April 9 (Bloomberg) -- Circuit City Stores Inc., the second- largest U.S. electronics retailer, posted an unexpected fourth- quarter profit after cutting costs by firing higher-paid workers.

The company said sales at stores open at least a year fell 10 percent in the three months ended Feb. 29, and it forecast a wider loss for this quarter. Circuit City declined 1.8 percent in New York trading.

The retailer's profit, its first in six quarters, failed to convince some investors Chief Executive Officer Phil Schoonover's plan to turn the company around by reducing staff and opening smaller stores will succeed. Mark Wattles, who holds a 6.5 percent stake, wants new management and says Circuit City should seek an investment bank to advise it on a sale.

``Mark Wattles is right,'' Burt Flickinger, managing director of Strategic Resource Group, said in a Bloomberg Television interview. ``Dramatic things have to be done in terms of changing management. Minus 10 percent same-store sales? A company cannot survive for more than a few years with those trends.''

The retailer, based in Richmond, Virginia, expects a loss from continuing operations of as much as $195 million in the first quarter, versus a loss of $82.5 million a year earlier. Second-half earnings will show a ``gradual recovery,'' it said.

`Dismal' Outlook

``The outlook is pretty dismal, especially the huge loss in the first quarter,'' Colin McGranahan, an analyst with Sanford C. Bernstein & Co., said in an e-mail.

Circuit City fell 8 cents to $4.45 at 4:02 p.m. in New York Stock Exchange composite trading. Best Buy Co., the biggest U.S. electronics retailer, declined 92 cents, or 2.2 percent, to $41.27.

Net income was $4.85 million, or 3 cents a share, for the three months ended Feb. 29, compared with a loss of $4.25 million, or 3 cents, a year earlier, the company said.

Excluding the writedown of some assets, fourth-quarter profit was 10 cents a share, the company said. Twenty-three analysts estimated a loss of 7 cents, according to the average in a Bloomberg survey.

Sales fell to $3.65 billion, the fourth straight quarterly decline. Eighteen analysts predicted revenue of $3.81 billion.

Warranty Sales

Schoonover's firing of some senior store staff last year initially hurt sales of warranties and installation services.

That is reversing, he said today. The company cut prices of warranties in the fourth quarter and is now selling more of them, he said on a conference call with analysts and investors.

Gross margin, the share of sales after subtracting the cost of goods sold, narrowed to 20.6 percent of sales from 23.9 percent as television and warranty-package prices fell.

The margin declines are ``self-induced'' and fixable, Chief Financial Officer Bruce Besanko said on a conference call. He said the retailer has cut as many costs as is ``prudent'' and is now focused on improving gross margin.

Wattles said while he was happy to hear executives on the call discussing plans to improve the stores and taking responsibility for decreased margins, his position remains unchanged.

``You don't have to be as good as Best Buy to make a lot of money in this company,'' he said. ``Focus on basic execution and all of us will make a lot of money.''

Revenue this year will be ``relatively unchanged,'' Circuit City said. Sales at stores open at least a year will decline in the ``mid-single digits'' this year, the retailer said. They fell 10 percent in the fourth quarter, more than some analysts estimated.

McGranahan estimated sales in older stores would fall 6.8 percent. Scot Ciccarelli, a New York-based analyst with RBC Capital Markets, estimated a 9 percent decline.

In the U.S., same-store sales fell 8.8 percent. Sales in the video category, which include televisions and make up 43 percent of revenue, fell 6.3 percent to $1.47 billion, hurt by tube TVs, which are losing shelf space to flat-panel sets.

U.S. warranty revenue, among the most profitable items retailers sell, was $75 million, or 2.2 percent of sales, compared with $110.2 million, or 2.9 percent, a year earlier.

To contact the reporter on this story: Mark Clothier in Atlanta at mclothier@bloomberg.net

Last Updated: April 9, 2008 16:08 EDT