Updated from 5:17 p.m. EST

Retail giants

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

report their fourth-quarter earnings Thursday morning amid surging stock prices -- and lingering questions.

Since the end of last year, shares of both companies have far outpaced the broader market, notwithstanding Wednesday's mixed results. The rise has come despite mixed fourth-quarter sales and some doubts about the outlook for both retailers.

Wal-Mart CEO Lee Scott

fostered doubts about his company in November when he said that Wal-Mart hadn't seen the upsurge in consumer spending that others were expecting. Meanwhile, Target has faced continued questions about its Mervyn's and Marshall Field's chains, which have posted continuous sales declines, and served as a drag on its overall performance.

"I think they both had a pretty decent holiday season. There might be some slight upside," said one buy-side analyst, who requested anonymity. "The bigger question is their guidance for the summer or spring. I think they're both going to be cautious." (The analyst's company owns shares in both Target and Wal-Mart.)

In the fourth quarter, analysts expect Wal-Mart to earn 63 cents a share on $74.69 billion in sales, according to Thomson First Call. Wal-Mart has said that it expects earnings at the low end of its 63 cents to 65 cents a share range.

Meanwhile, Wall Street is looking for Target to earn 87 cents a share on sales of $15.59 billion. Target warned at the end of last quarter that it likely wouldn't meet Wall Street's expectations at that time of 90 cents a share in fourth-quarter earnings.

For 2004, analysts are expecting Wal-Mart to post profits of $2.32 a share on sales of $286.94 billion. That would represent a projected 14% jump in per-share earnings on an expected 11% gain in sales.

For Target, analysts are expecting per share profits of $2.27 this fiscal year on $53.10 billion in sales. That would translate into an earnings-per-share gain of 15% on a 10% rise in sales.

But investors may be expecting bigger things from the companies. Since the end of last year, Target shares have gained 10%, while Wal-Mart's are up 8%. In contrast, the S&P Retail Index is up 5%, while the

S&P 500

has gained just 2%.

Of course, both companies underperformed their retail peers last year, and Wal-Mart underperformed the S&P 500.

Trouble Ahead, Trouble Behind

Part of the problem the companies faced last year was a mixed holiday season. Both companies struggled to meet their sales outlook for the holidays until after-Christmas sales boosted their results.

But the companies also faced a broader problem of where consumer spending was going. Spending by affluent shoppers and at upscale outlets surged in the second half of last year, benefiting chains such as

Tiffany

(TIF) - Get Report

,

Coach

(COH)

and

Neiman Marcus Group

(NMGA)

. In contrast, spending by middle- or lower-income consumers was more modest.

Investors will be waiting to see what to Scott and Wal-Mart executives have to say about consumer spending on Thursday. With the company representing between 5% and 10% of total retail sales, its outlook on consumer spending could be an indicator of broader trends, analysts say.

"I think they should have good things to say tomorrow," said a second buy-side analyst, who also requested anonymity. "I think they will be more optimistic than they have been."

The analysts' firm is long both Wal-Mart and Target, but has been selling off its Target shares recently.

But not everyone agrees Wal-Mart will boost its outlook. Rob Wilson, who covers Wal-Mart for Tiburon Research Group, predicts that the company will have to lower earnings guidance going forward.

Wal-Mart's results in recent quarters have been weaker than they appear, Wilson noted in a recent report. The company's rapid expansion of its Superstores -- which add fresh produce and other grocery products to the company's traditional general merchandise offerings -- has boosted its same-store sales. Without food sales, the company's overall sales results would be much less, he said.

Meanwhile, the company has posted a disturbing rise in inventory and increasing markdowns in recent quarters. And the decline in the dollar versus other foreign currencies has boosted the dollar value of Wal-Mart's overseas sales and earnings.

All these factors will likely catch up with Wal-Mart this year, Wilson said.

"We believe there is a reason that WMT did not participate in the retail rally of 2003 and will not again in 2004 as the valuation becomes more reasonable," he said in his report. (Wilson doesn't own Wal-Mart shares and Tiburon doesn't do investment banking.)

Another issue to look for with Wal-Mart will be what, if anything, it says about its supplier costs. Retail companies have been dealing with deflation at the supplier level for years now, and Wal-Mart has used that trend to slash prices. But commodity prices have been increasing lately, which could well affect what Wal-Mart charges consumers.

The question, analysts say, is when does the supply chain kick back?

As for Target, analysts have been

wondering when the company will cut loose its Mervyn's and Marshall Field's chains. The department store chains have been a source of cheap cash flow for Target, but their sales have repeatedly dragged down its overall results.

Through the end of January, Target posted an overall gain of 2.9% in year-to-date same-store sales, which represent the year-over-year revenue gains of outlets open more than one year. But the company's Mervyn's and Marshall Field's stores trailed far behind the company average, posting same-store sales declines of 7.6% and 2.6%, respectively, during that time period. In contrast, stores in Target's namesake division recorded a respectable 4.4% gain.

Because both Mervyn's and Marshall Field's are expanding at very slow rates or actually shrinking their store counts, those same-store sales declines translate into overall revenue drops. And that drop is already starting to eat into profits at both chains. Through the first nine months of last year, Mervyn's pre-tax profit was down 42% from the same period a year earlier, while Marshall Field's was down 55%.

Part of the run-up in Target's stock has come from the expectation that the company will announce tomorrow that it plans to sell or spin-off one or both of its department store chains, said the second buy-side analyst, who foresees disappointment for investors.

"I don't think anything is going to happen tomorrow," the analyst said. "I think that's going to be viewed as a let down."