NEW YORK ( TheStreet) -- It shouldn't take much for department stores to beat expectations when they report second-quarter earnings this week.

After months of cost cuts and the streamlining of operations, even just a moderate comeback in sales should provide earnings leverage for the stores.

But investors will really be focused on managements' outlook for the second-half of the year, as a consumer slowdown in spending once again looms, and severe discounting threatens margins.

Fitch Ratings predicts department store sales will be up about 1% in 2010 and 2011, better than its previous estimate of a decline between 1% and 2% for the year.

Of course, there will be both winners and losers within the sector. Those department stores that have invested in stores even amid the recession -- improving brands and adding private labels -- and those that have continued to focus on value, will likely come out on top.

These winners will succeed at the expense of those other players that continue to execute poorly, have underinvested, or are unable to invest appropriately in their store base, according to Fitch Ratings. Meanwhile, department store results will also set the tone for the retail as a whole, as they kick off the earnings season for the sector.

So settle in and click on for a preview of how department stores will fare in the second quarter....

Macy's

Macy's ( M), no doubt, is the comeback kid.

While most other retailers reported a disappointing start to the back-to-school season, Macy's posted a 7.3% surge in July same-store sales, easily topping forecasts of a 5.9% increase.

The department store declared itself to be off to a "great" start for fall, with particular strength in its new Material Girl clothing line designed by Madonna's daughter.

For the second quarter, same-store sales grew 4.9%, while total revenue shot up 7.3% to $5.54 billion -- better than the $5.48 billion analysts predicted.

In addition, Macy's has sharpened its fashion and home offerings, with exclusive lines from Martha Stewart, and Slade Wilder, a brand for young men. "The old Macy's didn't do this," says Craig Johnson, president at Customer Growth Partners.

Other benefits include: My Macy's localization efforts, which has better aligned inventories and unified the organizational structure; strength at Bloomingdale's; and online sales, which soared 28.1% in the second quarter.

J.C. Penney

J.C. Penney ( JCP) has middle-child syndrome. A direct competitor of both Macy's and Kohl's, the department store is losing on both ends.

In July, J.C. Penney reported a surprise 0.6% decline in same-store sales and warned that second-quarter profit will come in at the low end of its expected range of 5 cents to 8 cents a share. This marked the eight straight month that J.C. Penney lagged Macy's, after the two were nearly tied for much of 2009.

J.C. Penney has been trying to remain relevant with an exclusive deal with Liz Claiborne ( LIZ), which rolled out in stores this week, and fashion brand Mango MNG.

But its American Living line didn't pan out as people had hoped, Johnson says. "J.C. Penney still has a lagging image problem," he says. "Customers view them as dated and are visiting mall-based retailers less."

J.C. Penney is also being hurt by off-pricers like TJX ( TJX) and Ross Stores ( ROST), as well as Target ( TGT).

Over the last several years J.C. Penney has been the predominate market share donor in the sector, and as a result, Kohl's ( KSS) and TJX are now larger than the company.

"J.C. Penney is fixable, but it will take some time," Johnson says.

Kohl's

Kohl's ( KSS) upped its second-quarter outlook last week after it reported a 4.1% jump in July same-store sales.

The company now expects to earn between 80 cents and 82 cents a share, from prior guidance of 70 cents to 75 cents a share. Analysts are calling for a profit of 80 cents on revenue of $4.09 billion.

"Our sales results in July were driven by increases in the number of transactions per store, consistent with our trends throughout 2010," Kevin Mansell, president and CEO, said in a statement.

Kohl's has seen strength in the Southwest, and in its footwear and men's business.

Still, the average price of merchandise and amount shoppers are purchasing per trip is falling, indicating consumers remain cautious.

Saks

Saks ( SKS) has made a remarkable recovery from last year's lows.

Saks has been trimming its fleet, and Johnson expects the company to close a few more locations this year.

Still, within the luxury department store sector, Saks still lags rival Nordstrom.

In July, same-store sales shot up 6.4%, and in the second-quarter grew 4.6%. Total sales in the second quarter rose 4.8% to $583.4 million from $556.4 million, which fell short of estimates of $584.9 million.

Analysts are calling for a loss of 17 cents a share in the second quarter.

"Recent comparable store sales trends for the luxury department store retailers have generally outperformed the broader department store sector given very depressed sales levels in the year-ago period," according to a recent report released by Fitch Ratings. "However, it is still premature to determine sustained level of sales growth for 2011 and 2012."

Nordstrom

Nordstrom ( JWN) has been on a run for the past six months.

July was especially buoyantfor Nordstrom, as the company hosted its famed Anniversary Sale, which no doubt helped contribute to the 7.6% uptick in same-store sales during the month. This sale typically makes July the company's second largest sale month.

Jewelry, dresses and handbags were the best-selling categories during the month for Nordstrom, and the average amount that shoppers spent during each visit increased modestly.

For the quarter, same-store sales spiked 8.5% for Nordstrom, while total sales grew 12.7% to $2.42 billion. This was slightly higher than the $2.40 billion analysts predicted.

"The middle-to-upper customer is showing more stability," says Joe Feldman, analyst at Telsey Advisory Group. "The names that will hold up well are those that cater to this higher-end customer."

Of course, Nordstrom makes that list.

Dillard's

Dillard's ( DDS) remains one of the biggest laggards in the sector.

While Dillard's saw a rebound in sales over the past few months, this was primarily due to easy comparisons from last year's depressing numbers. Dillard's also reversed these gains in July when it reported a 3% decline in same-store sales, far worse than the 1.5% gain analysts expected. Besides a few months of positive same-store sales, Dillard's had been on a downward trajectory since 2001.

During the month, Dillard's made note of sluggish sales in its furniture and home categories.

Fitch Ratings said it remains cautious on Dillard's ability to drive sustainable top-line growth and garner market share in the long term.

"The future isn't too bright for second-tier players," Johnson says.

-- Reported by Jeanine Poggi in New York.

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