My latest column is up at RealMoney.

This has been a terrible time to own stocks tied to consumer discretionary spending. The Consumer Discretionary SPDR (XLY) is down more than 16% so far this year. So I’m somewhat surprised to find myself giving serious consideration to a retail stock that is up more than 50% since January.

Ross Stores (ROST) operates more than 900 stores, selling first-quality, in-season, name-brand and designer apparel and housewares at 20% to 60% off the regular prices of department stores and specialty stores. Ross targets value-conscious women and men between the ages of 18 and 54, a demographic that currently includes just about everyone.

After three quarters of exactly matching the consensus estimate, Ross beat its numbers by 2 cents a share in the April quarter. This month the company announced that June same-store sales were up a robust 8% and that total sales were up 15% from one year ago. The company now expects that earnings per share for the 13 weeks ending Aug. 2 will be in a range of 51 to 53 cents, up from previous guidance of 43 to 47 cents and a consensus estimate of 46 cents.

Although Ross has a higher price-to-book ratio than the average apparel retailer, I believe it is justified by the company’s higher return on equity. I don’t see much change in the level of valuation, which means the 15% annual growth expectation would also be my estimate of total return over the next three to five years.

My comfort zone is more in value investing than in momentum investing. To see a stock up so much makes me very nervous. But that doesn’t mean I shouldn’t consider buying it. Just like BJ’s Wholesale (BJ) or the recession diet, the plays on consumer belt-tightening continue to work. Ross is one of those plays. If I get antsy about the price because of the recent strength, I could always put in some tight stops or buy some out-of-the-money puts for downside protection. Meanwhile, it’s hard to argue with a stock that is working when so few are.Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

It is retail sales reporting day, and here is what our Watch List names are saying.

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Abercrombie and Fitch (ANF):

April comparable store sales decreased 15% for the four-week period ended May 5, 2007, compared to the
four-week period ended May 6, 2006. Total Company direct-to-consumer net sales increased 48% to $13.6 million for the four-week period ended May 5, 2007, compared to the four-week period ended April 29, 2006.

The Company expects to report net income per diluted share of $0.64 to $0.65 for the first quarter of fiscal 2007. Despite difficult selling conditions, the Company expects to achieve its projected growth primarily through prudent expense management.

Analysts were expecting $0.66. And to think, last month they seemed immune.

Small Cap Watch List (Track at Marketocracy) member Aeropostale (ARO):

Aeropostale, Inc. (NYSE: ARO), a mall-based specialty retailer of casual and active apparel for young women and men, today announced that total net sales for the four-week period ended May 5, 2007 decreased 9.8% to $75.4 million, from $83.6 million for the four-week period ended April 29, 2006. Same store sales for the month decreased 14.0%, compared to the corresponding four-week period ended May 6, 2006.

Julian R. Geiger, Chairman and Chief Executive Officer said, “While our results for the month reflect the negative effect from the shift in Easter, we remain very pleased with our performance for the first quarter, particularly the combined March and April period in which we generated a 2.6% comparable store sales increase. During the month we continued to control both the depth of our promotions and level of our inventory. Accordingly, we were able to maintain the positive trend in our gross margins and we are on track to end the quarter with earnings above our previously issued guidance. We also remain well positioned for a smooth transition into the summer selling season.”

Based on the positive trend in gross margins for the month, the company updated guidance for the first quarter of fiscal 2007. The company now expects net earnings in the range of $0.24-$0.25 per diluted share, versus its previously issued guidance of $0.22-$0.23 per diluted share.

Analysts were expecting $0.23.

Large Cap Watch List (Track at Marketocracy) member TJX Companies (TJX):

Sales for the four-week period ended May 5, 2007, were $1.28 billion, up 2% over the $1.26 billion achieved during the four-week period ended May 6, 2006. For the thirteen weeks ended May 5, 2007, sales reached $4.2 billion, a 7% increase over last year’s $3.9 billion. Consolidated comparable store sales for the four-week period ended May 5, 2007, decreased 1% versus last year.

Carol Meyrowitz, President and Chief Executive Officer of The TJX Companies, Inc., stated, “Comparable store sales results in April were below our expectations, which we attribute to the unseasonably cold and wet weather across most regions of the country during the first half of the month. That said, when the weather warmed up during the second half of the month, customer demand for spring apparel accelerated significantly and comparable store sales ran ahead of our plan. Furthermore, despite April’s unseasonable weather, comparable store sales for the combined March/April period, which includes the Easter holiday, were up 3%, which was in line with our plans.”

All in all a mixed bag, with lots of things on which to blame any missteps.

Large Cap Watch List (Track at Marketocracy) Member TJX Companies announced a sizable dividend hike:

The TJX Companies, Inc., the leading off-price retailer of apparel and home fashions in the U.S. and worldwide, today announced that its Board of Directors declared a regular quarterly dividend in the amount of $.09 per share, representing a 29% increase in the per share amount from the last dividend paid.

Giving the company a quick once-over, it is easy to recall how it made it onto our Watch List. Cash flow has exceeded net income in each of the last three years, and grown at a similar (if modest) rate. Free cash flow, defined as cash from operations less capex, last year was $800 million. Coincidentally, that is also about the same amount as both the cash on hand and the total long-term debt.

Given a total enterprise value of $12.6 billion, the company is trading at a 16x multiple of free cash flow. While not cheap, it implies a growth rate on the order of 4% per year, which is in line with free cash flow and earnings growth last year and well below the average analyst estimate of five-year growth, whatever that is worth.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

Watch List Companies

Jos a Bank (JOSB): Men’s clothing retailer JoS. A. Bank Clothiers Inc. said Thursday that sales at stores open at least one year, or same-store sales, increased 8.5 percent for the month of June, easily beating Wall Street expectations for a 4.3 percent boost.

BJ’s Wholesale (BJ): June sales fell 0.1 percent at its stores open at least a year as record-breaking rainfall hurt demand, and it lowered its quarterly profit forecast. Analysts, on average, expected 2.4 percent growth, according to estimates compiled by Reuters.

TJX Companies (TJX): Discount clothing retailer TJX Cos. on Thursday said June same-store sales rose 4 percent, beating both internal and Wall Street estimates, and prompting the company to estimate second-quarter earnings will be at or above the high end of its previous forecast.

Wall Street expected same-store sales, or sales at stores open at least a year, to add 2.7 percent, according to Thomson Financial.

Other Notable Retailers

Wal-Mart Stores Inc. (WMT) and other top U.S. retailers posted disappointing June sales on Thursday as soaring energy prices and record-breaking rains in the Northeast curbed consumer spending.

But mid-priced chains such as J.C. Penney Co. Inc. (JCP) and Kohl’s Corp. (KSS) reported strong gains, suggesting that some shoppers stayed away from more expensive department stores. Federated Department Stores Inc. (FD), owner of Bloomingdale’s and Macy’s, recorded lower-than-expected sales.

Overall, sales rose 2.8 percent at stores open at least a year — a key retail measure known as same-store sales. That was slightly below forecasts for a 3 percent gain, according to research firm Retail Metrics.

Apparel retailer Limited Brands Inc. (LTD), warehouse club operator Costco Wholesale Corp. (COST), and home decor chain Pier 1 Imports Inc. (PIR) were among the chains missing Wall Street’s sales targets.