SAN FRANCISCO -- The long and heated rivalry between Wal-Mart ( WMT) and Target ( TGT) is starting to get interesting.

For years, Target has been the trendy superstar, blowing past its larger, lumbering rival in both sales growth and profits. But holiday sales reports from each chain -- due Thursday -- could finally show Wal-Mart outpacing its chief competitor.

Target has already lowered its forecast for December same-store sales, or sales at stores open at least a year. The retailer said on Christmas Eve that it expects same-store sales to range from down 1% to up 1%, well below its initial projection for a 3% to 5% rise.

Meanwhile, Wal-Mart has maintained its guidance for a 1% to 3% rise in same-stores sales. And if the results come in at the high end, it will be the first time Wal-Mart has edged out Target in December same-store sales since 2003.

December, a crucial month for all retailers, is largely expected to be a dud for 2007. Many chains were forced to offer deep price cuts on their merchandise at the cost of their margins, while ultimately not bringing in enough holiday traffic to show for it.

Analysts estimate overall same-store sales in December will climb by a meager 0.9%, according to Thomson Financial. Department stores face the bleakest predictions. Their same-store sales are expected to collectively fall 6.8%, largely due to a calendar shift that left them with one less week of sales compared with last year.

Amid the tough economic times, discount chains are expected to be the best-performing group. Analysts estimate a December same-store sales climb of 1.8% for the group.

"In the broad sense, the discounters will tend to do better as long as the retailer is focused on price and value," says Mike Niemira, chief economist for the International Council of Shopping Centers, which predicts an overall 1% gain in December same-store sales.

Analysts expect Wal-Mart's same-store sales to be in line with the discount chain sector. They predict Target, however, will show a 2.5% same-store sales drop.

Both retailers have notoriously competed on price, but Goldman Sachs analyst Adrianne Shapira said Wal-Mart pursued the discounts much harder in December.

"Wal-Mart got more aggressive on key toy and consumer electronics categories as the holiday season progressed," she wrote in a research note after Target lowered its guidance for December.

Shapira added that consumers seem to have shifted their spending from home and apparel -- categories in which Target had been dominant -- into consumer electronics, which is not what Target is known for.

Wal-Mart is not necessarily blowing out its numbers for December. It comes against relatively easy comparisons from December 2006, when same-store sales inched up 1.6%, while Target is up against a 4.1% rise.

Wal-Mart is, however, showing a marked improvement over the prior year, when sales were viewed as particularly bad compared with other retailers because of the discount chain's botched attempt to recast itself as a hip retailer, offering trendy apparel that failed to impress customers.

Wal-Mart has since returned to its promise of value, under the marketing banner of "Save Money. Live Better." That message may have resonated more with shoppers in December, when sentiment about the economy and the housing market was deteriorating. Analysts have also pointed out that Wal-Mart is doing a better job of controlling its inventory and managing its margins.

Niemira adds that Wal-Mart has gone through issues that are specific to the company, and it may finally be overcoming those troubles.

At the same time, Target may simply be having an off season, at least for December. In November, the company recorded a 10.8% climb in same-store sales, far ahead of Wal-Mart, which posted a rise of 1.5%.

Target's shares have also already taken more of a short-term hit. They fell nearly 12% in 2007, while Wal-Mart, coming off a tough 2006, saw its stock rise 4.9%.

Analyst Ed Weller of ThinkEquity Partners calls Target's holiday dreadful, but remains upbeat about its future, noting that its rationally structured merchandise assortments, better-quality products and well-edited fashion "combine nicely with a growing replenishment business, we think, to constitute a desirable discount store alternative that will soon, we think, recover its market share momentum."

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