Updated from 4:32 p.m. EST

Slow sales of women's apparel and rising expenses hurt

Kohl's

(KSS) - Get Report

department stores in the third quarter, and the company is "very cautious" about the outlook for the soon-to-begin holiday season, the chain reported after the bell on Thursday.

In its quarter ended Nov. 1, Kohl's earned $121.2 million, or 35 cents a share. The results were down 10% from the year-ago period when the company earned $133.4 million, or 39 cents a share.

Overall sales at the company increased 11.7% to $2.39 billion. But on a same-store basis, which compares results at outlets open more than one year, sales fell 1.3%.

The company's earnings met analysts' lowered expectations and the company's revised guidance, but its revenue fell short of estimates. Analysts polled by Thomson First Call were expecting Kohl's to earn 35 cents a share on $2.44 billion in sales.

Last year's holiday shopping season was unusually short, and that hurt the entire retail industry. This year's longer holiday season should make for easier comparisons, but in a call with analysts Kohl's President Kevin Mansell said his outlook for the key months is "very cautious." Same store sales in November will be flat to slightly down and up "mid-single digits" during December, he said.

Overall, Kohl's is expecting earnings per share in the fourth-quarter to range from 89 cents to 95 cents a share, on the light side of Wall Street's expectations of 94 cents on sales of $3.79 billion. The company did not give revenue guidance, but it did say that gross margins could drop 30 to 50 basis points in the quarter.

Despite Kohl's overall sales gain, expenses at the company outpaced sales across the board in the third quarter. The company's gross margin, which represents the difference between what it charges for its products and what it pays for them, declined 67 basis points as a portion of sales to 34.06% as its direct product costs rose a commensurate amount.

Operating costs at the retail chain increased another 65 basis points as a portion of sales during the quarter to 21.89%. Kohl's depreciation and amortization costs rose 21 basis points as a portion of sales, to 2.5%.

During the quarter, the company opened 50 new stores bringing its store base up to 542. That slew of openings nearly doubled its pre-opening expenses in the quarter. Such costs increased by $9.1 million over the third quarter last year to $20.8 million.

Unlike the year-ago period, Kohl's posted positive operating cash flow in the third quarter. The company generated $94.8 million through its operations, compared to a cash outflow of $97.3 million in the third quarter last year.

But the company's rapid expansion program detracted from this performance. Its free cash flow declined by $435.4 million through the third quarter, compared with a $397.5 million drop in the same period last year.

Defined as the difference between operating cash flow and capital expenditures, free cash flow is an often-scrutinized indicator of a company's ability to generate returns for investors.

Kohl's has struggled with inventory all year, and the third quarter may have been no different. The company ended the quarter with $2.42 billion of inventory. That was up 16.7% from the year-ago period, a rate that outstripped the company's overall sales gain.

Kohl's shares closed regular trading on Thursday down 13 cents, or 0.3%, to $50.58.