Circuit City Stores Inc. (CC) Tuesday reported a much narrower quarterly loss on lower real estate costs and higher purchases of flat-panel TVs, digital cameras and camcorders.

But although the results surpassed analysts' expectations, shares of the No. 2 U.S. consumer electronics chain fell 2 percent on concern that expenses will rise later in the year as store remodeling picks up steam.

Circuit City, based in Richmond, Va., said its loss for the fiscal first quarter ended May 31 narrowed to $5.9 million, or 3 cents a share, from a loss of $46.7 million, or 23 cents a share, a year earlier.

Analysts polled by Reuters Estimates had expected, on average, a loss of 7 cents a share for the latest quarter. The year-earlier quarter included a loss from discontinued operations of $18.6 million, or 9 cents a share.

The retailer said that during the quarter it had pared its store relocation and remodeling push, helping reduce expenses.

But it said it still expects to spend $52 million on such projects this fiscal year, raising concerns that the spending could weigh on its performance if sales growth were to falter.

"Once you get behind the better-than-expected numbers, you realize that it's pretty much all attributable to the timing difference on their expenses," said Scot Ciccarelli, analyst at RBC Capital Markets.

Stacey Widlitz, analyst at Fulcrum Global Partners (search), however, said she was encouraged by the latest quarter as Circuit City's gross margins had stabilized on better execution even though customer traffic was static from a year ago.

For the past three years Circuit City has grappled with market share losses to top rival Best Buy Co., forcing the company to invest heavily to spruce up its stores to lure customers.

Poor store locations and unmotivated staff have often been cited as key reasons why Circuit City has had a tough time narrowing its performance gap with Best Buy (BBY), which is estimated to hold a 17.7-percent share of the $100 billion U.S. consumer electronics market.

Circuit City Chief Executive Alan McCollough said in a statement that its retail salespeople had achieved "meaningful improvements in execution during the first quarter" and sales at 27 relocated stores outpaced sales at older outlets.

A better-than-expected 6.4 percent rise in quarterly sales at stores open at least a year, or same-store sales, also helped Circuit City offset cost increases in the latest quarter, the company said. A year-ago, same-store sales had fallen by 10 percent.

Total sales rose 6.9 percent, to $2.07 billion.

Circuit City shares were down 26 cents at $12.67 in late morning trade.