After a lackluster showing in 2018, it looks like Dick's Sporting Goods (NYSE:DKS) has turned some sort of corner. The largest chain with a sporting merchandise focus put up surprisingly strong numbers during the second quarter of 2019 and increased its outlook for the year -- all in spite of its peers not doing so hot. According to the U.S. Census Bureau, sales at the average sports and hobby brick-and-mortar store is down over 5% through July compared with a year ago.

Now, it's worth mentioning that part of Dick's Sporting Goods' relative strength is due to the fact that it's lapping that poor performance from 2018. Nevertheless, this chain has built up a strong presence in online retail and is finding ways to drive foot traffic to its expansive real estate. I don't think it's a strong buy, but it does present a compelling argument at least worth considering.

Previous lap times matter

In 2018, comparable-store sales (a measure of foot traffic and average customer ticket size at existing locations) shrank 3.2%, and total revenue fell 2%. The company still managed to increase earnings per share by 8% because of stock repurchases, but investors were overall unimpressed with the top-line weakness.

A baseball, mitt, and bat laying on a field.

Image source: Getty Images.

Some of that was likely due to the sports merchandiser deciding to eliminate assault rifles and high-capacity ammunition magazines, as well as electronics and select apparel it opted to replace with its own in-house developed labels. Now that those headwinds are in the past, Dick's most recent year-over-year results are showing some improvement. Comps grew 3.2% in the second quarter, its best rate since 2016. For some background, bear in mind that 2016 was a big year because key competitors like Sports Authority and Sport Chalet closed up shop. That foot traffic had to go somewhere, and thus the big surge for Dick's.

In addition to the big comps advance, second-quarter revenues grew 3.8%, online sales were up 21% and made up 12% of the grand total, and EPS grew 5% -- once again getting a boost from a generous share repurchase program. Pair that with Q1 results and Dick's is showing some signs of life through the first half of the year.

Metric

Six Months Ended Aug. 3, 2019

Six Months Ended Aug. 4, 2018

Change

Revenue

$4.18 billion

$4.09 billion

2%

Gross profit margin

29.7%

29.8%

(0.1 pp)

Income from operations

$231 million

$250 million

(8%)

Earnings per share

$1.85

$1.78

4%

Data source: Dick's Sporting Goods. Pp = percentage point. 

To buy or not to buy

It would appear that the decision to take a controversial stance on the firearms issue hasn't given Dick's a permanent black eye -- at least not yet -- and its new apparel lines and online store are going swimmingly. Doubling down on the internet, a couple of new order fulfillment centers were opened in New York and California, and a new delivery partnership was struck with FedEx. All good things, right?

Based on its positive quarter, management thought so and upped its forecast for full-year EPS to $3.30 to $3.45. At the midpoint of this guidance, the company is trading for 10.3 times expected earnings. Not bad, but price to free cash flow (basic profits after operating and capital expenditures, less noncash expenses like depreciation on real estate) is at 20.8. Not quite such a hot deal anymore on a free cash basis. The company also pays a 3.3% dividend yield.

It all adds up to a solid retail play, albeit one that isn't growing very fast, as driving foot traffic into existing stores is still the main catalyst for sales expansion here. But Dick's Sporting Goods is putting up a respectable performance this year that shows it's still relevant in the age of digital retail. With shares trading at a reasonable -- if not slightly spendy -- valuation and a decent investor payday to boot, it's worth putting on your radar if you're an income investor.