Early indicators suggest that there is still some life left in the American consumer. The hordes were back out for the Thanksgiving weekend, though mega discounts means retailers will still struggle to break even. Martin Denholm says investors should stick with bargain-oriented retailers like Wal-Mart (NYSE:WMT) and TJX Companies (NYSE:TJX).

This from Smart Profits Report:

‘Tis the season to… well, spend. And in a credit-oriented nation, Americans again proved that they do that better than the rest. The National Retail Federation (NRF) says 172 million consumers hit the malls or logged on to buy goods over the extended Thanksgiving weekend - a 17% jump from the same period in 2007. And ShopperTrak says “Black Friday” sales rose 3% to $10.6 billion over “B.F. 2007,” with the average consumer spending $372 - up 7.2% from a year ago.

Granted, a 3% sales rise isn’t spectacular, but it’s not terrible for a nation with a pathetic savings rate, a 3.7% year-over-year inflation rate in October, and 1.2 million job losses. I’m sure America’s battered banks are wondering exactly where these guys are getting their money from - and whether they can pay it back.

Retailers are doing their best to help - and potentially at their own expense…

The Retail Sector’s Vicious Cycle

Many still predict a rough time for retailers, with the NRF predicting a measly 2.2% rise in holiday shopping sales - the lowest since 2002. Retailers are compelled to offer eye-popping deals to cash-strapped consumers, but they can’t sustain the bargains forever, for risk of eroding their profit margins too much.

That could result in flat sales and profit growth, with some analysts suggesting that it could also lead to more bankruptcies, following electronics giant Circuit City, Linens n’ Things, and The Sharper Image. In turn, that could drive unemployment even higher.

Already, a major online trend is providing some clues…

When High Traffic Meets Falling Sales

The good news: Online traffic on “Cyber Monday” (the Monday following Thanksgiving, which traditionally kicks off the online shopping season) climbed by 10% over the same day in 2007, according to Pricegrabber.com. Other firms have also reported heavy activity, with Target (NYSE: TGT) expecting its web traffic to jump 40% this season.

The bad news: Online research firm comScore says web sales are down 4% so far this season and will remain the same as last year throughout the November-December compared at $29.2 billion. That’s prime evidence that deep discounts could squash profit margins. But essentially, retailers have little choice.

But what choices do investors have?

“It’s Wal-Mart Time”

A few weeks ago, my colleague Marc Lichtenfeld gave you three companies that could be set to buck the gloomy retail trend this season.

One of them was sector bellwether Wal-Mart (NYSE: WMT), whose CEO Lee Scott proudly proclaims, “It’s Wal-Mart time. This is the kind of environment that Sam Walton built this company for.”

He’s right. As consumers go all-out to dig up value, Wal-Mart is among those discount-oriented firms set up to not only weather this season’s storm, but to profit from it. Check out Marc’s article for more details, plus his thoughts on Kohl’s (NYSE:KSS) and Dollar Tree (Nasdaq: DLTR).

I’m going to throw another one into the mix - The TJX Companies (NYSE: TJX) - a company I actually highlighted here a year ago…

The Outlook For TJX

At the time, the stock traded around $28.50 and bounced to $32 by early February 2008, followed by a 52-week high of $37.52 in August.

Since then, however, shares have sunk back to the $20 area, as a combination of high oil prices at the time stifled consumer spending, while the U.S. dollar (the company also operates overseas, including Britain and Ireland), economy and stock market slumped.

Despite this, though, the firm reported a 4% and 3% sales rise in August and September respectively, compared with August-September 2007. That’s a testament to its business model - the company offers fashionable, quality goods (some of which it buys from other higher-end retailers’ excess inventory) at attractive prices.

However, total third quarter profit came in at $235.8 million ($0.54 per share), compared with $249.5 million ($0.54 per share) in Q3 2007 - a 5.5% drop, due to the negative economic climate and an exchange rate hit. Over the first nine months of 2008, though, TJX earned $629.9 million ($1.42 per share) over the $470.6 million ($1.00 per share) from January-September 2007.

TJX pegs fourth quarter EPS between $0.58 and $0.62 - lower than the $0.67 in Q4 2007 and the $0.72 estimates, but $2.07 to $2.11 per share in fiscal 2009, compared with $1.68 for this year.

Also, the company’s T.J. Maxx and Marshall’s stores could be prominent destinations for bargain-hunting shoppers this season. The fact that The Gap (NYSE:GPS) posted better than expected third quarter results could bode well for TJX. Other positive factors include the U.S. dollar strengthening a little and Card Activation Technologies settling its litigation against TJX.

Ultimately, fourth-quarter retail earnings will tell the full story of this holiday period

And while the overall gloom shrouding the retail sector could drag successful, bargain-oriented companies down with the pack in the short-term, provided their business models lure in discount-hungry consumers this season, they could end up having the final word.

Source: Tune Out The Retail Doomsayers… These Firms Could Bust This Season’s Trend