Aren't iPod Touch packages transparent from the front?
I'm not doubting you, and this kind of thing certainly does happen, but I thought the transparent plastics would certainly allow you to see the cracked display. Unless perhaps there's something specific to Target in play here (such as the device being transferred from a secure cabinet directly to a bag) that i'm not aware of.
Anyway, sounds like a returned unit. As mentioned, bring it up with the store and ask for a replacement.