NEW YORK (Reuters) - Circuit City Stores Inc (CC.N: Quote, Profile, Research) reported a small fourth-quarter profit on Wednesday compared with the loss that Wall Street had expected, as costs fell in the wake of store closures.

But the electronics retailer said it is facing the "toughest macroeconomic environment in years," and it forecast a wider first-quarter loss from continuing operations compared with a year ago. It said it expects a "gradual recovery" in the second half of its fiscal year.

Shares were down more than 1 percent in afternoon trading after rising as much as 4 percent earlier in the day.

"Over the long term, they're starting to make the right moves to improve," said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm that previously had held a short position in Circuit City.

"But I still think there are strong headwinds, not only economically but competition-wise for them."

Circuit City, which faces pressure to oust its chief executive officer and speculation that it could be ripe for takeover, reported a profit of $4.85 million, or 3 cents a share, for its fiscal fourth quarter ended Feb. 29, compared with a loss of $4.25 million, or 3 cents a share, a year earlier.

Adjusted for goodwill and tax-related costs, Circuit City said it earned 10 cents per share on an operating basis, which Reuters Estimates said beat Wall Street's average estimate for an 8 cent per share loss.

Sales fell 7.7 percent to $3.65 billion from $3.95 billion.

Selling, general and administrative costs fell to $735.8 million in the fourth quarter from $835.9 million a year earlier, reflecting lower expenses tied to store and facility closures and lower compensation costs.