Like clockwork, Target (TGT 1.28%) delivered another rock-solid earnings report Wednesday morning.

In its third quarter, comparable sales jumped 12.7%, or a two-year comp of 36%. Performance was strong across the board, with store-based comps rising 9.7% and digital sales up 29%, easily outpacing peers like Amazon and Walmart in e-commerce growth. Comparable sales also grew by double-digit percentages in all five product categories, showing strong demand across the business.

Overall, net sales rose 13.2% to $25.3 billion, topping estimates at $24.8 billion. And adjusted earnings per share increased from $2.79 to $3.03, ahead of the consensus at $2.83.

Santa Claus and a dog sitting in a sleigh outside of a Target.

Image source: Target.

Target wasn't immune to the supply chain challenges impacting the global economy either, as margins compressed due to higher merchandise and freight costs, among other reasons. And that seems to explain why the stock price was down in pre-market trading.

Target's gross margin fell from 30.6% to 28%, and operating margin slipped from 8.5% to 7.8%. However, management still raised its guidance for Q4, calling for high-single-digit to low-double-digit percentage comparable sales growth, up from a previous forecast of high-single-digit growth. For the full year, it continues to expect an operating margin of at least 8%.

Turning on the share buybacks

What was most notable about the earnings report wasn't Target's strong execution. The third-quarter report continues a pattern of double-digit percentage sales growth and improvement in initiatives like same-day fulfillment services, expansion of its small-format stores, and partnerships with brands like Lego, Disney, and Apple.

What stood out is that management is now aggressively repurchasing its own stock. Target announced a $15 billion share buyback in August, and management wasted no time putting that to work. The company repurchased $2.2 billion worth of stock in Q3 at an average price of $246.80, retiring 8.8 million shares, or close to 2% of its outstanding shares.

In the past, management explained its plans to return excess cash to shareholders after investing in the business and funding its dividend, so investors should continue to reap the benefits of the share buyback program.

A clear bargain

Over the last few years, Target has proven itself as a best-in-class retailer. The company has a unique approach to multi-category retail, a sector with only a handful of competitors like Amazon, Walmart, and Costco. Unlike its peers, Target has cultivated a "cheap chic" image, partnering with designers and developing 10 owned brands that each generate at least $1 billion in annual sales.

The company has also eschewed the e-commerce marketplace model, instead focusing on first-party sales and store-based fulfillment. That has allowed it to consistently gain market share on peers like Amazon and Walmart that do offer marketplaces. And Target's store-based fulfillment strategy ensures that those sales bring in significantly higher margins as Target avoids the shipping costs necessary for most e-commerce businesses.

Finally, its small-format stores are a key component of its growth strategy and separate it from its closest peers, which only operate big-box stores or sell online. The small-format stores dovetail well with its store-based fulfillment and will help Target increase its customer base in high-density areas like underserved urban neighborhoods and college towns.

Target's aggressive share buybacks are a clear expression of management's confidence in its growth strategy and long-term cash flow, as well as its belief that the stock is undervalued. At a price-to-earnings ratio of just around 20, it's easy to see why.

Target share prices fell 4% in pre-market trading Wednesday following the earnings release, another sign that the company continues to be misunderstood. Though it's easy to ding the retail stock for declining margins, Target is doing what it must to ensure adequate inventory ahead of the holiday season, and it's sacrificing short-term profits for long-term market share gains -- a smart trade.

The company finished the quarter with inventory up $2.2 billion, or 18% from a year ago, putting it in a strong position heading into the peak shopping season.

Target is poised for a strong fourth quarter, yet analysts see earnings-per-share growth being flat next year at $13.05. Considering the company's momentum during the pandemic and its aggressive share buybacks, that looks like an easy target for the company to beat.