As “Black Friday” approaches next week, U. S. retailers are expecting a strong holiday season – at least, compared to the dismal performance of the past two years.

Indeed, retail sales rose a surprisingly strong 1.2 percent in October, despite persistently high unemployment, continued foreclosures and an overall fragile economy.

The National Retail Federation (NRF) forecasts that holiday sales for 2010 will increase by 2.3 percent to $447.1 billion, far better than last year's 0.4 percent uptick and the 3.9 percent sales drop in 2008. In addition, retail sales have climbed in four of the past five months; while same-store sales have risen for fourteen consecutive months.

“This continued momentum is good news for the industry, especially with Black Friday... quickly approaching,” said NRF CEO Matthew Shay.

“While there is no question that consumer demand has improved, there are still questions about consumer confidence tied to high unemployment. We need to see improvement in key economic indicators to sustain any long-term growth.”

Indeed, retail stocks have surged the past few months, far outperforming the broader market, largely in anticipation of a robust Christmas shopping season.

Since the end of August, the SPDR S&P Retail ETF (NYSE: XRT) has gained 25.6 percent through Wednesday, versus a 12.3 percent advance for the S&P 500 index. A large number of retail names, including Wal-Mart (NYSE: WMT) and Kohl's (NYSE: KSS) have recently posted strong quarterly profits and provided decent outlooks for the remainder of the year.

However, all is not necessarily rosy in the retail arena, despite these encouraging numbers.

It's not a healthy retail season at all, since we're coming up from such depressed levels, said Keith Springer, president of Springer Financial Advisors in Sacramento, Cal.

Any uptick looks positive and provides a sigh of relief; but. generally speaking, consumers are still over-leveraged and very cautious. The holiday sales figures will likely represent a blip.

Springer also said that while retail sales have indeed improved, they are nowhere near where they need to be in order for stores to increase supply and start re-hiring workers again -- the hallmarks of a true revival in retail.

In addition, many stores, including Wal-Mart and Target (NYSE: TGT), have already slashed their prices (well before Black Friday) in hopes of attracting the maximum number of customers. Presumably, such heavy discounts wouldn't be required if consumers were truly comfortable about spending.

Moreover, like corporations across the spectrum, many retailers have fattened their bottom-lines by cutting costs left and right and reducing head-count.

Still, Ted Vaughan, partner, retail and consumer product practice, BDO USA, an accounting and consulting firm, cautions that discounting by retail stores may be less pronounced this year than in the past and may simply be a way for stores to entice shoppers and expose them to an array of regularly-priced items.

A survey by BDO suggests that 64 percent of retail stores’ chief marketing officers expect to see more discounts and promotions this holiday season, a significant decline from 2009 when 96 percent said they planned more discounts.

“Higher sales expectations for Black Friday and Cyber Monday indicate that 5 a.m. door-buster holiday sales are still crucial revenue drivers for the retail industry, said Vaughan.

“This year, however, retailers may have turned the corner on the bargain-basement prices seen in 2009. Our survey results show that retailers will likely look to create more of a balance in promotional offers this year, slightly scaling back on excessive discounts and targeting more promotions in-stores.”

Vaughan is forecasting a 2.5 percent jump in holiday retail sales this year, slightly higher than the NRF estimate. He concedes that while unemployment is still uncomfortably high, the labor picture appears to be stabilizing, i.e., no huge layoffs have been announced recently, although job-creation remains elusive.

Thus, after two brutal holidays in a row, consumers might be a bit more willing to loosen their purse strings this year.

From an investment perspective, Springer believes retail stocks have already priced in a good Christmas season and that they have little upside -- excluding certain niche names like Best Buy (NYSE: BBY), given the continuing high popularity of electronic products, like Smartphones, iPads and DVDs.

Otherwise, the poor economic backdrop will likely lead to more retail companies either folding or merging in order to survive, Springer said.

Longer-term, many retail stores will either go out of business or combine with other entities as they face a serious price squeeze and increased competition, he noted.

Retail stocks are vulnerable; they will need to rack up tremendous sales, given their thin margins.

Another issue is the meaning and ongoing relevance of Black Friday, the day that has traditionally signaled the commencement of the holiday shopping season, Historically, this day after Thanksgiving has been closely watched by the market as an indicator of the strength of consumer spending and, by extension, the health of the economy.

However, with more and more people ordering and buying gifts online, Black Friday's receipts may no longer provide such a meaningful picture.

Black Friday no longer is a true reflection of retail sales, but it is symbolically important and will be observed by the market, Springer commented.