Traditional retailers haven't exactly embraced online sales channels. Sure, they all have websites, and they sell varying amounts of merchandise through them, but they've been slow to tap into the potential. When I was watching the space as an analyst at a major consulting firm (admittedly, back in 2007), many retailers equated a website to a new store opening. Finally, however, this industry is starting to see the potential of this venue, particularly when it comes to tracking consumer behavior.

When the CEO of Macy's (NYSE: M), Terry Lundgren, says that online sales are only good for 6% of last year's total sales, it's a hint. The translation: "We focus on where the revenue is" is much different from "We focus on where the revenue could be." Aeropostale (NYSE: ARO), on the other hand, sees the upside of playing in the online space, which is where it saw revenues spike 85% last year. Aeropostale has seen increases in traditional venues too, but nothing like what it's realized on the web.

So, maybe there's something to this internet, after all.

Amazon (NASDAQ: AMZN) is having a good day. At the time of this writing, shares of the online retailer are up well over 6% on great volume. The catalyst is the earnings report that was released on Thursday after the bell. Should individual investors share this euphoric mood and buy along with the institutions?

Well, the numbers do look nice. Sales rose 18% in the first quarter. Net income increased 20% to $0.41 per share. And free cash flow was said to have rocketed higher by over 80% over the last twelve months. These are impressive stats. And according to this news article, Amazon management beat analysts by a whopping ten pennies. That's a whole dime, my friends! Looks like people are using the electronic shopping cart a lot these days. Perhaps they find value in shopping at home during a recession. Saves fuel costs, and it's a lot easier to research prices and find deals.

My youngest daughter turned 3 yesterday, and my wife planned a big jungle-themed party for friends and family.

She went all out decorating the house like a rainforest with party supplies and accessories that she spent hours searching for online, primarily at Amazon.com, Inc. (NASDAQ: AMZN). Given the state of the economy, she can't afford to drive from store to store looking for goods. Instead, she is much more efficient and successful in finding a bargain by doing her shopping electronically.

While this is a week when many of us are celebrating and enjoying some much needed time with friends and family, things are not looking so cheerful over at eBay (NASDAQ: EBAY) as slow sales and low traffic are hurting sales on the popular online auction site (subscription required).

This is the first holiday season for the company under its new CEO, John Donahoe, and things are definitely not looking too jolly. According to research firm comScore Inc., the site has been losing a lot of valuable traffic to its competitors, such as Amazon.com (NASDAQ: AMZN) that have more fixed-price products for consumers to purchase, an area where eBay is still lagging.

For the period of November 3 through December 14, a time when many of us were busy spending hours online researching those perfect presents to hand out this holiday, eBay was just not getting the hits that it usually does, and traffic was down by 16% from the same period last year. In contrast, Amazon was enjoying a modest increase in traffic of 6% during the same time frame.

The good news this holiday season is that online spending for gifts is up. Depending on the source, the rise is somewhere between 4% and 9%.

The missing piece of the story not reflected in those numbers is that people are spending much less per transaction. While activity may be up, retailer profitability may be down, way down.

According to The New York Times, the Chase Paymentech's Cyber Holiday Pulse Index tells a depressing story. "Chase's index, which surveys 25 of the largest 150 retailers on its Internet payment processing network, showed that the average shopper spent $7.19 less per transaction on Cyber Monday this year over last."

Online spending is not likely to be the only place where this is happening. Consumers, under financial pressure due to lack of credit and concerns about their jobs, are probably spending less everywhere they go. That would make sense. Getting overextended financially is much more risky this year than at any time in the recent past, perhaps going back decades. Why shell out a lot of money? Who knows how bad 2009 will be.

Retailers work on narrow margins, sometimes as low as 2%. Discounts can wipe that out. Comparisons with last year's shopping activity can be very deceiving.

Douglas A. McIntyre is an editor at 247wallst.com.

When the Bureau of Economic Research declared that the recession had officially begun in December 2007, the entire retail sector shrugged its shoulders and said, "No kidding."

Shares of companies that deal directly with the consumer, except for the deep discount retailers, have known for some time that the economy was struggling. Sales have been declining steadily and, with the deteriorating operating environment, shares of the retail stocks have been absolutely crushed.

The entire retail group is one of the biggest losers in the market this year, with some stocks down 80% to 90%.

That said, those retailers that offer big discounts, including Wal-Mart (NYSE: WMT) and Big Lots (NYSE: BIG), are doing much better on a relative basis.

Is online shopping becoming boring to you? While the convenience of internet shopping is extra-handy to those of us with busy lives, the benefits go beyond that: little to no sales taxes for many, free shipping promotions and ever-cheaper prices. The sheer selection of things you can buy online generally outweighs what you can buy in a physical store, too. While there is a social component in many product categories these days -- like teenage clothes and athletic shoes -- that will preclude most from shopping for certain items online, for normal product purchases, you can't beat online shopping.

But at what point does the thrill of saving money, shipping costs and possible sales taxes lose its luster? The 25% growth rate from 2004 slowed down to an estimated 16% growth rate this year. Does this slowdown mean online shoppers are moving back to buying things in person, or they're just not buying as much online?

Will sales at online retailing behemoths like Amazon.com (NASDAQ: AMZN) continue to increase for the foreseeable future? Hard to tell, but like in the case of Wal-Mart Stores (NYSE: WMT), can sales continue at a nice pace (as in, double digit) with annual sales at such a high right now? Just because sales crest using a newer medium (like the decade-old online sales channel), this does not mean folks are becoming bored with online shopping -- it's just the top of the "product cycle" known to economists, but taken to the retail medium. In addition, brick-n-mortar stores and companies have fought hard to lure customers back from online venues and into stores again.

For years now, I've done much of my holiday shopping on the web, taking advantage of free shopping options at many online retailers and the absence of state sales taxes on many purchases. Add this to the ease of shopping from the couch with a few mouse clicks, and shopping online offers immense rewards, especially during the frenetic holiday season.

Soon, however, this luxury may be coming to an end. Many states are tired of their citizens not reporting online purchases -- and states are still owed sales tax even for online purchases. With combined city and town tax rates at nearly 7.5% in some cases, it seems like everything we do these days is taxed. The online purchasing option is one way for many consumers to escape the tax man.

Some states such as Delaware, Montana, New Hampshire and Oregon don't impose sales taxes, but all other states do. The Supreme Court has ruled a state can't constitutionally require a merchant to collect the tax unless the merchant has some physical connection to that state -- and most online retailers don't have a physical connection to most U.S. states, much to the delight of online shoppers.

Retailers like Best Buy (NYSE:BBY), Circuit City (NYSE:CC) and Wal-Mart Stores, Inc. (NYSE:WMT) collect sales tax on online purchases since those store chains have physical presences in most states. But Amazon.com doesn't, and as a result it is the preferred shopping place for many people. The Supreme Court noted, however, that there is nothing to stop Congress from authorizing states to require collection by out-of-state sellers.

With the U.S.Congress coming under the control of Democrats -- who are traditionally tax-hungry to fund everything and anything -- are we in for sales taxes from online purchases soon? Expect this one to be a billion-dollar fight.