By Ellis Mnyandu, Reuters

NEW YORK (Reuters) - Best Buy Co. Inc. (BBY.N), the No. 1 U.S. electronics chain, on Tuesday reported an 85 percent jump in quarterly profit, on strong sales of MP3 music players, digital TVs and video games and fewer markdowns, and its shares jumped 12 percent to a record high.

Analysts said the results suggested that Best Buy won more market share from No. 2 player Circuit City Stores Inc.(CC.N), but shares of the much smaller rival rose 3 percent on hopes it would also post better-than-expected results on Friday.

Best Buy`s profit increased to $170 million, or 51 cents a share, for the fiscal first quarter ended May 28, compared with $92 million, or 28 cents a share, a year earlier.

Analysts had estimated profit of 30 cents a share, according to Reuters Estimates. The company on April 1 had forecast earnings of 27 cents to 32 cents a share, including stock-based compensation expense of 5 cents a share.

Revenue rose 12 percent to $6.1 billion.

``There`s so much leverage in (Best Buy`s model), and a lot of it just flows through to the bottom,`` said Scot Ciccarelli, an analyst at RBC Capital Markets.

Alan Rifkin, an analyst at Lehman Brothers, in a research note said, ``Best Buy remains our top pick in consumer electronics. We believe Best Buy continues to gain market share.``

Best Buy said its gross margins improved even as it spent money to revamp stores and improve customer service to distance itself further from discounters like Wal-Mart Stores Inc. (WMT.N), all competing for a slice of the $107 billion consumer electronics market.

The higher margins, Best Buy said, reflected a less promotional environment, speedier introduction of new products, improved pricing from vendors, improved global sourcing, and increased sales of profitable private label products like ``Geek Squad``-branded PC networking accessories.

In addition, Best Buy said stores that have been tailored to cater to specific customer needs and showcase popular items like flat-panel TVs, delivered same-store sales growth twice that of its other stores.

Ciccarelli said he expects that Best Buy`s stock, which he rates ``outperform`` and does not own, ``would continue to run.``

Best Buy shares were up $7.32 at $66.43 in early afternoon trade on the New York Stock Exchange, after earlier hitting a record high of $66.87.

Piper Jaffray Senior Analyst Mitch Kaiser raised his 12-month target price on Best Buy to $76 from $60, saying in a research note that the premium in the stock was warranted given Best Buy`s industry dominance, among other factors.

But Circuit City`s shares also rose, gaining 53 cents to $17.44. ``People are probably extrapolating that maybe Circuit City`s sales were a bit better, but probably not as good as at Best Buy`s.`` SG Cowen analyst Joseph Feldman said.

He said a less promotional climate was seen likely as also helping Circuit City`s gross margins.

At current levels, Best Buy shares trade at 21.5 times analysts` 2005 average profit forecast, above a sector average price-to-earnings multiple of 20.78 and at a premium of more than 10 percent versus the S&P 500 index, according to Reuters data.

Best Buy raised its earnings forecast for the fiscal year ending February 2006 to a range of $3.10 to $3.25 a share, up from a prior forecast of $2.95 to $3.10 a share.

The company said the outlook reflects the first-quarter results and a lower effective tax rate for the year of 34.5 percent to 35.0 percent, compared with its prior estimate of 36.5 percent to 37.0 percent.

Best Buy said it continues to expect revenue for the fiscal year of about $30 billion, and growth in sales at stores open at least 14 months of 4 percent to 5 percent.

Best Buy`s first-quarter same-stores sales jumped 4.4 percent, surpassing analysts` estimates for an increase of as much as 3 percent.