Investors were cautiously optimistic about Kroger's (NYSE:KR) fourth-quarter earnings report. The supermarket chain had been trailing key rivals like Walmart (NYSE:WMT) as it worked to transition into more of an omnichannel business. But its fourth-quarter results included its fastest growth rate in nearly two years.

Kroger's actual results built on that positive momentum by closing the performance gap with Walmart and other peers. The chain also affirmed an optimistic outlook for 2020.

Let's dive right in.

A grocery cart in an aisle.

Image source: Getty Images.

Encouraging sales trends

Kroger's growth rate is looking better than it did in early 2019. Sure, sales gains slowed to 2% from 2.5% in the third quarter. Yet the retailer fared better than Target over the holiday season. It also modestly outperformed Walmart, its biggest direct competitor. The retailer had been trailing these peers by wide margins through the first three quarters of 2019.

The broader 2% growth rate for 2019 was helped along by a 29% boost in the e-commerce channel and marked an acceleration from the 1.8% uptick Kroger achieved in 2018. "We are pleased with our 2019 results," CEO Rodney McMullen said in a press release, "and improving trends in our supermarket business."

Financial update

Kroger booked several one-time charges during the year that combined to push reported earnings down to $2.04 per share from $3.76 per share in 2018. Adjusting for these writedowns paints a more attractive picture of the business, though.

Adjusted operating profit ticked up to $3 billion on that basis from $2.9 billion a year earlier. Kroger's gross profit margin was steady and operating costs dipped slightly thanks to its cost-cutting initiatives. Overall, adjusted earnings per share rose 4% to $2.19.

The company made a few big financial moves, including paying down $1.1 billion of debt and returning roughly $1 billion to shareholders through dividends and stock buybacks. Free cash flow, a metric that management says best reflects the effectiveness of its rebound strategy, dipped to $1.7 billion from $1.8 billion thanks to extra spending on growth initiatives.

Looking ahead to 2020

Investors could find plenty to like about Kroger's latest 2020 outlook. Sales growth is projected to speed up for the second straight year as comps rise to at least 2.25%. Walmart, for context, is expecting to grow its U.S. business by at least 2.5% this year.

Kroger is forecasting roughly flat operating profit for the year as it continues pouring resources into building out its omnichannel selling platform. Free cash flow is set to rise, and executives say that boost confirms that they are using the right strategic framework to build positive long-term returns.

Investors should celebrate those improving finances and the modest growth acceleration over the past few years. But the missing ingredient for the consumer staples retailer's rebound remains market share growth. That achievement has eluded management for the past two fiscal years, but executives are hoping that they can end that streak in 2020. The best way to judge that success is to follow its comps in comparison to Walmart's grocery business.