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December same-store sales figures beat expectations for the first time since summer, but it was a hollow achievement as margins eroded and forced many companies to cut their earnings guidance.

"We're looking at a pyrrhic victory at best," said Todd Slater, retail analyst at Lazard Capital Markets.

While most retailers did better than analysts' expected, their sales still fell for the month, reflecting softer business and dramatic price slashing.

As a result, fourth-quarter profit projections are coming down with "margins worse almost everywhere," Slater said.

Conditions are not expected to improve soon, with January comparable store sales "likely to remain negative," Slater said.

The 33 retailers tracked by Thomson Reuters posted a 0.9% drop in December same-store sales, a bit shy of the 1% decline that was expected and on top of a modest 0.5% rise a year ago. Eighteen, or 55%, beat analysts' expectations.

The International Council of Shopping Centers (ICSC) said chain-store sales dropped an even larger 1.7%.

The data firms have a bit of a different mix, with the ICSC's number including the 27.5% same-store sales drop by privately held Neiman Marcus Inc.

This was the first December that comparable-store sales have fallen since Thomson Reuters and the ICSC began tracking the data.

This was an extraordinarily difficult holiday season," said ICSC chief economist Michael Niemira. "Retailers were forced to slash prices to entice consumers to spend, but even that strategy was not enough as the elevated worry about job insecurity and increased job layoff announcements continued to restrain consumers."

Even stalwart Wal-Mart Stores Inc. (WMT) found itself challenged, with same-store-sales rising 1.7% when a 2.8% increase was expected.

The company said softer consumer spending and bad weather during the month were factors. Analysts said deep discounting by other retailers, like Target Corp. (TGT), drew business away. Target posted a 4.1% fall in December comparable-store sales, when a 9.1% drop was expected.

Sears Holdings (SHLD), another Wal-Mart rival, lifted guidance after reporting a 7.3% sales decline that was lower than projections, and the company provided fourth-quarter net income guidance that is above analysts' expectations.

Sears said its Kmart stores benefitted from increased sales through layaway plans, while sales at Sears stores in the U.S. dropped 12.8% on declines across most of its apparel and hardline offerings.

Ross Stores Inc. (ROSS) also raised guidance, after reporting flat same-store sales for December, when a 0.7% drop was projected.

Ross said fourth-quarter earnings per share should be 73 cents to 75 cents, the high end of its previous range and ahead of analysts' expectations for 71 cents.

The overarching move was to lower projections, as demonstrated by fourth quarter earnings reductions from retailers including Gap Inc. (GPS), TJX Cos. (TJX), American Eagle Outfitters Inc. (AEO), J.Crew Group (JCG), Limited Brands Inc. (LTD), and Pacific Sunwear of California (PSUN).

"The beginning of the month started slow, and deep promotions helped to drive traffic and clear inventory in the back half of December," said Credit Suisse retail analyst Paul Lejuez, who also noted margins suffered and this month's sales are also likely to fall.

Department stores exceeded analysts' expectations in all cases save one: Saks Inc. (SKS) saw its same-store-sales plunge 19.8% when Wall Street had projected 10.3%.

Kohl's Inc. (KSS) beat by the widest margin among department stores, with sales off 1.4% when a 5.9% drop was predicted.

Standard & Poor's equity analyst Jason Asaeda raised Kohl's shares to hold from sell and lifted his fiscal 2009 and 2010 earnings estimates. Kohl's "reported significantly less clearance inventory this year, which implies to us good sales planning and higher merchandise margins," Asaeda said in a research note.

Among other department stores, Dillard's Inc. (DDS) posted a 5% decline, when analysts were looking for an 8.5% drop. Nordstrom Inc. (JWN) saw its sales decline 10.6% compared to expectations for a 13.5% fall.

Among teen retailers, Aeropostale Inc. (ARO) saw sales at stores open a year or more jump 12%, when analysts had predicted a 4.6% fall.

Abercrombie & Fitch Co. (ANF), which analysts said didn't engage in many big markdowns until just before Christmas, reported a comparable sales decline of 24%, slightly larger than the 23.8% decline predicted by analysts.

While the better-than-expected numbers may be somewhat consoling at first look, sales fell in just about all cases and demonstrate that aggressive discounting by most retailers didn't pay off all that well.

"They still were not able to generate the traffic they hoped with all their sale promotions and markdowns," said Jim Harold, general manager of retail and consumer markets at Acxiom Corp. (ACXM), a retail services company. "It makes the margin situation even more challenging."

"Profit is equal to margin times unit," said Stephen Hoch, professor of marketing at the Wharton School of the University of Pennsylvania. "And the equation is being skewered by the way prices have been slashed and just how much unit was actually sold."

In general, a discount of more than 50% becomes a money-losing proposition because retailers have large fixed-costs such as rent, labor and utilities, analysts said.

And it was common to see retailers slashing 60% and more off prices last month.

As a result, Decembers sales will end up furthering earnings problems for retailers, most of which close their fiscal year at January's end.

"We're looking at red ink or a severe drop in profits from a year ago," Hoch said.

In some cases, not only did same-store-sales fall, but overall sales dropped as well, as stores did more poorly than a year ago despite having more locations.

"I see no good news looking ahead," Hoch said. "Consumers are facing the same, if not worse, liquidity problems and unemployment will get worse."

Retailers are also in a bind about whether or not to try to lift prices or at least cut their discounts on leftover and new merchandise as the winter progresses.

"It's a dicey thing," Hoch said. "The holidays are over and, from a reputation standpoint, retailers don't want to cut prices too much now because their brand and franchise can be hurt."

But retailers also "can't just say they are going cold turkey," Hoch said.

Some retailers may have sold down inventory, but it doesn't mean their competition has and that merchandise may have to see prices reduced to stay on a par with what rivals are charging.

The Standard & Poor's Retail Index is off 0.61, or 0.2%, to 275.01.

-By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley@dowjones.com

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