Richard Schulze, CEO of Best Buy Co. Inc.

This is a partial transcript from Your World with Neil Cavuto, December 18, 2001.

NEIL CAVUTO, HOST: Well, if you've been stocking up on DVD players and refrigerators and video games this holiday season — if the answer is yes — chances are you have been visiting one of Best Buy's 480 stores to get exactly what you need. The company, which is the top electronics specialty retailer in the United States, released third-quarter earnings today, earnings rising nearly 40 percent really on the back of increased sales.

Here to tell us more from Minnesota is the CEO of Best Buy, Richard Schulze. Richard, good to have you back. Thank you for coming.

RICHARD SCHULZE, CEO, BEST BUY CO. INC.: Hey, thanks, Neil, good to be here and happy holidays.

CAVUTO: This flies to counter to every doom and gloom story I've heard. What's going on?

SCHULZE: Well, you know, candidly, Neil, I think it's a classic story about the digital product cycle coming over the top of an otherwise pretty cautious and conservative consumer right now. The excitement surrounding this digital products that we're offering in all of our stores has really got consumers excited. Great value, meaningful improvement and performance, and when you look around, there isn't anything else out there that can consumers are saying is exciting as what these new products represent.

CAVUTO: When you say digital products, Richard, what specifically are you referring to?

SCHULZE: Digital cameras to integrate...

CAVUTO: Really. They're really hot, aren't they?

SCHULZE: The hottest category on the floor. Digital video...

CAVUTO: Is it the low-end line and, of course, the low-end line — a couple of years ago, these are super expensive cameras. Now they are commodities.

SCHULZE: They're down under $300. They're up over four million pixels. The resolution is becoming of such a high quality that consumers see them as a real integrated opportunity with their high-definition or digital television sets.

CAVUTO: So that's leading the way for you?

SCHULZE: Very strong, along with digital video disc.

CAVUTO: Really?

SCHULZE: The whole concept of these little, shiny hard discs with a high-quality digital entertainment...

CAVUTO: Yeah.

SCHULZE: ... being played on low-cost hardware product is expanding the amount of saturation. And we've got almost 30 percent of American households now that are owning a digital video disc player.

CAVUTO: Now these DVDs, of course, have been very hot, prices have come down markedly. And now there are some of these rival standards in the audio front. I mean, does that confuse a lot of buyers that think they are buying a machine for one thing and realize it's not compatible with another thing?

SCHULZE: Well, one of the advantages in the world of digital video disc is that it's compatible to play compact disc. So if you're buying a digital video disc player, you can play all your audio CDs flawlessly.

CAVUTO: Right.

SCHULZE: It's only when you start to talk about digital video disc audio products that you begin to get a little confused. And so far, it's such a small item on the market place that it hasn't captured too much interest.

CAVUTO: You know what's interesting, I mean, now we've had a period where Musicland and Future Shop stores have been under your umbrella, right?

SCHULZE: That's correct.

CAVUTO: And Musicland particularly looks strong. Is this owing to just mall traffic that is increasing or is it just people who are deliberately seeking out pop stars?

SCHULZE: You know, candidly, Neil, the mall traffic is down between five and seven percent, according to national studies that are being done. We think for the Musicland group in particular, it is really a by-product of the change in merchandise mix that we've applied since buying the chain last December.

We've added an expansion of digital video disc product...

CAVUTO: But do they ever cannibalize on each other, Richard? I mean, if you know your regular stores versus some of these others that are now under your umbrella, do they ever rob sales from each other?

SCHULZE: You know, candidly, they haven't, Neil, because Best Buy appeals to the Gen-X, young male, technophile consumer. And the mall stores have Gen-Y, younger female consumers that are more impulse buyers. So there really...

CAVUTO: So all the old fogies like me are in the master store. But we've got a chart here of some of your top competitors, you know, Radio Shack, Circuit City, among them. All of you guys have benefited surprisingly post-September 11.

And that — my crackpot theory on this, Richard and you're free to dismiss it — is I think there's a lot of cocooning going on. I think people are at home. They're doing a lot to beef up their home, to improve their home, to make their homes cozier, more, you know, useful. Does that trend seem real to you?

SCHULZE: Absolutely. There's no question that consumers, you know, left to some apprehension about travel, spending money on airlines or vacations are saying, "You know, let's stay home." And when they stay home, they look at what they have and they look on the market to see what's available. And they begin to improve the quality and the performance of what it is they're doing with their time when they're at home.

So, you're absolutely right, Neil. It's a big part of it. And you combine that with the excitement surrounding digital products and you've got an excited consumer who is actually spending dollars in these particular areas.

CAVUTO: Before I leave you here, any quick predictions for 2002? How's it looking from your end.

SCHULZE: Well, we think that the digital product cycle will get stronger as the year unfolds. We think the consumer is likely to begin to feel a whole lot better about the way the economy is progressing. And we think by mid-year next year, there will be more natural enthusiasm around, you know, the consumer's willingness to spend more naturally.

So, we think the back half of next year is going to be stronger than the front half, but we think our particular sector is going to do well all year.

CAVUTO: Richard, as always, happy holidays to you. Thank you very much, appreciate it, sir.

SCHULZE: Thanks, Neil. Nice to be with you.

CAVUTO: Richard Schulze, who runs Best Buy, out with some pretty boffo numbers.

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