Providing further evidence of a slowing U.S. economy and a more cautious consumer, Wal-Mart Stores and other retailers reported the weakest month of retail sales in about five years.
"Everyone's being hurt right now," said Dana Telsey, chief research officer at Telsey Advisory Group, in an interview on CNBC's "Squawk Box."
"The slowdown of the consumer is occurring, and I think we're going to see this continue, probably into February and March. March comparisons are very tough," she said.
Collectively, same-store sales fell short of expectations. The Thomson Financial Same Store Sales Index was projected to increase 1 percent, but it only inched up 0.3 percent. Excluding Wal-Mart, Thomson's index rose 0.2 percent. Year-earlier growth was 3.9 percent and 5.2 percent, respectively.
Excluding seasonal fluctuations, the sales were the worst since March 2003, when the Thomson Financial index was flat.
Despite the tough environment and the sluggish sales, retail stocks rallied Thursday.
Shares of both JCPenney and Gapsurged and were among the retail stocks posting the largest percentage gains. These two companies were among those retailers who showed that they were able to manage through the tough times in January and woo consumers with deep discounts. Although sales fell at both stores, the declines weren't as large as analysts were expecting. In addition, JCPenney expects fourth-quarter earnings to be at the high-end of its forecast, while Gap raised its guidance.
"Today's rally in the group may be a byproduct of short-sellers covering as a result that the news is finally out that sales are bad," Steve Neimeth, a portfolio manager at AIG SunAmerica.
Also, with retail stocks trading at historically low values, there may be some investors looking for bargains as well using the monthly sales reports to gauge which retailers are able to navigate the current environment.
According to Telsey, about 80 percent of institutional investors have portfolios that are underinvested in consumer discretionary stocks.
"Companies now are taking steps to lower expenses and inventory levels are being adjusted for the current environment," Telsey said. "Stocks anticipate the future and the potential exists for a better second half of 2008 given the changes that are taking place."
Notably, shares of retailers such as JCPenney that have underperformed in recent months were gaining more ground Thursday than companies such as Costco Wholesale , which have been relatively stronger performers.
"Expectations have been brought down to such a low point that actual results are meeting or beating them," said Charles Grom, an analyst at J.P. Morgan. Still, Grom expects the challenges to continue, and perhaps get worse, for at least the next several quarters.
Little Support from Gift Cards
“The numbers leave no doubt that consumers are holding the line on spending amid the weakening economy," said Ayuna Kidder, an economist and consultant at TNSRetail Forward.
The weakness in January followed a lackluster holiday season. Heading into January, retailers had hoped to get a boost from consumers cashing in the gift cards they received, but shoppers appear to be putting off that spending and concentrating on buying only must-have items.
Wal-Mart said its gift-card redemptions fell short of its expectations. The world's largest retailer also noted that when consumers used their gift cards, many purchased necessities like food, instead of splurging on higher margin discretionary items.
Wal-Mart reported a 0.5 percent increase in its same-store sales results, falling short of the 2 percent increase predicted by analysts. But the company backed its fourth-quarter earnings forecast, and said it expects February's same-store sales to be between flat and up 2 percent.
Meanwhile, rival Target, the second largest U.S. retailer, said its sales dropped 1.1 percent, steeper than the 0.4 percent decline that had been projected.
Driven by 'Value and Need'
"Consumers continue to be selective in their purchases, driven by value and need," said Larry Montgomery, chairman and chief executive of Kohl's.
The discount retailer posted a 8.3 percent decline in January same-store sales, a much wider loss than analysts had projected. Analysts were estimating sales would decline 6.3 percent.
In another sign that consumers are trading down, both Costco and BJ's Wholesale Club fared well in January, with sales topping expectations. Costco said same-store sales rose 7 percentlast month, while BJ's logged a 7.8 percent increase.
Macy's Sets the Tone
Macy's set the tone late Wednesday when it posted a wider-than-projected 7.1 percent decline in same-store sales. The slow sales prompted Macy's to cut its fiscal fourth-quarter earnings estimates and announce plans to cut 2,300 jobs.
High-end department stores, which had been previously immune to slowing consumer spending, saw mixed results, with JW Nordstromfalling short of estimates, while Saks outpaced analysts estimates.
Nordstrom said same-store sales fell 6.6 percent, compared with the 0.7 percent decline forecast by analysts.
Meanwhile at Saks, same-store sales rose 4.1 percent from last year, topping the average analyst estimate of 2.2 percent gain.
In general, sales at department stores have been weak. Although JCPenney managed to top analyst estimates, sales still declined in January. The retailer said sales fell 1.9 percent, compared with the 6.3 percent drop estimated by analysts.
The Plano, Texas, retailer said it benefited from consumer response to its seasonal clearance sale as well as a positive response to its spring merchandise.
Specialty women's chains such as Talbots and AnnTaylor Storesalso have been hurting from a combination of competition and purse tightening by women, who tend to be the first to spend less during times of economic uncertainty.
After another month of poor sales, Talbots said it would post a fourth-quarter loss and close another 22 stores as it scales back its expansion plans.
These steps are in addition to previous store closures announced by Talbots, which is in the midst of a strategic review of its business.
AnnTaylor fared better. The New York retailer reported flat same-store sales in January, which was better than the 4 percent decline projected by analysts polled by Thomson Financial.
But Limited, American Eagle Outfittersand Dillard's weren't as fortunate, as sales fell short of estimates.
--Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at firstname.lastname@example.org.