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Best Buy Meets, Circuit City Misses

Best Buy meets the consensus estimate, while Circuit City narrows its loss.

Updated from 9:13 a.m. EST

While rival consumer electronics companies

Best Buy

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and

Circuit City

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both reported improved third-quarter results Wednesday, their shares were moving in different directions.

Best Buy also provided fourth-quarter and full-year outlooks below Wall Street's estimates, saying bad weather has affected sales.

But investors and analysts were focusing on the fact that the company nearly doubled its profit. Shares were up 79 cents, or 1.6%, to $50.31, reversing a 2.7% decline in premarket trading.

The Minneapolis-based company earned $122 million, or 37 cents a share, compared with $59 million, or 18 cents a share, a year ago. Earnings from continuing operations were $122 million, or 37 cents a share, from $86 million, or 27 cents a share, in the third quarter last year. Analysts were also calling for 37 cents a share.

"This is a strong fundamental performance, from almost any vantage," wrote Raymond James analyst Bud Bugatch in a research note Wednesday. He noted that the company's gross margins increased 46 basis points and operating expenses were down 15 basis points. (Raymond James does investment banking for Best Buy.)

Best Buy was also upgraded at Jefferies to buy from hold and a $58 price target was set. Jefferies believes that bad news in the retail sector has already been priced in.

Total sales in the quarter ended Nov. 29 were $6.03 billion, up 18% from $5.13 billion a year ago. Comparable-store sales rose 8.6% on top of a 0.7% increase in the previous year's quarter. The company said it opened 72 new stores in the past year.

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"Primarily as a result of inclement weather in the Northeast, quarter-to-date revenue trends are modestly below our expectations," said CFO Darren Jackson. But the company still expects same-store sales to increase 6% to 8% for the fourth quarter, which would bring fourth-quarter revenue to about $8.3 billion.

The company said its fourth-quarter earnings from continuing operations outlook is $1.34 to $1.39 a share, which falls below analysts' consensus of $1.41 a share. The company also reiterated its guidance for $2.35 to $2.40 a share in earnings from continuing operations in the full year. Analysts expect $2.41 a share.

UBS analyst Gary Balter believes the company's guidance might be better than it seems, however. He said that while its fourth-quarter guidance is below consensus, it's the same as it was two months ago, and might be lower than average estimates due to "a few very high estimates that are skewing results." It is in line with his estimate.

Overall, Balter said Best Buy is gaining market share and investing in future growth. It "is very well positioned to sustain double-digit longer term growth," he said.

Meanwhile, Circuit City shares were dropping after the company trimmed its quarterly loss but said results were hurt by costs from its ongoing store remodeling program and the sale of its bankcard business.

Shares were lately off 73 cents, or 6.7%, at $10.35.

Richmond, Va.-based Circuit City had a net loss from continuing operations of $24.1 million, or 12 cents a share, compared with a loss of $26.1 million, or 13 cents a share, in the third quarter last year. Analysts were calling for a loss of 7 cents a share. Total sales were $2.41 billion, down 1% from the prior-year quarter. The company said comparable-store sales fell 1%.

UBS' Balter said Circuit City's results do little to show him a turnaround at the company has begun, calling the results "disappointing" and "problematic." He cited a 12% increase in inventory and a huge decline in extended service warranties.

Additionally, the company's lack of a fourth-quarter sales guidance reinforced Balter's worry about the strength of its turnaround. (UBS does investment banking for Circuit City and Best Buy.)

Circuit City said it has been renovating its stable of stores since 2001 and said it had $9.8 million in costs associated with it during the quarter. Currently, 20% of its 618 superstores have been built, remodeled or relocated.

The company also said that on Nov. 18 it completed the sale of its bank-card operation to

FleetBoston Financial

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and expects that the sale will result in an after-tax loss of $82 million. The company said it recorded a reduction of $19.4 million of the expected after-tax loss in the third quarter's results to reflect the sale proceeds.

In the quarter, however, the company said after-tax earnings from the discontinued bank-card operation were $24 million, compared with $4.8 million in the prior year.