Investors who were heartened when U.S. retailers reported their best holiday sales season in three years hope for one more gift: upgraded earnings forecasts.

Wall Street analysts expect top U.S. chains to report this week that sales at stores open at least a year, or same-store sales, rose 3.4 percent in December, according to Thomson Reuters data.

That follows a 6 percent increase reported for November.

But that strong end to the holiday season has been largely priced into stocks, said Manning & Napier analyst Walter Stackow. Investors are looking for companies to increase their earnings forecasts as a sign that the sales were not bought with unplanned margin-sapping discounts.

Those companies' shares are likely to rise, Stackow said.

Shoppers turned out in greater numbers this year, driven in part by pent-up demand after two seasons of frugality and a general sense that the economy is finally improving.

Still, Wall Street is fretting that shoppers will put their wallets away for a while, now that Christmas is over. That would place a question mark over the U.S. economic recovery given that consumer spending makes up 70 percent of the U.S. economy.

People have tended to shop during the times they need to, like holidays or back to school, said Nomura analyst Paul Lejuez. During off periods, they haven't been coming out.

A good December might not mean a great January, February, March, he added.

WEATHERING THE BLIZZARD

Retailers appeared to keep their momentum in the final week of the month. The International Council of Shopping Centers and Goldman Sachs said chain-store sales for the week ended January 1 were up 3.6 percent from the same week a year ago.

Last week's massive blizzard, which dumped as much as three feet of snow on parts of the U.S. Northeast, probably put a small dent in December sales. Research firm ShopperTrak has estimated that $1 billion in retail sales may have been postponed because of the storm.

Michael Niemira, chief economist for the Council of Shopping Centers, told Reuters the snowstorm could lower the December sales growth rate by 0.5 percentage point, though some purchases may show up in January.

So far most analysts say the season's discounting was not out of line, boding well for retailers' results.

I did not see any kind of chaotic rush to runaway promotions, said Richard Hastings, a consumer strategist at Global Hunter Strategies.

JPMorgan analyst Charles Grom predicted that a strong November and the expectation of solid December sales would prompt discounter Target Corp, department store chains J.C. Penney Co Inc, Macy's Inc, and Kohl's Corp, and upscale retailers Nordstrom Inc and Saks Inc to raise profit forecasts.

The spending recovery helped the S&P Retail Index rise 23.4 percent in 2010, compared with the broader S&P 500's increase of 11.7 percent. However, the index has stalled since early December on concerns the rally has run out of steam.

WINNERS & LOSERS

December's biggest winners are expected to include department stores such as Macy's, J.C. Penney and Kohl's as enough shoppers are on a sounder financial footing for them to trade back up to those chains from off-price retailers.

With unemployment still near 10 percent, however, discounters will continue to draw shoppers and should report some of the biggest gains, aided all the more by their forays into fresh food and, in Target's case, a push into consumer electronics that has damaged Best Buy.

Deutsche Bank analyst Bill Dreher named Kohl's, Nordstrom and Target among his top stock picks.

Still, whether Target can keep its streak in electronics is tough to determine given its aggressive pricing and deep inventory, said Janney Capital Markets analyst David Strasser.

Target and other retailers that cater to a lower-income group, including off-price retailer Ross Stores, may struggle later this year if gasoline prices keep rising, said Hastings.

Ross and TJX Cos Inc, parent of the T.J. Maxx and Marshalls chains, sell brand-name merchandise, much of it excess inventory returned from department stores, at steep discounts. In December 2009 TJX was a standout with a 14 percent increase in same-store sales. For December 2010, analysts predict a 2.8 percent decrease.

December was also a big test for teen retailers, particularly Aeropostale, which reported weak November sales and, according to the New York Post, has hired a strategic advisor to fend off any unwanted advances by buyout firms.

Analysts expect Abercrombie & Fitch to report a same-store sales increase of 9.3 percent, aided by higher prices and more modest promotions than its peers.

In contrast, Aeropostale and American Eagle Outfitters slashed prices on many items throughout the holiday season and are expected to report modest same-store sales declines for December.

(Editing by Phil Berlowitz, Tim Dobbyn and Steve Orlofsky)

Retail