Updated from 11 a.m. EST:

January retail sales at the nation's largest retailers generally exceeded modest expectations, indicating that consumer spending, while remaining cool, hasn't sharply deteriorated.

The figures released Thursday morning show that same-store sales, or those in shops open at least a year, improved a bit last month following a disappointing holiday season. Still, there were significant disappointments, with two prominent retailers, the

Gap

(GPS) - Get Report

and

Ann Taylor

(ANN)

, issuing earnings warnings. Most companies reported a rise in markdowns as they sought to rid their shelves of leftover holiday merchandise.

"Clearly, January is a clearance month, so you can't read much into it," said Wayne Hood, retail analyst at

Prudential Securities

, in a conference call with investors Thursday morning. "But it could have been a whole lot worse."

The figures are closely watched as a barometer of Americans' spending habits, and as such are not likely to add to fears that the U.S. economy is headed for recession. Still, retail stocks got hit hard Thursday afternoon, with the

S&P Retail Index

off 3.75% as investors worried about the prospect of economic slowing.

Mostly Solid

Of the 12 retailers for which

First Call/Thomson Financial

compiles consensus same-store sales estimates, seven companies exceeded expectations, four fell short and one matched estimates.

Posting strong growth were

Wal-Mart

(WMT) - Get Report

, the nation's largest retailer;

Kohl's

(KSS) - Get Report

, a fast-growing discounter; and the

Limited

(LTD)

, a multichain clothing retailer. Wal-Mart said same-store sales rose 6% in January from a year ago, easily exceeding the expected 4.7% increase. Kohl's also topped expectations, reporting a same-store sales increase of 7.1%, compared with an estimate calling for a 5.7% jump. The Limited said sales rose 5%, reversing an expected same-store sales decline of 0.5%. Wal-Mart shares fell $1.51 cents to $53.15, Kohl's lost 16 cents to trade at $68.10 and Limited lost 62 cents to $19.15.

Another bright spot was women's specialty retailer

Talbots

(TLB)

, which said same-store sales rose 4%. More importantly, the company upped its earnings expectations for the fourth quarter to between 49 cents and 51 cents a share, vs. a 48-cent estimate.

The biggest disappointments were the Gap and Ann Taylor, both of which significantly undershot same-store sales estimates and at the same time warned that fourth-quarter earnings will fall shy of Wall Street expectations. The Gap said same-store sales fell 12%, while analysts expected sales to fall 6.2%. The company also said it expects fourth-quarter earnings of between 30 cents and 31 cents a share, below the consensus estimate of 33 cents.

Women's apparel retailer Ann Taylor reported a 14.3% decline in same-store sales, compared with expectations of a 3.9% decline. At the same time, Ann Taylor forecast that its fourth-quarter earnings would fall short of estimates. It said earnings will be about 18 cents a share, compared with Wall Street expectations of 38 cents a share.

Both the Gap and Ann Taylor tumbled, with the Gap down lately $2.96, or 10%, to $26.60, and Ann Taylor down $1.26, or 4.6%, to trade at $26.44.

Down More

Stacy Pak, another retail analyst at Prudential who follows apparel companies, says she is advising investors to buy Gap and Ann Taylor on these price declines. (Her firm has not done underwriting for either company.)

"We think both are down more than they should be, and we think investors should be buying these stocks aggressively," she says. She explains that Gap isn't expected to post a strong sales rebound until the second half of 2001, but the pullback in its shares makes for a good time to buy.

Still, some were less optimistic. Take John Pitt, an analyst at

Instinet

who publishes the

Redbook Average

, a gauge of retail sales. "These numbers look a little stronger than they really are," he says. In Pitt's view, sales last January were lower than normal because people had stockpiled goods in December in anticipation of problems associated with the so-called millennium bug. Thus, he says, it was easy for retailers to show stronger sales compared to last January.

He says Thursday's numbers indicate "consumer weakness, not depression or calamity."