Safeway (NYSE:SWY) had missed earnings estimates in two of the past three quarters, so expectations were pretty low when it reported its third-quarter numbers on Thursday. When the grocer beat consensus estimates by $0.02, its stock jumped 5%.

The results were less than stellar, however. Total sales declined 7% from the year-ago quarter, to $9.5 billion. The decline was because of lower fuel prices and a 3% decrease in same-store sales (a figure that excludes fuel sales). The grocer registered earnings per share of $0.31, down from $0.46 in the year-ago quarter.

Safeway's sales numbers resulted from consumers trading down and price deflation in dairy, meat, and produce. Nevertheless, Safeway maintained its earnings guidance for 2009 at $1.70 to $1.90 per share.

Despite the guidance, Safeway is still in for some near-term pain, but it may have reached the worst part of this cycle. Consumers are still preferring to trade down to cheaper alternatives in categories across the board (a profitable trend in its own right). This combination has intensified competition in the grocery business and put pressure on prices.

Expectations investing
Even so, these negatives are well-known and already reflected in Safeway's shares. Its stock performance year to date has lagged that of several peers, and investors haven't bid up its shares, as shown in this table.

Company

YTD Return

 Forward P/E

Forward 5-Year EPS Growth

Costco (NASDAQ:COST)

13.6%

18.7

12%

Kroger (NYSE:KR)

-8.3%

11.3

9%

Safeway

-2.6%

11.8

8%

SUPERVALU (NYSE:SVU)

14.7%

7.9

8%

Wal-Mart Stores (NYSE:WMT)

-7.1%

13.1

12%

Whole Foods Market (NASDAQ:WFMI)

258.8%

30.8

15%

Sources: CAPS and Yahoo! Finance as of Oct. 15.

What's more, Safeway's third-quarter report and conference call had positives that investors could get comfortable with. For instance, management indicated that the competitive pressures have been easing in the fourth quarter and that there is already improved pricing for produce and dairy. More importantly, management sounded more upbeat on its prospects for the fourth quarter than for the third quarter.

Looking ahead, Safeway may have just started a new streak -- one where it beats earnings estimates in consecutive quarters. That would be the likely outcome with only a modest recovery in consumer spending, a little food price inflation, and fewer customers trading down.

With expectations still low, Safeway's stock is positioned to deliver solid gains in the year ahead.

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Costco and Whole Foods are Motley Fool Stock Advisor picks. Costco and Wal-Mart are Inside Value recommendations. The Fool owns shares of Costco. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rob Plaza does not own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.