NEW YORK — Deterioration, yes. Disaster, no.

That’s the profit outlook of Wall Street analysts and other informed observers of the retail landscape as they prepare for this Thursday’s reports on December comparable-store sales and, more critically, fourth-quarter and full-year earnings reports that will commence next month.

A late surge in business and prudent inventory management will help most major retailers steer clear of doomsday scenarios, they said, and stores’ willingness to take their markdowns early may have not only cleared the shelves for deliveries of fresh spring merchandise but also limited the extent of margin erosion.

Still, the margin picture, even to the most optimistic eye, is extremely problematic. “Margins will be absolutely awful and therefore the profit outlook for the quarter is diminished for most department and specialty store retailers who have been selling strictly on the basis of price,” said Emanuel Weintraub, head of the New Jersey-based consulting firm that bears his name. “The only thing stores are doing is converting inventory into cash. And, if they are not doing that, they are going to be in serious trouble.”

Clearly, emphasis on value and necessities, as opposed to luxury and frivolity, boosted the results of retail chains such as Wal-Mart, Target, Kohl’s and J.C. Penney Co., all of which are expected to show profit increases. Specialty stores with well-defined consumer targets — including Hot Topic, Chico’s FAS, Ann Taylor, Lands’ End, Wet Seal, Too and Hennes & Mauritz — should also weather a stormy quarter well.

In other cases, however, margins are expected to be depleted. Gap’s gross margins should be down 15 percent, according to A.G. Edwards & Sons’ Robert Buchanan, despite coming off weak year-ago comparisons. Federated, May Co., Saks, Dillard’s, Kmart, American Eagle Outfitters, The Limited, Intimate Brands, Charlotte Russe and Ross Stores also are expected to show decreases.

During a season in which the comforts of home and the appeal of gadgetry outshined the lure of fashion, most apparel retailers were able to ring up enough sweater and sleepwear sales to squeak past reduced sales plans. Consumers adhered to their patriotic duty to spend, but often picked up their holiday gifts at ridiculously reduced prices at the last moment. The drawback is that stores can expect profit droughts or at best only slightly improved results, retail and apparel analysts predict.

“Stores may meet their comparable-store sale plans with friends-and-family coupons and 40 percent off already marked down prices,” said Dana Telsey, analyst at Bear Stearns, “but the cost will be greater-than-expected margin erosion and some fourth- quarter profitability that may come in a bit lower than expected.”

Telsey said some stores were able to cushion the gross margin blow through lowered advertising expenses and adjusted payroll hours. Yet, as reported, Kmart Corp. cited reduced advertising for its recent sales shortfall and cutbacks in sales personnel may have contributed to the soft sales of many stores.

Christine Kilton Augustine with ABN AMRO said she anticipates a “tough quarter” and that the abbreviated retail rally late in the season “is not a just cause to raise earning estimates.” The analyst said she expects department store year-over-year earnings to be down 15 to 40 percent, while Gap Inc.’s problems, and anticipated loss, will pull down specialty stores slightly as a group.

A comparison of year-ago earnings per share with fourth-quarter consensus estimates provided by First Call revealed that 23 of 38 retail companies are expected to report reduced EPS for the current quarter, versus 15 penciled in for profit advances (see chart: TK check page). Only one, Gap, is expected to post a loss, but nine — including department store operators Federated, May Co., Saks and Dillard’s as well as Neiman Marcus — should see EPS declines of 20 cents or more. Analysts on average are expecting Gap to report a fourth-quarter loss of 12 cents for the current quarter, compared with EPS of 31 cents in the year-ago quarter.

Calling the quarter perhaps the weakest in recent memory, Richard Jaffe at UBS Warburg said the clean state of inventories may prove to be the silver lining. Even at the expense of margins, retailers moved their stocks and paved the way for fresh spring assortments. In addition, he said the markdowns were essential since consumers weren’t focused on apparel this season.

In the wake of the events of Sept. 11 and the recent onset of a recession, retailers started the fourth quarter defensively, accelerating sales and markdowns and often postponing or canceling orders. Holiday shoppers finally showed up in the last week of December, easing some of the pressure, but hardly setting the stage for a massive recovery in early 2002.

“We got unexpected strength in the final few days of December and margins at the end of the day are under a bit less pressure,” said Buchanan at A.G. Edwards & Sons. He predicted retailers as a group will show modest earnings growth in the fourth quarter, flat to up 5 percent. Overall, comps should come in at about 1.1 percent for December, with hard goods up 4.3 percent and soft goods down an equal amount.

Joseph Teklits with First Union Securities said strong selling activity just before and after Christmas cleared inventory, which could have proved an even greater liability. “The obvious effect is that retailers will post down earnings, but not the disaster people were fearing in late November and early December,” he said.

Richard Baum at Credit Suisse First Boston said he is looking for fourth-quarter net income for his group of 20 apparel and accessories specialty retailers to be down roughly 25 percent from last year. “This year, we had more first-time promotion pre-Christmas in the 15 to 35 percent range and not much at full-price selling. However, retailers sold a lot more at the first markdown and a lot less at second and third.”

For example, one analyst noted that Abercrombie & Fitch addressed retail softness early, mailing coupons to its customers, working down excess inventory before it required more substantial markdowns. “Their decision to mark down early in the season and be very proactive in managing inventory in a tough environment will pay off in the quarter,” he said, although he said profits should be lower. The consensus estimate for Abercrombie & Fitch is EPS of 69 cents, versus 76 cents for last year’s final quarter.

Shari Schwartzman Eberts at J.P. Morgan Securities said that although holiday sales were poor, they could have been worse. She said strong sales in the final days before Christmas and in the week after pushed many broadline retailers toward the high end of their lackluster sales plans. “This sales strength should provide limited upside, as heavy discounting drove the sales,” she said.

Eberts raised fourth-quarter estimates for Federated, Kohl’s, Target and Wal-Mart “to reflect what we expect will be above-plan sales combined with reasonable levels of margin pressure relative to plan.”

Looking to the immediate future, retail analysts and consultants said that although nearly all retailers were able to keep stores clean to make room for spring selling, they will now be faced with the daunting task of drawing consumers into full-priced purchasing again after a steady stream of on-sale selections.

“The challenge for retailers is going to be how to get customers into the stores now that they don’t have discounts,” Augustine said. “If there is enough newness at full price to lure the customer into the stores, they will be back. Working in favor are lower interest rates and energy prices, although the unemployment rate could be another matter in 2002.”

Those interviewed said that although they expect to see a slight pickup in sales during the first few months of 2002, any sort of noticeable impact will not be evident until the second half. Weintraub predicted 1 to 2 percent growth in comps in the first half and more in the second, although “nothing to write home about.”

However, with consumer confidence taking a nice jump in December, economists are hopeful that even a modest improvement in consumers’ spending levels will lead the nation out of the recession.

James Glassman, an economist with Chase Securities, noted that real consumer spending in the fourth quarter is expected to climb 3 percent, although it should fall in the first half of 2002 and return to 3 to 3.5 percent growth in the second half, as a $70 billion tax cut elevates workers’ net pay.

“It’s real promising,” Glassman said. “The real surprise has been that the consumer has been much more resilient than people feared.”