Circuit City posts profit but sees tough first half

NEW YORK (Reuters) - Circuit City Stores Inc CC.N reported a small fourth-quarter profit on Wednesday compared with the loss that Wall Street had expected, as costs fell in the wake of store closures.

But the electronics retailer said it is facing the "toughest macroeconomic environment in years," and it forecast a wider first-quarter loss from continuing operations compared with a year ago. It said it expects a "gradual recovery" in the second half of its fiscal year.

Shares were down more than 1 percent in afternoon trading after rising as much as 4 percent earlier in the day.

"Over the long term, they're starting to make the right moves to improve," said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm that previously had held a short position in Circuit City.

"But I still think there are strong headwinds, not only economically but competition-wise for them."

Circuit City, which faces pressure to oust its chief executive officer and speculation that it could be ripe for takeover, reported a profit of $4.85 million, or 3 cents a share, for its fiscal fourth quarter ended February 29, compared with a loss of $4.25 million, or 3 cents a share, a year earlier.

Adjusted for goodwill and tax-related costs, Circuit City said it earned 10 cents per share on an operating basis, which Reuters Estimates said beat Wall Street's average estimate for an 8 cent per share loss.

Sales fell 7.7 percent to $3.65 billion from $3.95 billion.

Selling, general and administrative costs fell to $735.8 million in the fourth quarter from $835.9 million a year earlier, reflecting lower expenses tied to store and facility closures and lower compensation costs.

IMPROVEMENT SEEN

Despite the softer spending environment as consumers wrestled with higher gasoline prices and tighter credit, Chairman Philip Schoonover cited signs of improvement at Circuit City, where results have weakened over the past year.

For instance, sales of accessories and services attached to hardware were getting better, with warranty unit sales rising after price cuts.

"We are implementing the right strategies with the right talent and processes to lead us to a successful turnaround and position us for long-term profitable growth," Schoonover said during a conference call.

Sales in the United States fell almost 9 percent to $3.45 billion from $3.78 billion, with sales at stores open at least 12 months, a key retail gauge known as comparable store sales, dropping 11.3 percent. Strength in flat-panel televisions was offset by weaker tube and projection TV sales.

International segment sales rose more than 17 percent to $200.6 million from $170.9 million.

Circuit City has seen its stock price tumble to multiyear lows in the past year as the U.S. economy has slowed. It has also made store changes, which included replacing more than 3,000 workers with lower-paid staffers, that disrupted business and hurt sales.

The company now faces a proxy fight from industry investor Mark Wattles, who has called for the immediate ouster of Schoonover and has nominated five people for election to the board at this year's annual meeting.

Circuit City declined to take questions about Wattles on its conference call.

Last week, main rival Best Buy Co (BBY.N) reported lower but better-than-expected quarterly profit and forecast higher earnings for the coming year.

For the first quarter, Circuit City expects to record a loss from continuing operations before income taxes of $180 million to $195 million, compared with a loss of $82.5 million in the comparable quarter a year ago.

The Richmond, Virginia, retailer said it does not expect year-over-year performance improvement until the second half.

"The outlook is quite weak as Circuit City faces severe pressure in the (first half) on weak comps (comparable store sales) and continued margin erosion," Sanford Bernstein analyst Colin McGranahan said in a research note. "The second-half improvement is filled with uncertainty at this point."

Shares were down 7 cents to $4.46 in afternoon New York Stock Exchange trading, while Best Buy was down $1.02, or 2.4 percent, to $41.17. Circuit City shares have fallen about 75 percent in the past year, while Best Buy is down 15 percent.

(Reporting by Nicole Maestri in New York, with additional reporting by Karen Jacobs in High Point, North Carolina; Editing by Derek Caney and Gerald E. McCormick)