UPDATE 3-Target's upbeat forecast drives retail stocks higher

* Sees 2nd-qtr profit above forecast range of $0.95-$1.15/shr

* Had previously forecast low-single digit drop in comp sales

* Shares up as much as 4 pct (Adds background, analyst comment, updates shares)

July 13 (Reuters) - Target Corp forecast sales to increase for the first time in five quarters, thanks to improved customer traffic and sales trends, sending its shares up as much as 4 percent and pushing retail stocks higher in early trading.

The forecast comes days after rival J.C. Penney Co Inc said it was expecting second-quarter sales to significantly improve from the first quarter, pointing to improving demand for bricks-and-mortar retailers.

Retailers have been struggling to revitalize their business as more shoppers switch from traditional stores to online shopping for bigger discounts and the convenience.

Amazon.com Inc recently upped the stakes by offering to buy upmarket grocer Whole Foods Market Inc in a deal that could potentially upend the retail market.

Traditional retailers such as Wal-Mart Stores Inc and Target have stepped up their game by heavily investing in their ecommerce businesses, keeping prices low and offering services such as pick-up-in-store and curbside delivery.

Target's upbeat forecast drove retail stocks higher on Thursday. Macy's Inc's shares were up 2.4 percent, Kohl's Corp's shares rose 2 percent, while Wal-Mart was up 1.3 percent. Discount retailer Dollar Tree Inc's shares rose 1.7 percent and Costco Wholesale Corp's stock was up 1 percent.

Target said on Thursday it expects a "modest" increase in second-quarter same-store sales, compared with its previous forecast of a low single-digit decline.

"A return to positive comps in the second quarter after four quarters of declines is clearly a good sign," Quo Vadis Capital analyst John Zolidis said in a note.

"At a minimum, it indicates that traditional retailers are not following a straight line directly to irrelevance."

Zolidis added that it would still take sustained improvement to convince the market that Target had found a "true path forward."

Target also said it expects second-quarter profit to come in above its forecast range of $0.95 per share to $1.15 per share, helped by a net tax effect related to its global sourcing operations.

Target is expected to report second-quarter results on Aug. 16. (Reporting by Sruthi Ramakrishnan in Bengaluru, additional reporting by Siddharth Cavale; Editing by Saumyadeb Chakrabarty and Sayantani Ghosh)