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How to Play Retail Stocks in 2010

NEW YORK ( TheStreet) -- Retail sales may be slowly steadying, but there are still plenty of concerns heading into 2010.

Citigroup (C) has forecast that consumer spending will increase by just 2% next year, which means retailers will once again be battling for shoppers' dollars.

Of course, not everyone will be successful, making it difficult to pick out the winners from the losers. But there are a few smart retail bets to mitigate lingering fears.

If you worry the U.S. economy won't rebound quickly: While consumers' may still be spending cautiously in the U.S., economic recoveries have been more robust internationally, a trend that favors companies with a strong portfolio overseas. This includes retailers such as Guess (GES), Home Depot (HD), Costco Wholesale (COST), and Wal-Mart Stores (WMT).

"Guess still has growth and the stock is still cheap," says Needham analyst Christine Chen.

The specialty retailer is resuming square-footage growth in 2010 in both North America and other countries, Guess CEO Paul Marciano said last month when the company reported third-quarter earnings.

Guess has 373 stores in Europe and the Middle East, 327 in Asia and another 53 locations elsewhere overseas.

"Market penetration in new markets in Europe and Asia will be the main drivers of growth for Guess in 2010," Chen wrote in a note.

Acceleration of economic growth has been especially profound in China and Brazil, while Canada, Japan, Mexico and the U.K. are experiencing relatively strong recoveries, Citigroup analyst Deborah Weinswig wrote in a research note.

The weak U.S. dollar and stronger euro could also benefit top-line and earnings growth at retailers with international operations in the first three quarters of 2010, Needham's Chen added.

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