After Dick's Sporting Goods (NYSE:DKS) reported its fiscal second-quarter results on Wednesday morning, its shares fell by as much as 10% before recovering to end the day down just over 2%. America's largest sporting goods chain missed total sales expectations while beating its bottom-line targets. Among other issues, the chain has been making some changes to its product mix, which has resulted in a tough year for shareholders, but the stock now looks like a bargain at current prices.

Second-quarter numbers

Metric

Fiscal Q2 2018

Fiscal Q2 2017

YoY % Change

Revenue

$2.18 billion

$2.16 billion

0.9%

Cost of goods sold

$1.52 billion

$1.52 billion

0%

Operating expenses

$497 million

$478 million

4%

Earnings per share

$1.20

$1.03

16.5%

Same-store sales

(4.0%)

0.1%

N/A

Chart by author. Data source: Dick's Sporting Goods quarterly earnings report. YOY = year over year.

Though the chain's bottom line advanced in the quarter, which ended Aug. 4, investors chose to focus on its lack of sales growth. After several years in which competitors' bankruptcies provided it with extra tailwinds, 2018 has been much more muted for Dick's, which slowed its pace of new store openings. Only five new locations opened last quarter, bringing the Dick's Sporting Goods store count to 729, plus 94 Golf Galaxy and 35 Field and Stream stores.

The company's emphasis has shifted toward building out its online capabilities. Total e-commerce sales rose 12% year over year, and e-commerce represented 11% of total revenue. But including the brick-and-mortar segment, same-store sales fell 4%.

A closeup shot of a baseball, baseball glove, and bat.

Image source: Getty Images.

The company has also made some product mix changes this year that are proving to be a drag on sales. Specifically, it scaled back its hunting and electronics departments, with moves that notably included a decision to stop selling semi-automatic modern sporting rifles and high-capacity magazines and to raise the minimum age for purchasing a firearm in its stores from 18 to 21. In addition, key supplier Under Armour (NYSE:UA)(NYSE:UAA) has been expanding its distribution, which has hurt sales at Dick's. CEO Edward Stack had this to say about the impacts of those changes.

I'd like to point out that the operating margin of the hunt and electronics categories are approximately 1,700 basis points lower than the company average. Therefore, while our decisions regarding these slow-growth, low-margin categories are impacting sales, they have limited impact on our ability to generate earnings.

It's all about growing profits

While the sales picture isn't looking good in 2018, Dick's management thinks it will improve in 2019. The company is building out its own line of athletic apparel and merchandise, and focusing on other higher-margin categories, but it will take some time for those moves to improve the overall business. Dick's is also working with beleaguered Under Armour to develop a solution in which sales are good for both parties, but it could be a while before they sort that relationship out. 

The other good news is that, despite another same-store sales decline, Dick's Sporting Goods is still very profitable. While competition in the sports apparel and equipment industry remains stiff, with online-only options going strong and product partners like Under Armour opting to grow via their own channels, Dick's is in firm control of the full-line sporting goods-only market. Management reports that sales of its private brands and apparel are growing by double-digit percentages, so the company's pivot to grow the top line more profitably looks like it could pay off soon.

In line with that theory, management raised its profit outlook for the fiscal year once again. Earnings are now expected to be in the $3.02 to $3.20 range, up from the previous $2.92 to $3.12 guidance. Using the midpoint of that new guidance range, Dick's shares are valued at just 12 times earnings. Factor in a 2.5% dividend, as well as a share repurchase program authorized to spend up to $575 million through the next couple of years, and Dick's Sporting Goods stock looks like a real bargain right now.

Nicholas Rossolillo and his clients own shares of Dick's Sporting Goods. The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool has a disclosure policy.