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Harvey Norman no investing train-wreck

Are Harvey Norman (ASX: HVN) shares a buy? I quiz Scott Phillips on why he still thinks “Buy Harvey Norman, Buy”.

A few months ago, Motley Fool Share Advisor Analyst Scott Phillips went out on a limb, telling Take Stock and Fairfax readers that retailing pariah Harvey Norman (ASX: HVN) was a buy.

We’re talking Harvey Norman here — the company chaired by a retailing dinosaur (allegedly) who refuses to move with the times (allegedly) and where sales are sinking faster than our Aussie Olympic swimmers (fact). Surely it’s a train wreck waiting to happen.

Scott, as ever, sees it differently. Sure, Harvey Norman shares are down a couple of percent over the past few months, but they are certainly no train wreck, and investors have picked up a fully franked dividend along the way.

I simply had to quiz Scott on his latest views on life, the universe, and Harvey Norman…

Bruce: So Scott, would you still call Harvey Norman a buy today?

Scott: Yeah, I would actually, but not with enough conviction to add it to our Share Advisor best-of-the-best recommendations. That said, I did go perilously close to adding to my existing Harvey Norman stake at the low $1.90s.

Bruce: Are you off your rocker?

Scott: Quite possibly, but as you’re older than me, you’re likely to fall off your rocker before me!

As consumer electronics shrinks, it becomes less important for Harvey Norman, increasing the proportion, and the importance of the remainder of the business.

Harvey Norman will still be around if/when others go to the wall, and will be poised to benefit from upturn in housing/spending.

Bruce: Do they have a competitive advantage in appliances, beds and furniture?

Scott: They’re the default option for most of Australia in those categories.

Bruce: Call me an old fart (you just did!), but personally I can’t see the upturn for a while yet. Houses are still unaffordable and consumers are still cautious, carrying high levels of debt. What’s the catalyst?

Scott: The never-ending cycle. We don’t need a catalyst, in my opinion, just a market that slowly forgets about hard-core frugality. Plus, the handbrake of more money saved than spent will come to a stop at some point.

Australia grew in the early 2000s by earning $100 and spending $110. Now we’re earning $105 but spending $95. We only need to get back to something of a parity level for spending to increase to ‘normal’ levels.

Bruce: What did you think of Harvey Norman’s recent sales numbers, revealing same store sales down 7.3% in the most recent quarter?

Scott: Harvey Norman’s results should have surprised nobody. Previous quarters have been soft, and retailers across the country have been complaining about consumer spending. We’ve also seen continued price deflation in consumer electronics for many years, and with no end in sight, sales growth was always going to be hard to come by.

The company still looks inexpensive at current prices, and while competitors are struggling or closing down, Harvey Norman has the financial strength and product diversity to be in a strong competitive position when consumer spending starts to grow again. While growth might be a little while away, the trend is moving in its favour.

Bruce: Thanks Scott. You’re a braver Fool than me, although you do have a great track record, so who am I to argue?

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