Target is tightening a store-led operating model that pushes more fulfillment through physical sites while holding inventory risk upstream and chasing demand late.
In Brief
- Inventory risk is being reset upstream, with planning deliberately biased to chase demand rather than carry broad surplus.
- Stores are being engineered as primary fulfillment hubs, with remodels, labor, and tools aligned to higher digital and same-day volumes.
- New upstream capacity and AI-enabled forecasting act as relief valves for heavy category resets and rising flow complexity.
Why Inventory Risk Moved Upstream
Target has made its inventory posture explicit. The chief executive is clear that the company prefers to be in a position where it is ‘chasing inventory’ when sales overperform rather than cancelling orders or pushing markdowns on excess stock. That is a structural choice about where inventory risk sits in the system.
This stance runs through current planning for 2026 and beyond. Leaders describe a ‘slightly cautious’ planning approach, with an explicit willingness to chase into additional inventory on top items when demand proves stronger than expected. The numbers show the effect: inventory turns are more than 10 percent higher year-on-year while top-item availability has improved.
In operational terms, this kind of shift typically requires tighter SKU policy, clearer service thresholds for top items, and a planning cadence that locks less volume far in advance. Instead of building broad inventory early, the business concentrates commitments on priority assortments that represent about half of current sales and are expected to drive roughly three-quarters of growth. That reduces the breadth of exposure while preserving depth where it matters most.
The risk trade-off is direct. Conservatism in initial buys lowers markdown exposure and protects gross margin but increases reliance on late-stage replenishment agility, supplier responsiveness, and upstream buffers. Target is trying to manage that trade-off by pairing cautious buy plans with new upstream capacity and better forecasting.
How Stores Became The Primary Fulfillment System
The operating model is now anchored in what internal leaders describe as a ‘stores-as-hubs fulfillment model’. More than 95 percent of sales are fulfilled from stores. That figure folds in in-store purchases, pickup, same-day delivery and other digital orders picked from store inventory.
Store investment is therefore supply chain investment. Remodels are being prioritised where the operational benefit and financial returns are strongest, with more than 100 projects underway and an enhanced focus on food and other frequency-driving categories. New stores are larger, typically 125,000 to 150,000 square feet, with layouts and back-room space designed to handle higher food throughput and expanded fulfillment activity.
Store labour and tooling are being reshaped around this model. Over 300,000 team members have received guest experience training, and handheld devices such as MyDevice are being upgraded, alongside performance dashboards that simplify workflows and improve visibility. Payroll is being rebalanced to put hours where workload is highest, particularly evenings and weekends, to reduce friction in replenishment and service. Leaders report that many store experience metrics, including wait times and product availability, reached three-year highs in the first quarter, even as digital demand grew.
At network level, this is implemented through:
- Back-room and staging design that can handle both shelf replenishment and order picking without gridlock.
- Workload planning that links digital order waves, truck arrivals, and shelf-labour windows.
- Simple, standardised merchandising and execution routines so more than 2,000 stores behave consistently under higher fulfilment load.
The constraint is visible in high-frequency categories. Despite progress, product findability and in-stock availability remain the biggest friction points in food and at critical times such as evenings and weekends. This underlines the execution intensity required when the vast majority of fulfilment load sits on stores.
Upstream Relief Valves: Receive Centres and Food DCs
To support a cautious inventory stance and store-centric fulfilment, Target is adding upstream capacity. Two facilities stand out: a new receive centre in Houston and a new food distribution centre in Colorado.
The Houston receive centre is expected to process around 25 million cartons annually. Its role is to hold more long lead-time import seasonal inventory upstream and release it closer to the time of need. This acts as a shock absorber between variable demand and long supply lines, and allows stores and downstream DCs to operate with leaner safety stock while still being able to chase into upside demand.
The Colorado food DC is designed to improve in-stocks and freshness in that region, addressing known weaknesses in food availability. Leaders link the facility directly to step-changes in top-item availability in food, essentials and beauty. Together, these facilities expand throughput and provide geographic risk diversification, in line with a stated focus on reliability, speed and cost efficiency across the network.
Benchmark peers are making similar upstream moves, but often in more automated, DC-led patterns. Walmart reports that over 60 percent of US stores now receive freight from automated DCs and that about half of US e-commerce fulfilment centre volume is automated. Tesco is building semi-automated fresh facilities like Aylesford to serve both large stores and online from the same hub. Target’s configuration remains more store-centric, with limited detail so far on automation levels in new facilities.
Managing Assortment Overhaul Through a Store-led Network
The current strategy implies unusually high SKU churn in several large categories. In center-store grocery, Target is about to execute its largest transition in over a decade, resetting nearly half of its assortment and accelerating the pace of newness by nearly 50 percent. This includes removing all certified synthetic colours from its cereal assortment.
In home, about three-quarters of decorative accessories will change out this quarter, with similar transitions to follow in kids’ home and bedding and further home categories such as kitchen and storage in 2027. Wellness will see about 40 percent of the assortment refreshed this year, with around 1,500 new items already added, delivering double-digit sales growth and doubling comp growth rates relative to the prior quarter.
Food itself is a focus area, with 3,000 new items added in the first quarter and sales from those items more than 50 percent higher than the prior assortment. Priority subcategories include protein, functional beverages and better-for-you snacking. Culturally driven limited-time collaborations in other categories have produced some of the strongest launch-week sales the company has seen, with associated operational spikes.
In operational terms, this level of newness typically requires:
- Strong master data governance to ensure new SKUs, vendors and pack formats flow correctly through systems.
- Tight allocation logic for launches and resets to avoid uneven in-stocks and stranded inventory.
- Clear exit strategies for legacy stock during cut-ins to prevent margin erosion.
- Cross-functional transition governance, so merchandising timelines and network capacity constraints are aligned.
Leaders say they are ‘carefully managing’ transitions and working to minimise disruption, particularly for the planned launch of Target Beauty Studio in more than 600 stores this fall. That concept requires coordinated reset logistics, labour planning, and inventory flow adjustments in a high-margin category.
Using AI and Top-item Focus To Contain Volatility
Target is attempting to manage the tension between high SKU churn and cautious inventory by concentrating on top items and applying AI to demand forecasting. The fastest availability improvements in the quarter were in these top items across food, essentials and beauty. This is consistent with a policy that emphasises depth on a defined set of products while allowing more experimentation and shorter lifecycles elsewhere.
AI tools are being used to improve demand forecasting, particularly in seasonal and high-frequency categories. Combined with the Houston receive centre, this allows more seasonal inventory to be held upstream and deployed closer to need, reducing the risk of either empty shelves or heavy markdowns in stores.
Peers are moving in related directions. Walmart uses AI to optimise lorry and van routing and to underpin inventory placement and slotting decisions across automated DCs and store-based fulfilment, while Tesco uses AI for store-specific range curation and retail-media targeting that blends demand sensing with stock triggers. Target’s disclosures centre more on forecasting and availability than on detailed AI deployment, but the direction is similar: using data to tighten forecast-execution loops.
Cost, Margin and The Labour–service Balance
All of this is taking place under cost pressure. Gross margin in the first quarter was 29 percent, about 80 basis points higher than a year ago. Leaders attribute this to productivity initiatives and leverage in the supply chain, growth in higher-margin revenue streams, and lower markdown rates, partly offset by higher product costs.
SG&A tells the other side of the story. The adjusted SG&A rate rose to 21.9 percent, with adjusted SG&A dollars up about 7 percent year-on-year. The company links this to investments in additional hours and training for field teams, higher incentives, capital project spending, higher marketing and general liability expense. Cost headwinds, including freight, are expected to be more challenging in the first half of the year and to moderate in the second.
This reinforces that the store-centric fulfilment model depends heavily on labour and in-store process discipline. Simplifying fulfilment to manage growing digital demand ‘without compromising the in-store experience’ is framed as a central priority. Investments in payroll and training are being treated as operational levers rather than purely as costs.
What This Operating Model Now Enables
Target is building around a clear operating logic: concentrate inventory risk and capacity upstream, run stores as the primary fulfilment system for more than 95 percent of sales, and use disciplined priority assortments and top-item focus to cope with demand volatility and SKU churn. Upstream facilities in Houston and Colorado, AI-enabled forecasting, and larger, food-forward store formats provide the relief valves needed for this configuration to work.
That model enables higher inventory turns with better top-item availability, supports multi-year category reinventions without overwhelming the network, and uses store capital expenditure as both commercial and logistics infrastructure. It also hardwires significant dependence on store execution quality, labour availability and the resilience of a store-led network to manage spikes, transitions and cost pressure.
