Updated from 9:55 a.m. EST

SAN FRANCISCO -- Deep discounting for the holidays was not enough to offset slow traffic for retailers in December, with many of them missing their own already bleak estimates for the month.

As expected, discount chains were ahead of the pack, led by Wal-Mart ( WMT), which topped analysts' expectations and outpaced its main rival, Target ( TGT).

But department stores and specialty chains were battered as traffic was weak, especially in the first part of the month. That led many retailers to resort to big promotions to attract shoppers, who have been tightening their purse strings amid the housing slowdown and ever-rising gas prices.

To be sure, the holidays were expected to be weak against these headwinds, and retail stocks have already taken beatings in recent months to reflect the problems. As a result, many of the stocks -- with the exceptions of big disappointers like AnnTaylor ( ANN) and Gap ( GPS) -- were managing to stay afloat Thursday after the lackluster round of sales reports. The S&P Retail Index was down a modest 0.3%.

According to Thomson Financial, chain stores' same-store sales, or sales at stores open at least a year, overall inched up 0.5% in December. That was just shy of the 0.9% increase expected by analysts.

Of the 43 retailers that have reported December results, 63% missed estimates, while 33% beat targets and 5% matched.

"Given the state of the housing market, subprime woes, credit situation, gas and food prices, and unemployment on the rise, we do not see any near term stimulus to boost consumer spending in the first half of 2008," said Ken Perkins, president of research firm Retail Metrics. "Comp store sales have been in a slowing trend for roughly two years and we expect this to continue."

Discount chains posted an overall 2.1% increase in same-store sales, making it the best-performing sector. Department stores, however, were hammered, with a 7.2% decline. Specialty apparel also saw weakness, reporting a collective 2.5% drop.

Wal-Mart, the world's biggest retailer, performed relatively well as consumers flocked to low prices. December same-store sales were up 2.7%, within the company's expected range of 1% to 3% and ahead of analysts' estimate for 1.8% growth.

Same-store sales rose 2.6% at Wal-Mart stores and 3.4% at wholesaler Sam's Club. Analysts projected Wal-Mart stores' same-store sales to be up 1.6% and Sam's Club to rise 3.7%.

"Our price leadership position was clear very early in the holiday season, and customers responded throughout the period to our pricing and merchandise offerings, which were supported by well-integrated advertising and in-store communications," said Eduardo Castro-Wright, president and chief executive of Wal-Mart Stores in the U.S.

Wal-Mart said its same-stores sales, also known as comps, for the first two months of the fourth quarter have run about 2%, and the company expects a similar rate for January.

Wal-Mart reiterated its fourth-quarter earnings guidance of 99 cents to $1.03 a share, but added that it would feel pressure from higher interest expense compared with last year.

Same-store sales at discount rival Target inched up 0.6% in December when adjusted for a shift in the calendar. The company had said on Christmas Eve that it expected a 1% decline to 1% rise for the month.

But with the calendar shift, which gave the retailer one less week of pre-holiday sales than last year, Target's comps dropped 5%.

"Our December sales were in line with the mid-month update provided on December 24," said CEO Bob Ulrich, who on Wednesday announced that he would be stepping down from his post as of May 1. "As a result, we continue to believe that fourth quarter earnings per share will not meet last year's performance."

Discounter Costco ( COST) beat expectations, with same-store sales up 7% for December, led by big gains at its international stores. That was above Wall Street estimates for a 5.7% increase.

Department, Specialty Stores Slammed

Aside from the discounters, there were few other bright spots. In department stores, Macy's ( M) comps for December fell 7.9%, worse than the company's guidance for a 4% to 7% decline. Analysts estimated a drop of 6.5%.

"Given the calendar shift between November and December, we noted previously that the two-month holiday selling period needed to be viewed together rather than each month individually," said CEO Terry J. Lundgren in a statement. "After a strong November, we had hoped that a more positive sales trend would continue through December. But macroeconomic trends led customers to spend cautiously for the holiday."

Macy's said it is on track to be within its guidance for fourth-quarter same-store sales in the fourth quarter, but they will be at the low end of the range of down 2% to up 1%.

Kohl's ( KSS) was also weak, with an 11.4% plunge in same-store sales. Wall Street expected an 8.4% drop in comps. On a calendar-adjusted basis, accounting for an extra pre-holiday week a year ago, same-store sales slipped 0.7%.

Kohl's said deep discounts hit its margins, and it now anticipates fourth-quarter earnings of $1.30 to $1.34 a share. In November, the department-store chain projected earnings of $1.45 to $1.51 a share for the quarter.

At J.C. Penney ( JCP), same-store sales fell 7.5%, compared with the company's guidance for a mid-single digit decrease. It expects similar performance for January and the fourth quarter.

J.C. Penney also expects fourth quarter earnings to be on the low end of its guidance of $1.65 and $1.80 a share.

The higher-end department store chains fared better. Nordstrom ( JWN) recorded a 4% decrease in same-store sales for December, slightly narrower than Wall Street's estimate for a 4.2% decline. Same-store sales at Saks ( SKS) increased 0.8%, better than estimates for a 2.5% decline. Both were affected by a calendar shift.

AnnTaylor was among the big disappointments in specialty stores, reporting a 9.4% drop in same-store sales and slashing earnings guidance. Analysts predicted a 1.9% drop in comps for the month.

AnnTaylor said it had double-digit traffic declines amid a highly promotional retail environment, hurting both sales and margins. The women's apparel seller now expects fiscal-year earnings of $1.80 to $1.85 a share, compared with its prior forecast of $2.15 to $2.25.

Shares of AnnTaylor were sliding $4.05, or 17%, to $19.55.

Gap shares also were hit after the clothing seller reported a 6% drop in same-store sales, pulled down by its Gap and Old Navy divisions. Analysts anticipated a 2.2% comps decline.

Gap said that it didn't sell through as much inventory as expected, though margins were stronger than a year earlier. That indicates that Gap shied away from using big discounts to move inventory; the company, however, said it will focus on clearing out remaining holiday product in January.

The stock was falling $1.29, or 6.7%, to $18.06.

At Limited Brands ( LTD), owner of the Victoria's Secret and Bath & Body Works chains, same-store sales tumbled 8%. Wall Street expected a 4% drop. Limited now anticipates fourth-quarter earnings at the low end of its prior guidance of 90 cents to $1.05 a share.

In the teen space, Abercrombie & Fitch ( ANF) posted a 2% drop in December comps, worse than Wall Street's projection for a 0.8% decline.

Aeropostale ( ARO) was the one bright spot, posting a 12.2% surge in same-store sales and raising its earnings forecast. The comps rise was well above analysts' 3.7% expectation.

The teen-apparel seller now sees fourth-quarter earnings of 87 cents a share, before items, up from its prior guidance of 82 cents to 84 cents a share.

Fellow teen clothing seller American Eagle Outfitters ( AEO)on Wednesday posted comps in line with expectations, but lowered its profit forecast . Hot Topic ( HOTT) also warned.

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