Circuit City Stores Inc. said yesterday that it will spin off CarMax Group, its most profitable business, and that results for its consumer electronics stores will not meet expectations for its fourth quarter.

The Richmond-based company said CarMax Group shareholders will trade their stock one-for-one for shares in the new CarMax Inc., and investors in Circuit City Group stock will acquire a fractional share (estimated at 0.316 shares of CarMax) for each share of Circuit City Group they hold. The company said it believes the transactions will be tax-free and has requested a ruling from the Internal Revenue Service on the issue.

Circuit City Stores Inc. now trades as two tracking stocks, Circuit City Group and CarMax Group, with values that reflect the performance of each subsidiary. However, because Circuit City Group has a 64 percent stake in CarMax, shares of the electronics chain also are affected by the performance of the used-car retailer.

The spinoff would leave Circuit City Group's shareholders holding two different stocks that they could trade separately and that would reflect only the performance of each business.

Yesterday, CarMax shares fell $2.51, or 9 percent, to close at $26. Circuit City Group's shares fell $7.04, or 30 percent, to close at $16.55.

Circuit City President W. Alan McCollough said that completely separating the two businesses would permit their managements "to better focus on the operational and financing objectives of their respective businesses without the constraints imposed by being affiliates within the same corporate group."

Circuit City expanded into auto retailing in 1993 when it opened its first CarMax Store, bringing the efficiencies of scale of "big box" retailing to the used-car business. CarMax is the largest specialty retailer of used cars in the nation.

The company's electronics retailing business -- the industry's second-largest chain -- has been struggling through hard times after its decision in July 2000 to jettison major appliances from its product offerings. Early attempts at remodeling the stores were more costly than anticipated and hurt earnings, and consumer electronics sales have been slipping for most of the 18 months since.

McCollough said the electronics business's sales in January and February were less than the company anticipated after a strong showing in December. As a result, he said, Circuit City Group will earn 70 to 74 cents in the quarter ending Feb. 28, down from the 72 to 76 cents forecast last month.

McCollough said inventory shortages in some key product areas had hurt sales. "Inventories have improved throughout the period, but we do still see some shortages," he said. McCollough said in a conference call with analysts that he didn't know if the inventory problems were industry-wide.

Laurie Bauer, spokeswoman for the nation's largest consumer electronics retailer, Best Buy Co., said that Best Buy has had "no issues related to inventory." She added, "In January we saw better stock levels than a year ago."

While completely remodeling the stores remains "the endgame," McCollough said that Circuit City will spend its time and money in the next two years in remodeling their video departments and improving their lighting.

McCollough said the improvements would cost about $325,000 to $350,000 per store and would cover about 300 stores both this fiscal year and next.