Target is rewiring a store-led fulfilment network to fund more than $2 billion of experience and growth investment while aiming to restore pre-pandemic margins.
In Brief
- Store capital and operating spend is being treated as network investment, with nearly all sales fulfilled through the store estate.
- Digital growth is being pushed through same-day and next-day services that rely on node specialisation and leaner parcel fulfilment.
- Inventory risk is being shifted upstream through owned brands, faster lead times and marketplace models to support heavy assortment change.
A Store Network Recast as The Primary Supply Chain Asset
Target has made an explicit strategic break: stores are no longer just selling locations, they are the core of the fulfilment network. Management states that more than 97% of sales are fulfilled through nearly 2,000 stores, and that store investment is supply chain investment because of the role those locations play.
This is backed by a sizeable capital and operating commitment. Capital expenditure will rise to about $5 billion in 2026, up more than $1 billion on the prior year, with the bulk directed to stores. More than 30 new stores, mostly full-sized, and over 130 full-store remodels are planned. On top of this, Target will reinvest about $1 billion into the profit and loss account, including hundreds of millions of dollars for store labour and training and its most ambitious in-store merchandising transitions in more than a decade.
In parallel, more than $1 billion of 2026 capex is earmarked for food and beverage, more than double recent years. Since 2019, food and beverage sales have grown by more than $9 billion, at an average annual rate above 8%, and the category now earns more physical and supply chain space. Food is framed as a traffic engine that opens the box for shoppers to explore the rest of the store, even if margins are lower.
At network level, this model means store formats, back-of-house layouts, cold chain capacity and labour standards are being redesigned with fulfilment in mind. The decision to concentrate capital in stores signals that any optimisation of distribution centres, transport and digital services must align to this store-centric architecture.
How The Store-centric Fulfilment Model Operates
Operationally, Target runs a hub-and-spoke system where supply chain facilities replenish stores and stores fulfil both in-person and digital demand. Same-day services drove more than $14 billion in sales last year and now account for about two-thirds of digital volume. The remaining third is delivered as parcels, with most of that already enabled for next-day fulfilment in existing markets.
Digital fulfilment is being refined after an initial period of rapid growth. Management notes that during earlier expansion, pack stations were added into stores everywhere. The current phase simplifies this. In Chicago, some stores are designated to specialise in fulfilment for the market while others opt out. This node specialisation is described as a major unlock for cost-efficient next-day delivery by concentrating scale and operations in a limited number of store nodes. The Chicago model has already been expanded to more markets.
In operational terms, this kind of shift typically requires:
- clear designation of fulfilment and non-fulfilment stores by catchment;
- differentiated labour and process standards at fulfilment nodes, particularly for picking, staging and carrier handoff;
- revised allocation logic in planning systems to account for store roles and service thresholds; and
- harmonised master data and packaging rules to support both same-day and next-day promises.
Store labour is being increased deliberately. Where payroll was tested, management reports better experience metrics, sales lifts in categories such as apparel and home, gross margin expansion and growth in sales that originate in stores. For digital, a key data point is that shoppers who use Drive Up for the first time increase total spend by 20% to 30%, with in-store spending also rising. This underpins the view that same-day click-and-collect services expand the wallet rather than cannibalise store sales.
On the parcel side, efficiency gains in so-called brown box fulfilment are identified as one of the sources funding the broader investment programme. At a supply chain level, that usually implies improvements in pick productivity, packaging, sortation and transport procurement, as well as more accurate inventory placement across nodes to support next-day service at lower cost.
Compared with peers that are rebalancing towards store-based fulfilment, such as Walmart, Kroger and Tesco, Target is pushing the logic further by running almost the entire business through the stores-as-hubs model and by explicitly stating that digital growth is healthy for the profit and loss account. That stance depends on the productivity and node specialisation work landing as planned.
Why Inventory Risk Is Moving Upstream
Target is committing to more assortment change and category innovation than at any point in the past decade, which raises the question of where inventory risk sits. The answer is increasingly upstream in sourcing, design and third-party partnerships.
In home categories, more than three-quarters of decorative accessories were overhauled by June, with more than 75% of top-of-bed and over 80% of kids home due to be refreshed by fall. In food, last year newness drove $2 billion in sales, and the company plans to double the number of unique food items over the next three years, responding to the 40% of shoppers who say they are looking for something new in food.
At the same time, inventory ownership is being constrained where possible. The Target Plus marketplace, which grew more than 30% last year with acceleration expected, is used to expand style and assortment breadth in categories such as furniture, mattresses and rugs while limiting inventory liability. Marketplace flows transfer a portion of working capital, storage and markdown exposure to third parties, but still rely on Target’s digital front-end and often its physical network.
Owned brands are another upstream risk and margin lever. The portfolio now generates about $30 billion in sales and delivers superior gross margin rates versus national brands. Good & Gather is on track to become the first $4 billion owned food brand. Shorter cycle times in apparel and accessories also reduce forecast risk. In some cases, design-to-store lead times have been cut from over a year to weeks. Women’s swim, where Target holds the number one market share position, is presented as an example of using speed-to-market processes to match product availability with emerging trends and full-price demand.
In operational terms, this means sourcing governance, vendor collaboration and design calendars are being restructured to support faster cycle times and more frequent, smaller bets. It also means network capacity must be flexible enough to handle more frequent assortment transitions and display changes without overwhelming stores or distribution centres.
Funding a $2 Billion Reinvestment Under Cost and Risk Pressure
Target is planning more than $2 billion of incremental investment in 2026: an extra $1 billion in capital expenditure and another $1 billion reinvested into operating expenses. Within the P&L, this includes store labour, training, store-originated merchandising transitions, brand marketing and technology such as AI.
The funding logic relies on several elements that matter directly for operations:
- about $0.5 billion in one-time tariff and inventory adjustment costs in 2025 that will not repeat in 2026;
- about $200 million in savings from last year’s headquarters and field headcount reductions; and
- ongoing productivity improvements in supply chain and digital fulfilment costs.
Tariffs and shrink are material constraints. Last year, gross margin was down about 30 basis points versus the prior year, with significant incremental tariff costs and inventory actions, including markdowns and write-downs. Management positions those as nonrecurring, but also acknowledges that tariff paths remain uncertain. The stated intent is to stay focused on value, using sourcing changes, cost engineering and internal absorption where possible.
Shrink moved in the opposite direction and is now a tailwind. Lower inventory shrink delivered around 90 basis points of gross margin benefit and brought shrink rates back to pre-pandemic levels. That improvement has a double effect: recovered margin and better inventory accuracy, both critical to reliable fulfilment.
Supply chain and digital fulfilment productivity also contributed favourably to gross margin, particularly in the fourth quarter of 2025. These gains, and further efficiency in parcel fulfilment, are expected to help offset the ongoing step-up in operating spend.
Target guides to around 2% net sales growth in 2026, with a small positive comparable sales figure. New stores, revenue from the Roundel media business and third-party sellers on Target Plus are together expected to add more than 1 percentage point of that growth. Operating margin is expected to improve by roughly 20 basis points from the prior year’s adjusted rate of 4.6%, and earnings per share are guided to $7.50 to $8.50, with the midpoint representing 5% to 6% growth.
The company states a clear intent to return operating margin rates to pre-pandemic levels over the next few years and sees room for operating margin dollars to grow faster than sales until that optimal rate is reached. This ambition is contingent on the store-centric network, digital fulfilment design, assortment risk management and cost productivity all progressing together.
What The New Operating Model Now Enables and Constrains
Target’s rewired operating model treats stores as the primary nodes in a national network that serves both physical and digital demand, with category investments and assortment agility tuned to what those nodes can execute. The combination of designated fulfilment stores, faster design-to-shelf cycles, marketplace expansion, owned brands and intensified food, wellness, beauty and baby investments is designed to drive trips, increase share of basket and support higher-margin revenue streams such as media and marketplace fees.
The model enables tighter integration between network design, sourcing and demand shaping, but it also locks the company into sustained capital and operating spend on store infrastructure, labour and digital fulfilment optimisation. Tariff volatility, the complexity of widespread assortment change and the execution load on stores remain real constraints. The strategic bet is that a store-centric network, tuned for same-day and next-day service and supported by upstream risk management, can carry that load while delivering the margin recovery and growth the company has signalled to investors.
