceries, making the competition even more severe.

Keeping these challenges in mind, the company expects its sales growth for fiscal 2014 to be in the range of 11% to 12%; the prior range was 11% to 13%. Same-store sales are expected to grow by 5.5% to 6.2%, which is again slower than the historical average comps growth of 7% to 8%. Earnings per share are projected to fall between $1.58 and $1.68; a previous estimate was for $1.65 to $1.69.

Safeway's fourth-quarter earnings fell by 10.2% to $0.53 per share, primarily because of weak top-line growth. Revenue ticked up 0.7% to $11.2 billion. In addition to posting weak results, the company gave a conservative outlook for fiscal 2014 and also disclosed a possible sale of its business, which disappointed investors even more. The company is looking to distribute its 37.8 million shares of Blackhawk Network Holdings to investors. Moreover, it is planning to monetize its 49% stake in Mexican grocery chain, Casa Ley.

Whole Foods' other rival, SUPERVALU, reported an EPS jump of more than 50% in its latest quarter. However, revenue declined slightly and missed consensus estimates of $4.05 billion, according to Reuters.

Earlier in 2013, SUPERVALU sold about 900 stores under five brands, which were not performing well and experienced weak sales growth. Since then, the company has made a successful turnaround; however, intense competition in the grocery industry coupled with macroeconomic challenges will restrict SUPERVALU's growth to some extent in the near future.

Final thoughts
Whole Foods had a mixed first quarter, as its sales and earnings rose but missed expectations. The company now wants to cater to middle-end consumers, and as such is reducing its prices on numerous food items. This strategy will work, as consumer spending in the US is still low and shoppers are looking for more discounted items.

Whole Foods has a massive plan of expanding, which shows that the company is confident about its future growth prospects. However, as the economy is still in recovery phase, the company has lowered its earnings guidance for this year. Taking all this into account, I will remain neutral on Whole Foods at this point in time.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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