Electronics retailer Circuit City (NYSE:CC) has played second fiddle to industry leader Best Buy (NYSE:BBY) for as long as investors can remember. But lately, the performance gap has widened dramatically, and Circuit City has failed to keep pace with its larger and more profitable archrival. Does a weak earnings report from Best Buy suggest that Circuit City will also release surprisingly tepid first-quarter results? Fools will know the answer tomorrow.

What analysts say:

  • Buy, sell, or waffle? Twenty-eight analysts currently follow Circuit City. Six are bullish, two aren't, and the rest can't make up their minds, with a hold rating.
  • Revenues. Analysts are projecting second-quarter sales of $2.43 billion, for a year-over-year fall of nearly 7%.
  • Earnings. Analysts project a first-quarter earnings deficit of $0.32 per share versus a gain of $0.03 in last year's quarter.

What management says:
Back at the end of April, when Circuit City announced fourth-quarter earnings, it guided to a first-quarter operating income loss of $80 million to $90 million. It also expects a full-year operating income margin toward the low end of a 1.4%-1.8% range.

What management does:
Management cited "substantially below-plan sales" in April and pointed a finger at plummeting prices and margins for large flat-panel displays and other televisions. As you can tell from the chart below, margins have been on a downward path for some time now. More recently, bottom-line profitability recently dipped into negative territory, where it will likely remain for the next couple of quarters.  

Margins

11/05

02/06

05/06

08/06

11/06

03/07

Gross

24.3%

24.4%

24.3%

24.3%

23.8%

23.6%

Operating

1.5%

2.3%

2.6%

2.6%

1.9%

1.4%

Net

0.8%

1.2%

1.3%

1.4%

1.1%

(0.1%)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
It's not game over yet in electronics retailing, but cutthroat industry dynamics and a constant onslaught from Best Buy are hurting the weaker players. Circuit City continues to reel, and regional player Tweeter (NASDAQ:TWTR) recently filed for bankruptcy protection.

Second place could still work at Circuit City, but it has a way to go before it can convince investors that it knows how to make a buck, given that the marketplace is becoming more competitive and moving to lower-margin, big-ticket items that are being sold everywhere, from Conn's (NASDAQ:CONN) to Rex Stores (NYSE:RSC) to Fry's Electronics.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.