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Matthew Fassler, an analyst at Goldman Sachs, yesterday downgraded his rating on Circuit City (CC) to Neutral from Buy.

He cited three reasons for his call. One, he notes that the stock has bounced since year-end “suggesting more modest risk/reward.” Two, he says Best Buy (NYSE:BBY) is “maintaining pricing parity on TVs, impeding further CC share gains.” And third, he says the stock has “surged” on recent “tangential” restructuring moves, “ignoring more troubling management turnover.”

Fassler says that Circuit City “remains a high-potential turnaround situation.” He says the company is working to address profit shortfalls in flat panels,” focusing on boosting sales of accessories and peripherals. Inventories, he adds, are lean:

Still, avenues toward a successful turnaround appear increasingly elusive. CC is still spending to upgrade its infrastructure, industry gross margins are unlikely to provide long-term comfort, and the market share gains that fueled superior same-store sales growth versus BBY are unlikely to recur if BBY maintains a competitive pricing stance on TVs.

Fassler raised his estimates for fiscal 2007 and 2008 by two cents each to 82 cents and $1.02, based on the company’s recent announcement of restructuring moves; nonetheless, he says those moves, which mostly involve shutting weak Canadian stores, “are solid but ultimately minor in the grand scheme.”

Circuit City yesterday was down 31 cents at $21.02.

CC vs. BBY 1-yr chart

cc bby chart

Source: Circuit City: Turnaround 'Increasingly Elusive'