Updated from Aug. 25

August sales are coming in better than expected at

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

. While that may be a good sign for them and other retailers, investors shouldn't get too excited.

Following a number of strong second-quarter reports, the pickup at the two discount giants could well indicate that a broader upturn in retail sales is under way, analysts say. But the companies -- and other retailers -- also could be benefiting from easy comparisons with last year. And any sales upsurge may mean little for retailers' bottom lines, analysts warn.

"On the surface,

Wal-Mart's announcement sounds great, but I'd like to see what happens when they announce earnings," said Rob Wilson, who covers Wal-Mart and other retailers for Tiburon Research Group. "Maybe this is a turning point

for retail, but it's coming against easier numbers, so it's all relative."

Retailers including Wal-Mart have struggled for much of the last year. With the economy weakening and unemployment rising, sales and earnings slowed at many companies. This spring, sales were further affected by poor weather that closed stores and kept consumers at home, and the war in Iraq, which distracted shoppers and added to the economic uncertainty.

Through June of last year, Wal-Mart's comparable-store sales for fiscal 2002 were up by 7.6%. But beginning around July, the company's sales slowed markedly. Since then, the company has not topped 5% same-store sales growth in any one month and, until recently, consistently posted growth below 3%.

Same-store sales compare results of like outlets open for more than one year, and are widely viewed by analysts as an indicator of companies' market share growth and overall performance.

In the last two months, Wal-Mart's sales have started to

pick up. In July, for instance, the company posted comparable-store sales growth of 4.6%. For August, the company originally forecast growth of 3% to 5%, but now expects 4% to 6% growth.

Likewise, same-store sales at Target are coming in

above the company's August plan. The company had previously projected that comparable-store sales at its Target stores division would grow by 4% to 5% in August, with overall same-store sales growth for the corporation 1% to 1.5% percentage points lower than that. The Wal-Mart rival didn't update its revenue guidance, but said strong sales at its Target division have helped it exceed expectations.

The pickup at the two discount chains follows the recent reports from many chain stores on their second-quarter earnings. Although second-quarter sales at Wal-Mart and Target were below expectations, many companies exceeded their own and analysts' estimates for sales and earnings.

Retailers' Summer of Love

A number of factors seem to be coming together that could continue to help retailers improve sales, and possibly earnings, analysts say. Not only does the economy seem to be picking up, but many consumers now have more money in their pockets, thanks to the recent tax cuts. Also, improved weather has not only made it easier for consumers to get into stores, but seems to have inspired them to buy all kinds of seasonal merchandise, such as garden equipment and summer clothes, analysts say.

Perhaps most importantly, the psyche of consumers seems to be improving, said Richard Hastings, a retail analyst with credit-rating firm Bernard Sands.

"I'm not convinced yet if all of the retailers will enjoy all of the benefits of Wal-Mart, but July and August so far suggest that discretionary spending at chain stores is looking good," Hastings said.

TST Recommends

Considering the poor sales and earnings that many retailers experienced in the last half of last year and the first part of this year, many chain stores could continue to post substantially improved sales and earnings into next year, said Fran Radano, a research analyst with Gartmore Global Investments.

"We may have another six months of pleasure," Radano said.

But analysts question how sustainable the recovery will be long term -- and what it will mean for retailers' bottom lines.

Consumers' psyche is a fragile thing, notes Hastings. It's been boosted by a lot of relatively small factors. The increases in people's paychecks, for instance, has been fairly small, Hastings notes.

"The psychological effect has generally been quite positive, but I don't know if that psychological mood is sustainable over a period of time," Hastings said.

Setting aside consumer psychology, Tiburon's Wilson wonders how much of the revenue upside at Wal-Mart and other retailers might trickle down to the bottom line. Although the company saw improved earnings in the second quarter, its overall performance was held down by increased markdowns and in growing payroll and benefits costs, Wilson noted.

"My big question is, has

Wal-Mart sacrificed merchandise margin for this?" Wilson said. "They've set themselves up, if they do 4% to 6% comps for the rest of the quarter, you better show me some earnings improvement."

But it may be too early to know how the sales pick-up will affect the bottom line. Most retailers are just three or four weeks into their third quarters right now. After the tough economic times many just passed through, many will likely be unwilling to raise earnings guidance this early into the quarter, noted one hedge fund analyst who asked not to be named.

"I would be surprised if anyone would be too brave right now," said the analyst. "The shooting has stopped. You might stick your head out of the fox hole, but no one's going to wave their arms and say, 'shoot me.'

"You're going to want to see if the truce is holding before jumping out of the fox hole."

But while retailers might not be feeling too brave right now, investors have already taken plenty of risks, expecting earnings to improve. Despite their struggles, many retailers have seen their stock prices post solid gains thus far this year. Wal-Mart, for instance, is up 17% this year, and Target is up 30%. Meanwhile,

Home Depot's

(HD) - Get Report

stock is up 35%,

Federated's

47.5% and

Best Buy's

(BBY) - Get Report

, is higher by a whopping 105%.

"If we don't start seeing earnings gains, these guys are at risk," Radano said. "The buy side boosted these

stock multiples to levels of high expectations."