Retail's Short-Lived Christmas Miracle

In December, retailers got an 11th-hour reprieve, as consumers finally caved in their discount-seeking game of chicken. A spike in sales at the end of the month boosted some retailers' fortunes. However, investors should still regard the retail sector with a cautious eye.

Overall, December sales managed to increase by 2.8%, but let's remember that it's not hard to excel compared to the overall 3.6% drop this time last year. I've rounded up some highlights and lowlights from the all-important December shopping month:

All data from CAPS and company press releases.

The discount retailers definitely added luster to the month's sales. Costco's same-store sales rose 9%, although that figure was helped by gas price inflation and currencies; without those effects, Costco's comps would have risen 4%.

Two big retail surprise stories today are Sears and Bed Bath & Beyond (NASDAQ:BBBY), both of which raised their quarterly guidance. Sears was particularly interesting, as strength at its Kmart unit offset weakness in the Sears stores. (Honestly, I didn't think they had it in 'em.) Given both stocks' surges today, investors were pleasantly surprised by the news, but I'd still say "buyer, beware."

In teen retail, a "more of the same" theme emanated from several retailers. As they often have over the last year or so, Buckle and Aeropostale stood strong, reporting impressive same-store sales increases (particularly considering both were up against tough comparisons last year). In a less pleasant twist on the theme, Abercrombie's naughty tidings seemingly have no end in sight.

Tough times aren't over for retailers
I'm sure we're all thrilled that it's a new year, but investors shouldn't sit back and assume all's well for retail -- even with December's cheerier tidings. Plenty of consumers will remain mired in tough financial circumstances as they try to reduce their debt and pay down underwater mortgages. Worse, many are unemployed. As a result, stores will still face an uphill, highly competitive battle for shoppers (even if January gets a nice little boost from all those gift cards that stuffed stockings).

Still, savvy investors can look for strong retailers with plenty of cash and little debt to start their new year off right. Buckle and Aeropostale remain among my favorites, given their consistent success in luring teen shoppers despite the chilly economic climate. Costco's another favorite for the long term.

What are your favorite retail names for 2010? Let us know in the comments boxes below.