By Andria Cheng

Retail shares headed higher early Wednesday with Big Lots Inc. (BIG) shares getting a boost after an upgrade from J.P. Morgan. Staples Inc. (SPLS) shares dropped after the office supplies retailer's fourth-quarter profit excluding items missed analysts' estimates and the retailer said it's not giving any profit forecasts for the first quarter or the full year.

The S&P Retail Index rose 1.1% to 249.21 in early trading, in line with the broader markets, after a rally in the financial sector.

Staples shares rose 1.4% to $15.96, erasing an earlier decline as the markets headed higher. The retailer said fourth-quarter profit dropped 14% after the recession and the worst jobless rate in over a quarter of a century led to lower demand for bigger-ticket items such as computers and furniture. The Framingham, Mass.-based company also said it's not providing profit and sales forecasts for the first quarter and for the full fiscal year as it expects weak economic climate to continue throughout 2009.

Big Lots shares jumped 9.1%. J.P. Morgan analyst Charles Grom raised his rating on the discount closeout retailer to overweight from neutral. "We believe (Big Lots) remains the best positioned retailer we cover to take advantage of the soft consumer backdrop, and the company continues to see more deals today than at any point in recent history," he wrote.

American Eagle Outfitters Inc. (AEO) shares rose 6.6% to $10.20. The teen clothing retailer said Wednesday that its fourth-quarter net income fell to $32.7 million, or 16 cents a share, from $140.5 million, or 66 cents, a year earlier. Excluding store impairment charges and other items, the company said it would have earned 19 cents a share. Sales fell 9% to $905.7 million from $995.4 million. Comparable-store sales declined 16%. The retailer forecast first-quarter profit of 4 cents to 7 cents a share, excluding the possibility of additional losses related to investment securities. Analysts, on average, estimated profit of 20 cents a share in the fourth quarter and 8 cents in the first quarter.

J. Crew Group Inc. (JCG) shares jumped 12% to $10.89 after it posted a smaller-than-expected fourth-quarter loss.

-Andria Cheng; 415-439-6400; AskNewswires@dowjones.com