January sales at top U.S. retail chains should rebound into positive territory from last year's decline as shoppers redeemed holiday gift cards and retailers avoided drastic clearance sales.

Retailers ranging from Target Corp to J.C. Penney Co Inc to American Eagle Outfitters Inc will report January sales on Wednesday and Thursday. Sales at stores open at least a year, or same-store sales, are forecast to rise 2.4 percent compared with a drop of 5.7 percent last year, according to Thomson Reuters data.

The figures could mark the fifth consecutive monthly sales increase after a year's worth of declines during the recession, as consumers slowly return to spending and retailers lower prices to match a more circumspect shopper.

January is seen as the least important month of the holiday fourth quarter, accounting for the smallest portion of its sales. But retailers including Aeropostale Inc , Gap Inc and TJX Cos Inc could raise their earnings forecasts when they report sales results, analysts said, helped by demand from bargain-hungry shoppers and improved margins.

Comments retailers make about sales trends and whether traffic weakened significantly at the end of January will also give clues on how consumers might spend in the first quarter.

Some analysts worry stronger-than-expected holiday sales pulled spending forward and retailers could face an uphill battle luring shoppers in the first quarter, especially if cold weather crimps demand for spring merchandise.

We want to get a sense of consumer sentiment and their appetite to continue to spend after they just spent quite a bit during the holiday, said Wedbush Securities analyst Betty Chen.

DISCOUNTERS DOMINANT AS TEEN RETAILERS STRUGGLE

By category, the best sales performance in January is expected to come from discount chains such as Costco Wholesale Corp or BJ's Wholesale Club Inc , where same-store sales are forecast to rise 4.5 percent. Wal-Mart Stores Inc , the top discounter, no longer reports monthly sales.

Traffic at discount retailers has risen during the economic downturn as shoppers seek bargains on TVs, food and medicine.

But upscale shoppers are once again spending as the stock market stabilizes, Wall Street bonuses bounce back and high-end retailers introduce lower-priced merchandise.

Michael Gould, chief executive of upscale department store Bloomingdale's, which is owned by Macy's Inc , told Reuters at the opening of its store in Dubai that the retailer had a wonderful fourth quarter in the United States.

I think January is the strongest month we have had probably in a year and a half, he said.

Macy's same-store sale are expected to decline 0.1 percent, compared with a drop of 4.5 percent last year.

The worst performance is expected from teen and child apparel retailers, where sales are forecast to decline 0.8 percent. The category is on track to post its 19th consecutive drop in same-store sales, according to Thomson Reuters data.

Jharonne Martis, director of consumer research for Thomson Reuters, said retailers were helped by shoppers redeeming holiday gift cards in the month.

Consumers are spending, but they're spending on basic necessities or at a discount, Martis said. Even though the high-end consumer ... is spending a little bit more than they did last year, it's not as big as we saw back in 2007.

HO HUM FIRST QUARTER?

Total holiday retail sales in November and December rose 1.1 percent, according to the National Retail Federation, beating the trade group's forecast for a 1 percent drop.

Retailers prepared for muted demand this holiday season by stocking less merchandise, allowing them to avoid profit-crunching price cuts in January.

They were not very aggressive on their promotions, so that should help many of them raise their EPS guidance, Chen said.

But the outlook for 2010 is muted. The NRF expects sales to rise 2.5 percent. Aside from the past two years, that would mark the lowest year-over-year increase since 1995.

Martis said unemployment could derail same-store sales if it ticks higher. Chen said retailers need to show they can do more than simply stabilize sales to win investors' favor, including reversing a trend of declining traffic in January.

What we're going to need is a top line recovery in order to deliver earnings growth above last year's results, Chen added.

(Reporting by Nicole Maestri; editing by Andre Grenon)

Dubai Retail Christmas Walmart