Target Corp. on Tuesday said first-quarter earnings fell 7.5 percent, due in part to disappointing sales as customers pinched pennies and shied away from discretionary purchases such as apparel.

Gregg Steinhafel, who took on the mantle of chief executive officer this month, said the company would stay the course and emphasize the “pay less” portion of its “expect more, pay less” tag line.

Earnings fell to $602 million, or 74 cents a diluted share, from $651 million, or 75 cents, a year ago. Revenues for the three months ended May 3 increased 5.4 percent to $14.8 billion from $14.04 billion.

Earnings per share came in 3 cents ahead of the 71 cents analysts were expecting, but investors traded the company’s stock down 1.2 percent to $54.29.

“We are disappointed in our top-line growth,” said Steinhafel, on a conference call with analysts. “As gas and food prices continue to rise and [the] housing market slows, consumers are facing increased financial pressure and [are] reducing their spending, especially in discretionary categories.”

For Target, that means, among other things, weakness in apparel.

“I’d love to be able to tell you that there is a lot of exciting trends in apparel right now, but we’d settle for some positive same-store sales growth in any one of our apparel divisions,” Steinhafel told analysts.

There have been a few brighter spots in apparel, though. The Converse launch has been successful so far and performance activewear and intimate apparel have been doing “exceptionally well,” said the ceo.

With the imminent departure of Isaac Mizrahi, Target is focusing more than ever on its Go International initiative, which brings goods by designers such as Rogan Gregory into the chain for a limited time.

And Target is reacting to tepid consumer spending by doing some belt tightening of its own.

Selling, general and administrative expenses rose 6.2 percent during the quarter, slightly faster than revenues.

“The good news is they’ve been controlling expenses extremely well and they’re doing a good job with inventory management,” said Joseph Feldman, managing director and analyst at Telsey Advisory Group. Still, the company is struggling with the impression that it costs more to shop there.

This story first appeared in the May 21, 2008 issue of WWD. Subscribe Today.

“There’s still a perception in the market that the prices at Target are higher than at others, such as Wal-Mart, which, in fact, is not true,” he said. “The prices are effectively the same.”

If Target looks bad compared with Wal-Mart, which posted higher first-quarter earnings and sales last week, it looks good compared with other broadline apparel retailers.

“Target’s faring better than most — certainly better than any of the department stores or midpriced mass-tier stores,” said Todd Slater, equity analyst at Lazard Capital Markets. “Target is faring remarkably well in a consumer-led recession in the discretionary space.”

Slater said the biggest drag on consumer spending was higher oil prices. Crude oil topped $128 a barrel Tuesday.

Target also said it completed the sale of about half of its credit card receivables to J.P. Morgan Chase for $3.6 billion Monday.

That sale lessens the discounter’s exposure to the volatile world of consumer lending, but also partially cuts it off from a potential profit center.

At Target’s 1,613 stores, earnings before interest and taxes dipped 2.2 percent to $959 million on a 5 percent rise in sales to $14.3 billion. Comparable-store sales slid 0.7 percent.

In the credit card business, profits before interest and taxes dropped 9.6 percent to $199 million, even as revenues shot up 19.8 percent to $500 million. Bad debt expense jumped 108.8 percent to $181 million, as consumers struggled to keep up with their credit card payments.

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