Circuit City Stores Inc. on Friday said it will split off its CarMax used-auto store business, and warned that store remodeling and relocations will reduce earnings through 2003, sending its shares into a tailspin. 

The Richmond, Virginia-based company, the No. 2 U.S. consumer electronics retailer behind Best Buy Co. Inc. , also said sales in January and February were below expectations. 

The company's shares plummeted $6.71, or 28 percent, to $16.88 in morning trade on the New York Stock Exchange. Trading in the stock was delayed by the exchange for nearly the first half hour of the session. Circuit City was the top percentage loser on the market. 

Todd Kuhrt, an analyst at Midwest Research, said while the news of the CarMax spin-off may be seen by investors as positive, the company's earnings guidance was disconcerting. 

"It's a little disappointing," he said. 

He added that the company's earnings outlook could even be much worse if the store remodeling costs were included, not as one-time items, but as ongoing charges that are prevalent in the store-remodeling prone retailing industry. 

The company's store remodeling and store relocations, which are expected to cost $182 million in the next two years, will shave 6 cents off earnings per share in 2002, and reduce them by 18 cents off in 2003, Circuit City said in a statement. 

The retailer said it expects to earn between 70 cents to 74 cents in the fourth quarter, ending Feb. 28, slightly below analysts' consensus estimate of 75 cents, as compiled by research firm Thomson Financial/First Call. Circuit City earned 49 cents in the year-earlier period, and current analysts' estimates range from 72 cents to 78 cents. 

Shares of Best Buy also fell 5.87 percent, or $4.14, to $66.50 in early trading. 

INVENTORY LEVELS HURT SAME-STORE SALES 

The company said it had anticipated January and February sales to "moderate" from the December levels, especially given merchandise shortages as a result of vendors changing to new product lines. 

Fourth-quarter sales at stores open at least a year, or same-store sales, are expected to show mid-single-digit growth, Circuit City said, adding for the two months combined same-store sales growth is likely to be in the low single digits. 

The company said it will increase its liability for lease termination costs by about $10 million, related to its exit from the appliance business. It expects fiscal 2002 earnings of 89 cents to 93 cents a share, including the lease termination costs and an anticipated contribution from CarMax of up to 31 cents, it said. 

Circuit City has been losing market share and customers to Best Buy as it struggles to revamp its operations and boost sales after deciding in November 2000 to cease selling major household appliances like refrigerators and dishwashers. 

But increased spending by Americans on red-hot home entertainment technologies like big screen televisions and DVD players helped Circuit City regain some lost ground through the second half of 2001. 

CARMAX ON ITS OWN 

In the spin-off, which Circuit City expects to complete by September, holders of CarMax Group stock would receive one share of CarMax Inc. stock for each share of stock redeemed by the company. It said management currently expects holders of Circuit City Group stock to receive 0.316 of a share of CarMax Inc. stock for each share of Circuit City stock they hold. 

The CarMax chain, based in Glen Allen, Virginia, buys and sells cars and light trucks at some 40 dealerships in 10 states. CarMax trades separately as a tracking stock . 

Circuit City President and Chief Executive W. Allan McCollough said CarMax has produced solid sales and earnings growth for the past two years and is now able to support growth by itself. 

"This split-off would enable the investment community to analyze each business on its own merits," McCollough said. He said the spin-off would also enable management to better focus on their respective businesses.