Grocery chain Safeway (NYSE:SWY) will ring up first-quarter 2007 financial results on Thursday.

What analysts say:

  • Buy, sell, or waffle? It looks like all the checkout lanes are busy for the supermarket giant, with six analysts saying buy, six saying hold, and five on the express line with a sell.
  • Revenue. Revenue is expected to grow by 4.5% to $9.3 billion. That's a lot of gefilte fish.
  • Earnings. Profits, however, are expected to surge even more -- by nearly 19%, to $0.38 per share.

What management says:
Safeway is trying to transform itself from simply a grocery store chain into something more akin to a destination spot. It's upgrading its stores to the new Lifestyle format featuring expanded bakeries, produce sections that look like outdoor markets, and florist boutiques that would offer a shopping experience similar to the one found at Whole Foods (NASDAQ:WFMI). So far, it seems to be paying off. CEO Steve Burd says, "By delivering superior perishables, completing more Lifestyle stores, making investments in price and promotion, controlling our costs, and delivering outstanding service, we are able to bring more to the table for our customers and our shareholders."

What management does:
All those improvements enable Safeway to reduce SG&A expenses and increase operating and net margins. With even the likes of competitor Kroger (NYSE:KR) making grocery shopping an event rather than a chore, the ability to differentiate will continue to be a strong driver for future growth, and more cost-cutting will help shareholders. Both Safeway and Kroger have seen their shares appreciate more than 50% over the past year (while Whole Foods has fallen by about half that amount), giving the impression that perhaps grocery chains are the next sexy growth industry.

Margin

12/05

03/06

06/06

09/06

12/06

Gross

28.9%

28.9%

28.9%

28.8%

28.8%

Operating

3.7%

3.7%

3.8%

3.9%

4.3%

Net

1.5%

1.5%

1.7%

1.9%

2.2%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Safeway's management has tried to temper the enthusiasm underlying its stock's advance by pointing out that full-year per-share earnings growth will be on the flat side. But as the consolidation wave continues -- with private equity perhaps eying Kroger or SUPERVALU (NYSE:SVU), and A&P (NYSE:GAP) buying Pathmark (NASDAQ:PTMK) -- the realization that these chains throw off lots of cash and have valuable real estate makes them an attractive investment.

With Wal-Mart (NYSE:WMT) still struggling to rekindle the public's love affair with it, chains like Safeway can quickly become the darling of both investors and shoppers alike.

Safeway has earned a two-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock-rating service by joining today. It's free!

Whole Foods is a recommendation of Motley Fool Stock Advisor. Wal-Mart is a recommendation of Motley Fool Inside Value. A 30-day guest pass lets you tap the watermelons  on all the market-beating recommendations of both investment services.

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Fool contributor Rich Duprey owns shares of Wal-Mart but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.