Jan. 4 (Bloomberg) -- Holiday sales at Wal-Mart Stores Inc. and Target Corp. slowed as U.S. retailers were forced to reduce prices to lure shoppers.

Industry sales at stores open more than a year rose 3.1 percent in December, making this year's holiday season the slowest in two years, the International Council of Shopping Centers said today. Federated Department Stores Inc.'s sales rose less than analysts anticipated, and Gap Inc. lowered its profit forecast by 18 percent.

Slower growth threatens holiday-season profits, which account for almost a third of the industry's annual earnings. Retailers discounted flat-screen televisions, while cold- weather clothes went unsold during the warmest December in a decade.

``The numbers are going to be less robust than everyone hoped for,'' said Patricia Edwards, who helps manage $7.9 billion in assets at Seattle-based Wentworth, Hauser & Violich. ``Promotions were high and earnings are going to be difficult across the board.''

Sales for November and December combined increased 2.8 percent. In 2005, sales for the two months rose 3.6 percent, while December alone gained 3.5 percent.

The Standard & Poor's Retail Index of 29 companies declined 0.20 to 503.47 at 4:14 p.m. after climbing 9.4 percent last year. Federated's shares fell 20 cents to $37.31 in New York Stock Exchange composite trading.

`Slower Pace'

``It's at best a moderate gain,'' Michael Niemira, the ICSC's chief economist, said in an interview today. ``We have certainly seen a slower pace of spending at the end of the year. That's what we're likely to see in 2007.''

The majority of retailers missed estimates for the third consecutive month, Swampscott, Massachusetts-based research firm Retail Metrics LLC said.

Warm weather hurt apparel sales, and price cuts on clothes and consumer electronics pulled down the figures, analysts said. An acceleration of purchases by procrastinating shoppers on the extra weekend shopping day before Christmas, as well as gift-card spending and bargain-hunting afterward, weren't enough to compensate for a lull earlier in the month. Dana Cohen, an analyst with Banc of America in New York, wrote in a report yesterday that it ``will be a tougher 2007 for apparel retailing.''

Gift Cards, Internet

Retailer profits may still get a lift in January from gift card sales, which aren't reflected as revenue until customers redeem them, analysts said. Internet spending may also give a boost.

The National Retail Federation forecast the average amount spent on gift cards by consumers will rise to $116.50 this holiday season from $88 last year. Online sales for the 61 days ended Dec. 31 rose 26 percent to $24.6 billion, Reston, Virginia-based ComScore Networks Inc. said yesterday.

Wal-Mart, the world's largest retailer, reported a 1.6 percent increase in same-store sales, and forecast an increase of 1 percent to 2 percent in January.

Sales at Federated, the second-biggest U.S. department store company, increased 4.4 percent, falling short of the 5.4 percent increase estimated by analysts in a Retail Metrics survey.

The Cincinnati-based retailer, which converted more than 400 May stores to the Macy's name almost four months ago, said January sales would gain 1.5 percent to 3 percent. It projected a fourth-quarter gain of 5 percent, compared with a previous forecast of 5 percent to 7 percent.

`Softer Than Expected'

Federated Chief Executive Officer Terry Lundgren said in a statement that the sales were ``somewhat softer than expected.'' Revenue at former May stores improved in December from October and November, Lundgren said.

U.S. sales of electronics during the holiday shopping season decelerated from a year earlier, as retailers discounted flat-panel television sets, the NPD Group said Jan. 2. Sales gained 6.5 percent, it said.

Gap, AnnTaylor Stores Corp. and teen apparel retailers were among retailers slashing prices in an effort to generate sales even at the cost of profit, Edwards said.

Limited Brands Inc.'s sales at stores open at least a year rose 4 percent, missing analysts' average estimate of a 9.2 percent gain, after sales at its Express, Victoria's Secret and Bath & Body Works chains each fell short of estimates. Its shares sank 7 percent.

Warm Weather

Last month was the warmest December in 10 years in the U.S., according to a Jan. 2 report from Planalytics Inc., a Wayne, Pennsylvania-based weather consulting firm. The average U.S. maximum temperature was 51 degrees Fahrenheit (10.6 degrees Centigrade), up from 46 degrees in December 2005, it said.

During the holiday season, sales were boosted by early promotions on the day after Thanksgiving, then growth slowed the following three weeks. In the last two weeks, consumers resumed spending.

Minneapolis-based Target, the second-biggest U.S. discounter, said sales gained 4.1 percent in December, short of analysts' 4.4 percent estimate.

The bright spot of December came from upscale retailers, which exceeded analysts' projections on demand for women's clothes and jewelry. Seattle-based Nordstrom Inc. posted a 9 percent increase, and Saks Inc., based in Birmingham, Alabama, said sales soared 11 percent, more than double analysts' estimate.

About 32 percent of the retail industry's profit and 27 percent of sales were derived during the final quarter of 2005, according to the ICSC.

The NRF forecast a 5 percent gain in total sales for November and December, compared with a 6.1 percent jump a year earlier. It will issue its holiday report Jan. 12.

To contact the reporter on this story: Cotten Timberlake in New York at ctimberlake@bloomberg.net.

Last Updated: January 4, 2007 16:19 EST