How TGT (Target) Makes Money in 2026: A Deep-Dive With Income Statement

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Understanding how a retail giant like Target makes money is essential for investors and anyone interested in the business of retail. In this post, we break down Target's quarterly income statement (Q4 2025) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

Quick Target Overview

Target operates as a leading general merchandise retailer with over 1,900 stores across the U.S., offering everyday essentials, apparel, home goods, groceries, and beauty products through physical stores and digital channels. Revenue comes primarily from total sales revenue supplemented by advertising, non-merchandise, and other streams. The company focuses on omnichannel retail, combining in-store shopping with same-day services like Drive Up and Target Circle 360 subscriptions.

Revenue Breakdown

• Total Revenue (Q4 2025): $25.4B (-1.1% YoY)
  • Total Sales Revenue: $24.8B (97.5% of total)
  • Advertising Revenue: $0.241B (0.9% of total)
  • Growth is powered by strong advertising expansion (+44.3% YoY) and other revenue streams like non-merchandise ($0.158B, +26.4% YoY), offsetting softer core sales amid competitive retail pressures.

Target's core sales dominate, representing the vast majority of inflows from merchandise like groceries (a key category), apparel, and household items. Smaller but fast-growing segments like advertising—through Target's Roundel media network—and other non-merchandise revenue (e.g., gift cards, vendor income) provide diversification. The slight YoY revenue dip reflects broader retail challenges, including shifting consumer spending, but targeted growth in high-margin areas signals resilience.

Gross Profit and Margins

• Gross Profit: $6.633B (26.1% gross margin)
  • Cost of Revenue: $18.8B (+5.7% YoY)
  • Target maintains robust margins due to optimized supply chain efficiencies, private-label brands, and pricing discipline in a high-volume retail model.
• Most costs come from supply chain logistics, merchandise procurement, inventory markdowns, and distribution center operations.

The gross margin expansion highlights Target's ability to control cost of goods sold despite inflation pressures on freight and sourcing. Cost of revenue rose due to higher volumes in certain categories, but efficiencies in vendor negotiations and inventory management kept margins healthy at 26.1%, above industry averages for big-box retailers.

Operating Income and Expenses

• Operating Income: $1.381B (+18.2% YoY, 5.4% margin)
• Operating Expenses: $5.252B (-4.3% YoY)
  • R&D: N/A — Target invests minimally in traditional R&D, focusing instead on store and digital innovation.
  • SG&A: $5.252B (-4.3% YoY, 20.7% of revenue) — covers store operations, corporate overhead, marketing, and digital fulfillment costs
  • Target continues to control costs while maintaining efficiency through workforce optimization and technology-driven store operations.

Operating expenses declined YoY, driven by disciplined SG&A management amid flat-to-down revenue. This includes payroll efficiencies, reduced marketing spend relative to sales, and streamlined administrative functions. No separate R&D line reflects retail's emphasis on operational tech investments rather than pure research.

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Net Income

• Pre-Tax Income: $1.235B (+13.2% YoY, 4.9% margin)
• Income Tax: $0.264B (21.4% effective tax rate)
• Net Income: $0.971B (+13.7% YoY, 3.8% net margin)
• Target converts a significant portion of sales into profit due to scalability in its store network, high inventory turnover, and omnichannel synergies.

Other items impacted pre-tax income, including $32M in other income and $114M net interest expense. Net income growth outpaced revenue decline, showcasing profitability leverage from cost controls.

What Drives Target's Money Machine?

• Total Sales Revenue: 97.5%+ of revenue — Core engine from physical and digital merchandise sales across groceries, essentials, apparel, and home categories.
• Inventory Turnover: High-velocity model turns inventory ~8-9x annually, minimizing holding costs and enabling fresh assortments.
• Digital and Services Investment: Heavy focus on fulfillment tech, same-day delivery, and loyalty programs like Target Circle to boost basket size.
• Future growth areas: Advertising and subscriptions (e.g., Target Circle 360), though not yet dominant, show explosive growth potential.

Target's model thrives on volume-driven retail with loyalty-driven repeat visits. Advertising via Roundel targets brands reaching shoppers at purchase moments, while non-merchandise streams add high-margin layers.

Visualizing Target's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates.

• Most revenue flows into gross profit, with operating expenses (especially SG&A) taking the largest chunk.
• Even after significant supply chain costs, 3.8% of revenue drops to the bottom line.

The diagram illustrates the "funnel" effect: $25.4B revenue narrows through $18.8B cost of revenue to $6.633B gross profit, then SG&A trims it further to operating income. Interest and taxes finalize the net profit stream, highlighting retail's thin but scalable margins.

Key Takeaways

• Target's money comes overwhelmingly from total sales revenue
• High gross and net margins illustrate the power of Target's high-volume, efficient retail operations
• Heavy investment in digital fulfillment and advertising, balanced by efficiency in operating costs
• Ongoing growth is driven by omnichannel expansion and high-margin services

Target's Q4 2025 results demonstrate resilience: despite a revenue dip, profit growth via cost discipline positions it well for 2026 consumer recovery. The Sankey visualization underscores how sales fuel the model, with expenses tightly managed.

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FAQ About Target's Income Statement

1. What is the main source of Target's revenue in 2025?

Target generates over 97.5% of its revenue from total sales revenue. Advertising (0.9%) and other non-merchandise streams (0.6%) provide supplementary high-growth income.

2. How profitable is Target in Q4 2025?

Target reported net income of $0.971B in Q4 2025, with a net margin of approximately 3.8%, reflecting strong profitability driven by cost controls and gross margin expansion.

3. What are the largest expense categories for Target?

The biggest expenses on Target's income statement are operating expenses, particularly Sales, General & Administrative (SG&A) costs. SG&A investment reached $5.252B in Q4 2025, as Target prioritizes store operations, digital fulfillment, and marketing.

4. Why does Other Non-Merchandise operate at a loss?

N/A — Target's segments are not reported as loss-making; core sales cover operations, with advertising and other revenues accretive to margins.

5. How does Target's effective tax rate compare to previous years?

Target's effective tax rate in Q4 2025 was 21.4%, consistent with previous years. This moderate rate is primarily due to standard U.S. corporate tax structures and minimal international offsets.