Pier 1 Imports (NYSE:PIR), known for its eclectic range of home furnishings and decorative items, recently announced the closure of 450 of its stores in order to right-size its business in the face of decreasing revenues. The company faces challenges from increasing competition from discount stores and e-commerce. In its recent fiscal third quarter (ended November 30) earnings report, the company announced double-digit declines in both comparable sales and net sales.

While the home goods store works to close hundreds of stores, other retailers in the space could benefit from the closures. Research company Telsey Advisory Group wrote that Target (NYSE:TGT) and The TJX Company's (NYSE:TJX) HomeGoods stores are potential beneficiaries, as the two retailers have a high percentage of stores within three miles of a Pier 1 location. This means potential market share gains could boost the sales of Target and HomeGoods. Both retailers sell unique, well-priced items for home, as Pier 1 is known for.

A couple shops for home goods.

Image source: Getty Images.

Target stands to gain market share

In mid-January, Target announced holiday sales that were below expectations, with comparable sales in the November/December period increasing 1.4%. The weakness was due to the toy and electronics categories. Some analysts didn't see this announcement signaling anything wrong with the company's strategy, citing that this holiday season had six fewer shopping days than last year's; Target has had an impressive eight straight quarters of comparable sales growth of 3% or more.

Now Target stands to gain share in its home department from Pier 1 store closures, as 35% of Target stores are within three miles of a Pier 1. The big-box store continues to have success with its home category, with low single-digit comp growth in the latest fiscal third quarter (ended November 2) off very strong growth a year earlier. Much of this success results from the retailer's private brand strategy. From 2016 to 2018, Target launched 20 of its own brands, concentrated in the apparel and home divisions.

If Target receives additional customer traffic from people who used to shop Pier 1 for furnishings and decor, not only will Target's home department get a boost, but other categories could see additional sales. One of Target's strategies has been to draw traffic into stores with exclusive products (often collaborations with in-demand designers like Marimekko and Lilly Pulitzer), then getting them to buy from other departments and view the store as a convenient, one-stop shop. (For example, 75% of Target customers who visit with the intent to buy a non-food item also up buying at least one food product.)

The company trades at 17 times forward earnings (below the S&P's 19 times and the consumer discretionary sector's 25 times), and is expected to have a 9% increase in earnings in 2021. Given Target's successful strategy with private-label brands and impressive growth, shares are worth buying for those looking for exposure to the retail space.

TJX's HomeGoods and Homesense could also benefit

TJX is the parent company of popular home furnishings retailers HomeGoods and Homesense, which are known for affordable, eclectic products. These specialty stores have an opportunity to gain market share from the Pier 1 closures, helping boost future sales growth. 59% of HomeGoods stores are within three miles of a Pier 1 store, according to Telsey Advisory Group.

In TJX's most recent earnings report (for the period ending September 30, 2019), the company announced a consolidated comparable sales increase of 4% "over a very strong 7% increase" in the prior year. The HomeGoods division's comparable sales increased 1% year over year, over a 7% increase last year.

CFO Scott Goldenberg commented that "customers love HomeGoods, and we are very confident in its enduring appeal for consumers and the fundamental strength of this division."

The additional business from former Pier 1 customers will further boost the success of both HomeGoods and complementary Homesense stores, which launched in the U.S. in 2017. The company operated 807 HomeGoods stores and 32 Homesense stores in the U.S. as of the end of the third quarter of fiscal 2020. This is up from its 526 HomeGoods stores in January 2017. Executives see potential in the long term for about 1,000 HomeGoods and 400 Homesense stores in the U.S.

Parent company TJX sports a valuation of 21 times forward earnings, below the consumer discretionary sector's 25 times forward earnings. Analysts project earnings growth of 9% on revenue growth of 6% in fiscal 2021. TJX has cornered the market for quality merchandise and coveted brands at discount prices, and now has potential market share gains in home furnishings. The shares look interesting for an investor looking to invest in specialty discount retail.