Safeway Stores Inc., the world's largest supermarket chain, is waging war against shrinking sales and their customers' swelling appetites for fast food away from home.

Competition with fast-food restaurants is only one of the problems faced by the chain, particularly in the first quarter, Safeway Chairman William S. Mitchell said today at the company's annual stockholders' meeting.

After sales failed to keep pace with inflation during the first quarter, the company investigated each of its 29 divisions to determine which items were selling, what they were doing wrong, and what appealed to customers, Mitchell said.

"Results were disappointing in that our sales increase over the same fiscal quarter in 1978 was only 7.6 percent and earnings per share were 88 cents, down from 97 cents in the prior year," Mitchell said.

"Sales are the lifeblood of any retailer," Mitchell continued, "and we need a stronger sales increase to make any kind of creditable showing on the bottom line."

Mitchell said, however, that sales have improved somewhat during the first four weeks of the second quarter. Sales compared to the same period last year increased 10 per cent while earnings were 48 cents a share compared to 44 cents in 1978, Mitchell said.

"While this is an improvement over the first quarter, it doesn't mean we are out of the woods," Mitchell added. After the meeting, Mitchell announced his retirement as chairman after 43 years with the company.

Mitchell said after his address to the stockholders that he does not know all the reasons for the sales slump, but that the company is working on finding out why it occurred.

The Safeway chain, which operates about 2,450 stores in the United States, Canada, Britain, Australia and West Germany, will add 120 stores this year, Mitchell said. At least three or four new stores will be in the District , said regional manager Jack Kimball.

Most of the new stores will be "super stores," one-stop centers that sell groceries, some clothing, appliances and sometimes prescriptions. They will be a saver of energy during a gasoline crunch, Kimball said.

To keep pace with the fast food industry, Safeway introduced last February its line of "Great Escapes" frozen dinners, which Mitchell and Kimball said are selling very well.

"Our supply divisions are coming up with new ideas all the time," regarding fast food products, Kimball added.

Part of Safeway's fast food lure is the prepared food and delicatessens in the super stores, Mitchell said.

"Although we appeared to stumble slightly in the first quarter, in terms of sales and profits, our outlook for the remainder of 1979 and the years ahead is positive," Mitchell told the stockholders. "We are dedicated to building up our sales momentum and we are confident that satisfactory profits results will follow."

Mitchell said after the meeting that the company's board would choose his successor by years' end and that he would not speculate on who that person would be.

The stockholders also elected three new directors. They are Edward N. Henney, senior vice president for supply operations; Marjori S. Kinney, president of the Kinney Marketing Corp. and Peter A. Magowan, vice president and western regional manager for Safeway.