Updated from 3:36 p.m. ET

Reports of strong October sales at specialty and discount stores set investors off on a wild shopping spree Thursday -- and news of lackluster department store sales, even a profit warning from one struggling retailer, weren't enough to dissuade them.

Investors snapped up retail stocks like shoppers at a holiday clearance sale, pushing the

S&P Retail Index

up 2% for the day and sending the stock prices of two popular clothing retailers to their highest levels of the year.

Though sales were up in October at nearly all the major discount stores and particularly strong at some of the specialty stores, total retail sector results were mixed. Nonetheless, investors even found

J.C. Penney

(JCP) - Get Report

shares attractive, sending them up 6% Thursday despite the company's warning that it expected to report quarterly losses twice as large as analysts' expectations.

Analysts remain unconvinced. Even as discount warehouse giant

Costco

(COST) - Get Report

reported its strong sales growth,

Banc of America

announced that it was downgrading the retailer's stock to "market perform" from "buy."

A.G. Edwards called October another tough month for retailers, with poor results at nearly all department stores, excluding

May Department Stores

(MAY)

and

Federated Department Stores

(FD)

, and discount retailer

Kmart

(KM)

reporting a drop in sales. The firm pointed out that sales of many apparel retailers were hurt after they were forced to offer a large volume of unsold summer merchandise (due to low sales in August and September) at deeply-discounted prices.

Department store sales continued to disappoint in October, dragging down overall sales results at companies like

Target

(TGT) - Get Report

, where strong discount and mid-range store sales managed to offset the losses at its department stores. And even while October sales were up at May Department Stores, year-to-date sales remain lower than a year ago.

The

situation for retail companies is not expected to improve much in the months to come. Retailers used to be able to count on a big sales spike at the holidays, but that may not be the case this year. The surge in gas and heating fuel costs combined with concerns over stock market volatility may prompt many consumers to trim their holiday gift budgets this season.

Wal-Mart Warns of Slower Growth

At

Wal-Mart,

(WMT) - Get Report

, the country's largest retailer, same-store sales (those at stores open a year or longer) rose a lower-than-expected 4.9% in October from the same period last year. Yet, shares rose even after the retail giant warned in a telephone message to investors that sales could be slower in the current month. The company estimated that total fourth-quarter same-store sales growth would be between 3% and 5%, with November's sales at the low end of that range.

The Bentonville, Ark.-based discount retailer said total sales for the four weeks ended Oct. 27 rose 10.1% to $14.32 billion from $13 billion in the year-ago period. Unit

Sam's Club

sales for the four-week period rose 9.5% to $2 billion from $1.83 billion last year.

Shares of Wal-Mart closed up $1.75, or 4%, at $48.44 Thursday. That brings the value of the stock up 16% from the 52-week low of $41.44 set in mid-October.

Kmart Feeling the Blues

Meanwhile, executives at rival Kmart may be bluer than the lights that advertise their specials. The giant retailer's October same-store sales fell 1.2%

In a statement released Thursday, Kmart Chairman and Chief Executive Chuck Conaway said October sales were hurt by a "significant" volume of clearance merchandise. He added that the nation's No. 2 discount retailer continues to focus on reducing inventory levels in an effort to increase profits at its more than 2,000 stores.

Troy, Mich-based Kmart said total sales for the four weeks ended Oct. 25 were relatively flat at $2.48 billion. Excluding the impact of store closings and inventory liquidation, same-store sales fell 2% for the period. Year to date, same-store sales are up slightly at $25.39 billion, a 0.7% increase from $24.82 billion a year ago.

Still, shares of Kmart closed up a quarter, or 4%, Thursday afternoon at $6.31.

Costco Shopper's Load Up

But consumers were loading up their shopping carts at Costco, where same-store sales increased 5% in October.

The Issaquah, Wash.-based discount warehouse giant reported net sales of $2.49 billion in October, a 9% jump from $2.29 billion in the same period a year ago. Costco, which operates 338 warehouses in North America, the U.K. and Asia, said year-to-date sales were up 6% on a same-store basis.

Shares of Costco recovered to end Thursday's session up 44 cents, or 1%, at $36.19, after falling as low as $33.19 earlier in the session.

Target Same-Store Sales Up 3.5%

Minneapolis-based Target reported net retail sales for October at $2.639 billion, up 9.1% from $2.420 billion a year ago. Same-store sales increased 3.5% from the same period a year ago.

However, while sales growth was strong at Target's flagship stores and at its

Mervyn's

locations, same-store department store sales were down 4.6% last month compared to October 1999. Sales at its department stores, which include the upscale

Marshall Field's

and

Hudson's

stores, are down 4.2% for the year so far. Sales at the mid-range Mervyn's stores were relatively flat while the Target discount store sales were up 3.8%.

Nonetheless, Target shares rose Thursday afternoon, gaining 81 cents, or 3%, to close at $28.38.

Federated Total Sales Up Moderately

Federated Department Stores, the nation's top upscale department store operator, said its total sales grew slightly to $1.293 billion for October, up 0.6% from total sales of $1.285 billion for the same period last year. On a comp-store basis, Federated's October sales increased 1.6%.

The Cincinnati-based retailer, which operates more than 400 department stores including

Bloomingdale's

,

Macy's

and

Stern's

, said its year-to-date sales were up 2.3% on a same-store basis.

Year-to-date comparable sales remain down at May Department Stores, despite a 2.6% jump in same-store sales in October, to $1.01 billion from $942 million in October 1999. The figures exclude sales at the chain of

David's Bridal

stores, which were acquired in August.

Total year-to-date sales at May were down 0.3% on a same-store basis, with third-quarter same-store sales nearly flat compared to the same period a year ago. The St. Louis-based company, the country's second-largest upscale retailer, operates more than 400 stores nationwide, including

Kaufmann's

,

Lord & Taylor

and

Filene's

.

Shares of Federated jumped $1.75, or nearly 5.5%, to close at $33.94 Thursday afternoon, while shares of May ended up $2.06, or about 8%, at $28.38.

J.C. Penney Sales Sluggish

Declining department store sales prompted J.C Penney on Thursday to

warn investors, for the fourth time in three months, that third-quarter earnings would fall short of Wall Street expectations. The retailer also said total October sales were down 1.7% from the same period a year ago.

J.C. Penney's sluggish department store more than offset an 8.4% gain in sales at its

Eckerd

drugstore chain. Department store sales fell to $1.08 billion, down 3.2% from $1.11 billion in October 1999. Catalog sales declined 12% to $315 million from $358 million a year ago. Year-to-date sales at its department stores are down 2.9% on a same-store basis, with total company sales up just 1% at $22.9 billion.

Nonetheless, J.C. Penney shares closed up 69 cents, or 6%, at $11.94.

Talbots' and Limited's Rocktober

In contrast,

Talbots

(TLB)

reported 21% growth in its total year-to-date sales. The high-end specialty store said total sales jumped to $158.5 million in October, up 21% from $130.7 million in the same period a year earlier. Same-store sales were up 19% in October from a year earlier.

Thursday afternoon, shares of Talbots closed up $7.44, or 9%, at $86.75, after reaching a 52-week high of $87 earlier in the day.

Limited

(LTD)

also enjoyed strong sales growth, with same-store sales increasing 8% in October. The clothing retailer reported net sales of $650.5 million for October, up 8% from $600.3 million for the same period a year earlier.

Year-to-date sales were up 7% on a same-store basis at Limited, which sells clothes and accessories through its

Express

,

Lerner New York

,

Lane Bryant

,

Limited Stores

,

Structure

and

Henri Bendel

stores.

Limited shares closed up $1.94, or 8%, at $26.81 after reaching a 52-week high of $27.19.