Best Buy Hones the Edge

Still, a stellar performance from Best Buy is not exactly unanticipated. Despite its lackluster performance so far this year, the stock has jumped better than 20% since mid-April. At current prices, shareholders might not get any immediate gains from an earnings beat next week.

Its early-year struggles stem from a disappointing fourth-quarter performance, in which Best Buy reported earnings at the low end of its guidance and lowered its forecasts for the year. The news appeared to confirm that consumer electronics was in the midst of a slowdown. Circuit City missed its own estimates for the quarter, but its comps essentially broke even, while Best Buy posted a historically small gain of 2.8%.

"All things considered, that was a good quarter for Circuit City," Weinhart says. "I viewed it as a substantial closing of the gap between Circuit City and Best Buy on a same-store sales basis."

Circuit City, which rejected a $17-a-share buyout offer from Boston hedge fund Highfields Capital in March, did a few things Wall Street liked during its first quarter. The retailer made several key management changes, it held its first analyst conference in years, and it offered decent sales guidance for 2005. The company predicted its total sales would rise between 3% and 6%, its same-store sales would rise somewhere in the low single digits, and said it planned to open 30 to 40 stores this year, including 12 to 17 moving to new locations.

"Circuit's execution on its turnaround looks more credible this year," Widlitz says. "They still have a variety of concerns in the short term. They are stuck in some undesirable real estate positions, and they are still up against a best-in-breed competitor. But the story has definitely changed from last year."

Meanwhile, Best Buy faced concerns that the rollout of its Customer Centricity format, expected at 150 to 200 of its stores in 2005, might yield growing pains. The program was added in 67 of its stores last year, and so far, the results have been favorable. The stores have recorded a marked improvement in same-store sales, sales per square foot, operating income dollars, employee engagement and customer loyalty metrics, according to Lehman Brothers analyst Alan Rifkin.