Retailers will have a better holiday than last year, but sales will still be the second softest in more than 40 years, according to one of the first studies issued for the Christmas buying season.

Gift buying will be flat for the upcoming fourth-quarter holiday season, after falling 4.5% in 2008, research firm Retail Forward said. These are the two worst years since the government began tracking retail sales 42 years ago.

Holiday season sales will rise around 2.5% for mass merchants, a group that includes discount department stores like Wal-Mart Stores Inc. (WMT) and warehouse clubs like Costco Wholesale Corp. (COST), Retail Forward said. This is up from a 2% gain last year.

Online sales are forecast to grow 4% this holiday season, a big turnaround from their 5% drop last year. The pace of online sales is expected to be sustained into 2010, but remain shy of double-digit growth seen before the recession hit in December 2007.

Apparel and accessories stores are projected to see holiday sales drop about 2% during the fourth-quarter holiday period, a better showing than their 9% decline last year. Most of the continued decline will be at department stores, which will still feel the brunt of poor economic, competitive and demographic trends, Retail Forward said.

The homegoods channel will see sales decline more than 2%, compared with a 7.4% drop last year.

Building and home improvement retailers are projected to see sales decline 2%. The group is also expected to see slight sales gains emerge in early 2010 as the housing market continues to improve.

An "emerging recovery will be driven by growing confidence among households in response to, among other things, subsiding job cuts," said Frank Badillo, senior economist at Retail Forward. "Businesses, in turn, are taking their foot off the brakes in light of leaner inventories and expectations that pent-up demand and economic stimulus will soon require new business investment."

The outlook comes as retailers are expressing a great deal of uncertainty about the coming holiday season after being hammered last year by a lack of sales that left them with a major bloat in inventory they have been paring back throughout 2009.

Retailers are entering this season with less merchandise, with many saying the prefer to "chase inventory," or order on an as-needed basis if initial stocks of goods are bought out.

Earlier this month, Wal-Mart Chief Executive Mike Duke said he expects buying for the holidays to start late this year as consumers hold back in search of bigger markdowns as well as do a lot of comparative shopping for the best deals.

Retailers have been a drag in what is shaping up as a recovery in other key areas of the economy, like housing and manufacturing.

Investors appear to be anticipating that retailers will join the fold, based on their lifting the group's shares over the past couple of months. The Standard & Poor's Retail Index hit a 52-week high on Tuesday, for a second day in a row, with over one-tenth of its roughly 95 members at their highest levels in a year. The index was recently up 0.3% to 386.85.

Stocks at fresh 52-week highs are mainly apparel retailers and discounters, while department stores, while up, are not at peaks. Retailers trading at one-year highs include Gap Inc. (GPS), Stein Mart Inc. (SMRT), TJX Cos. (TJX), Ross Stores Inc. (ROST) and Jos. A. Bank Clothiers Inc. (JOSB).

- By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com