Best Buy (NYSE: BBY) has been one of the toughest retailers to own over the past few years — but investors who bought BBY when there was “blood in the streets” are still up over 100%.

#-ad_banner-#The key issue for Best Buy is that it’s quickly losing market share to Amazon.com (Nasdaq: AMZN). This is not unlike the majority of brick-and-mortar retailers in the U.S. 

For instance, consider office-supply giant Staples (Nasdaq: SPLS), which, like Best Buy, is down about 25% this year. Staples’ problems have been twofold: The rise of e-commerce competition and the lingering economic downturn have both weighed on its sales. 

Staples missed fiscal first-quarter earnings expectations by 14%, which drove its stock down further. But after being beaten up for the past couple of years, Staples could be a turnaround story trading in deep value territory. 

Shares of Best Buy went on a tear last year after the company announced a number of initiatives to transform it into an omni-channel (retail and online) leader. Trouble is, Best Buy has yet to live up to its turnaround promise and has continued to lack a strong e-commerce presence. As a result, Best Buy’s stock crumbled at the end of 2013. 

BBY data by YCharts

The difference between Staples and Best Buy is that we are starting to see the early signs of improvement at Staples — not just hearing about plans for improvement. 

The rise of e-commerce has really put pressure on the brick-and-mortar retailers. However, unlike Best Buy, Staples has a robust online presence. The third largest e-commerce company by revenue (behind only Amazon.com (Nasdaq: AMZN) and Apple (Nasdaq: AAPL)), Staples had over $10 billion in online sales last year, accounting for around 45% of its total revenue. In comparison, Best Buy’s Web sales were roughly $3 billion, just under 8% of its total revenue. 

Last year, Staples decided to accelerate its plan to expand its e-commerce presence. It will be opening a development center later this year to help focus on boosting personalization to increase conversions in online sales. Staples also revamped its website last year, its largest Web makeover in nearly a decade, and increased the number of products it offered online from 100,000 to 500,000.

Staples’ cost-reduction program — focusing on improving its supply chain, downsizing its workforce and accelerating its store closure plan — is already producing results. Staples closed 16 stores during the first quarter and expects to close 80 more next quarter. The company expects to save $250 million in costs this year and $500 million annually by 2015.

Staples expects to generate free cash flow of $0.90 a share this year, which would amount to a robust free cash flow yield of 8%. For comparison, Wal-Mart’s (NYSE: WMT) free cash flow yield is only 4%. Staples also has a strong balance sheet, with a debt-to-equity ratio of only 20%, well below the industry average of close to 40%. 

Staples’ dividend also makes SPLS an income story. It has increased its annual dividend payment in each of the past four years. Its dividend yield is an enticing 4.4%, which compares favorably with Best Buy’s 2.4% yield and the industry average of 1.8%. 

As far as valuation goes, the specialty retailer industry trades at an average price-to-earnings (P/E) ratio of 16. Staples is trading at a P/E ratio of just over 13. Once investors start to see signs that Staples’ sales and margins are improving, the stock should be rewarded with higher multiples. 

Staples should also get a boost from a rebounding U.S. economy, which should increase the demand for office products. In the meantime, Staples generates around 17% of revenues from outside of North America, which should help offset the weakness in U.S. office supply sales. 

Risks to Consider: Staples might fail to see a rebound in the demand for office supplies, due to increasing competition and the shift toward digital. This could lead Staples to rely more on lower-margin non-office supply products, which would lead to further margin compression and reduced profits. 

Action to Take –> Staples is a long-term turnaround play. Once the business shows signs of stabilizing, SPLS should trade more in line with its specialty retail peers. My target price of $15.50 represents 40% upside and is based on the assumption that Staples should trade at a P/E of 16 on expected fiscal 2016 earnings of $0.97 a share. 

High-yielding stocks that throw off plenty of cash for dividend growth are the foundation for Amy Calistri’s “Daily Paycheck” investing strategy. To see how she’s used this strategy to earn more than $60,000 in dividend checks since 2010, follow this link.