It's Gold Star Clearance Time for This Department Store Stock

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If you went shopping at the typical Kohl's (NYSE: KSS) outpost this Christmas season, you found plenty of sale signs and clearance racks as you pushed your black shopping cart around a sprawling, single-story, brown cinderblock box in the 'burbs.

You may have woken up for morning specials called Early Birds or stayed up past your bedtime to catch the late-night deals called Night Owls. Either type of promotion may have included toys, jewelry, apparel, shoes, or housewares.

The savings don't end there. If you paid with a Kohl's chargecard, your purchases would have counted towards Most Valuable Customer (MVC) status, leading to additional discounts.

Amid the shopping frenzy, did you ever consider buying the stock? How can you determine if it even belongs in your portfolio?

Let's analyze KSS and get to know the chain's marketing terminology.

Earn Kohl's cash

Kohl's often offers $10 in Kohl's Cash, a gift certificate good the following week, for every $50 in purchases. The in-store announcements proclaim that this promotion is "like getting paid to shop."  

I'm not sure about that, but I do know that it pays to hold KSS. You'll get a 3% dividend that consumes only 28% of the company's earnings. There is room for dividend growth, but because the dividend's only been around since March 2011, it's hard to predict where the yield will go.

Gold star clearance

Kohl's places its most heavily discounted merchandise underneath signs with a gold star. Here you'll find items priced to sell, e.g., 70% off the original price and 50% off the clearance price. Like many of the customers, you'll probably arrive at the register bearing a coupon for another 15%, 20%, or 30% off your order.

Look at the chart of the price of KSS for 2012. From January through early June, the stock's performance resembles the pricing pattern for most of the chain's merchandise: up and down, but on average very steady. Then it dips, rebounding from July through September. Finally, the rest of the year, it follows the Gold Star Clearance pattern: endless markdowns.

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KSS data by YCharts

Last year, the market treated KSS like damaged goods a la J.C. Penney (NYSE: JCP), not even giving it the benefit of the doubt, as it did for Sears Holdings (NASDAQ: SHLD). More upscale chains such as Macy's (NYSE: M) and Dillard's (NYSE: DDS) were popular, however, and their stock prices were on a tear.

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KSS data by YCharts

Kohl's now trades at only nine times its forward earnings, a slight discount to the forward P/E ratios of 10 for Macy's and 12 for Dillard's. (J.C. Penney and Sears are unprofitable and are not expected to become profitable this year.)

Macy's and Dillard's have been growing slightly faster than Kohl's lately, but Kohl's has outpaced them historically, as this chart shows. Moreover, Kohl's, unlike the upwardly mobile Dillard's, has stuck to its value-oriented strategy. Remember, it is a time-tested investment strategy to buy quality companies when they're out of favor and hold them for the very long term.

Anyway, it's worth noting that Kohl's (the store) has plenty in common with Macy's in terms of promotional activity. Customers, who aren't taking to J.C. Penney's "fair and square" pricing, should be responding well to the constant sales, coupons, and rewards programs at Kohl's. What is less certain is whether they still enjoy Kohl's home fashions and clothing, which are fairly inoffensive.

Kohl's has been as close to Old Faithful as any department store can get, and customers and investors should appreciate that. I don't mind doing math when shopping, I don't consider myself a fashionista, and I love a great deal. I like this stock.

Fool blogger Jonathan Lim has no positions in the stocks mentioned above. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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