Joel Greenblatt is the Managing Principal and Co-Chief Investment Officer of Gotham Asset Management, which manages roughly $15 billion.

Gotham owns several deep-value plays, as well as high-yield dividend stocks.

For example, Staples (SPLS) is one of the top 20 dividend stocks in Joel Greenblatt’s portfolio.

Staples is not on the list of Dividend Achievers, a group of 271 stocks with 10+ years of consecutive dividend increases.

Staples doesn’t make the list, because the company has frozen its quarterly dividend at $0.12 per share, since 2013.

This is because Staples is struggling to keep up with the changes taking place in the office supply industry.

The stock has lost nearly half its value in the past five years.

This article will discuss Staples’ current financial performance, and whether investors should consider following Joel Greenblatt into the stock.

Business Overview

Staples’ challenges can be attributed to three specific changes occurring in the office products industry.

First, consumers are using fewer office products, which has resulted in less demand for office supplies.

Second, is the evolving use of technology. Staples specializes in selling office products such as printers and fax machines, which are not needed as much in the Internet age.

Third, the retail industry more broadly is seeing a massive shift in consumer demand, from brick-and-mortar retail, to mobile.

In response, Staples is attempting to move beyond office supplies, by shifting its product category and channel sales mix.

(Click on image to enlarge)

Source: March 2017 Presentation, page 5

The company seeks to expand its online and delivery businesses to fuel its turnaround.

However, progress has been slow, because the core business continues to decline.

2016 was another bad year for Staples, following on a long-running trend.

The company’s annual sales have declined each year since 2012, when Staples posted revenue of $24.6 billion.

Last year, total sales declined 2.7% from 2015.

The North American retail business was once again the worst-performing segment for Staples.

Sales fell 7.1% in 2016, including a 5% decline in comparable-store sales, which measures performance at locations open at least one year.

Due to considerable expense incurred from the company’s restructuring, Staples swung to a net loss of $459 million in 2016, reversing a $462 million profit from the previous year.

The company was also hit with a $250 million termination fee after its merger with Office Depot (ODP) was blocked by regulators.

Growth Prospects

Staples is pinning its turnaround hopes on a plan called Staples 20/20. It is a multi-year plan, with the over-arching goal of maintaining profitability in its core retail business.

To do this, the company first intends to focus on mid-size business customers.

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Source: Q4 Earnings Presentation, page 5

The mid-market segment is a pocket of opportunity for the company, as business-to-business is one of the few remaining growth areas in the office supply industry.

To further its growth, Staples is investing in delivery as a growth catalyst. However, this has not gained traction as management had hoped.

Sales in Staples’ North American delivery business declined 1% last year. Growth in facilities supplies, computers, and break room supplies, was offset by declines in tablets, ink, toner, and office supplies.

Aside from expanding its reach among mid-sized customers, the bulk of the Staples 20/20 plan involves slimming down.

Staples closed 48 stores last year, and has closed 358 stores in North America since 2011. It plans to close another 70 stores in North America in 2017.

(Click on image to enlarge)

Source: March 2017 Presentation, page 17

Staples plans to focus almost entirely on North America going forward, after selling its U.K. retail business in 2016.

The company envisions generating 95% of future revenue from North America.

Not surprisingly, Staples is also cutting costs.

(Click on image to enlarge)

Source: Q4 Earnings Presentation, page 7

Staples expects to generate $300 million in annual pre-tax cost savings each year through 2018.

Competitive Advantages & Recession Performance

One of the reasons why Staples has been unable to slow its decline, is because it does not have many competitive advantages.

Retail is a highly competitive industry, with few barriers to entry. Online retailers like Amazon.com (AMZN) and others had little trouble taking market share from brick-and-mortar retailers like Staples.

The same products found at Staples can be found on Amazon, often for lower prices, and with the added convenience of at-home shopping and delivery.

Staples has a well-known brand, but in retail, consumers are typically motivated by price and convenience, more than brand loyalty.

Making matters more difficult for the company, is that office supplies are not a defensive industry.

When the economy sputters, office supplies are one of the quickest items cut from corporate budgets.

Staples’ earnings-per-share during the Great Recession are shown below:

• 2007 earnings-per-share of $1.38
• 2008 earnings-per-share of $1.29
• 2009 earnings-per-share of $1.10
• 2010 earnings-per-share of $1.21
• 2011 earnings-per-share of $1.37

As you can see, Staples’ earnings-per-share fell significantly during the Great Recession, although the company rebounded nicely once the recession ended.

Valuation & Expected Total Returns

It is difficult to value Staples, because the company incurred a sizable net loss last year.

However, excluding non-recurring expenses, Staples generated adjusted earnings-per-share of $0.90.

Based on its current share price, Staples stock trades for a price-to-earnings ratio of just 9.7, which is very low.

Consider that the S&P 500 Index has an average price-to-earnings ratio of 26.

Of course, cheap stocks are often cheap for a reason. In this case, there are very real doubts about Staples’ long-term future.

Staples forecasts adjusted earnings-per-share of $0.15-$0.18 for the first quarter of 2017, compared with adjusted earnings-per-share of $0.17 per share in the same quarter last year.

As a result, it appears Staples’ turnaround efforts will need more time to bear fruit.

If Staples does not turn itself around, it is difficult to see the market rewarding the stock with a higher valuation.

Future returns will be comprised of earnings growth and dividends. A potential—albeit optimistic—projection of future returns could be as follows:

• 1%-3% revenue growth
• 1% earnings growth from cost cuts
• 5.5% dividend yield

Total annualized returns could reach 7.5%-9.5% per year, if the company can return to positive revenue and earnings growth, and its dividend remains intact.

However, these are big ‘ifs’.

Staples’ turnaround is not guaranteed to be a success, which means the stock could continue to lose value moving forward, even with such a high dividend yield.

Final Thoughts

Staples is taking some good steps toward turning itself around, including focusing on delivery and its mobile platform.

However, these efforts have not worked so far. It is understandable why the stock continues to fall.

Joel Greenblatt has a track record of buying deeply discounted, turnaround stocks, particularly in the retail industry.

Investors should know that Staples is a high-risk stock pick. Even its high dividend yield may not justify buying the stock.