Despite reporting weaker-than-expected sales during its second quarter, upscale jewelry retailer Tiffany & Co. (NYSE: TIF) is seeing a nice recovery in its top line. This, coupled with global expansion ambitions and new product launches, should keep growth chugging along, though the current stock is a bit pricey.

Second Quarter Sales Review

Net sales improved 9.2% to $668.8 million, as same-store sales improved 5% and Tiffany opened approximately a dozen new stores. Top-line growth was strongest in the Asia Pacific and European markets, rising 21% and 14%, respectively. Growth in the Americas was respectable at 8% and more modest in Japan, rising 4% on a reported basis.

Management mentioned that sales came in below its own expectations, especially in the Americas. Across its global store base, it cited healthy demand for gold and platinum jewelry but flat silver trends.

Profit Recap    

Gross margins improved markedly, up 2.7 percentage points to 57.8% of sales as Tiffany raised prices to offset higher product costs. SG&A expenses increased faster than sales, rising 10%, which was in part due to relocating employees at the company’s headquarters. The combined effect was to push operating income ahead 26.9% to $113.5 million. (Learn more on our Fundamental Analysis Tutorial.)

Higher taxes tempered the bottom-line growth, but earnings still grew 19.2% to $67.7 million, or 53 cents per diluted share. This matched analyst expectations.

Outlook

For the full year, Tiffany expects total sales to rise 11%, and earnings will reach between $2.60 and $2.65 per diluted share. This would represent year-over-year profit growth of about 24%.

Competitive Landscape

Tiffany’s subdued sales results were a bit surprising, especially after rival Signet Jewelers (NYSE: SIG), which operates the Jared and similar middle-market stores, reported strong quarterly earnings and a jump in higher-end sales. However, Zale Corp. (NYSE: ZLC) continues to struggle, and online rival Blue Nile (Nasdaq: NILE) posted disappointing profit results during its Q2, though sales still grew 9.7%.

High Brand Awareness

Tiffany’s high brand awareness across the globe has carried it through the current recession and will allow it to continue to grow its store base around the world. The stock valuation is a bit rich at more than 15 times forward earnings and discounts quite a bit of the firm’s growth potential, though it does pale in comparison to Blue Nile’s very lofty forward multiple of more than 40.

Recent Move Into Purses

A recent move into purses will test whether Tiffany’s brand has portability to other fashion items and can compete with the likes of Coach (NYSE: COH) in the handbag industry. This could boost sales prospects a bit going forward, but selling jewelry and charging premium prices will remain Tiffany’s bread-and-butter for years to come.

http://stocks.investopedia.com/stock-analysis/2010/Tiffany-Is-Expensive-But-Worth-It-TIF-SIG-ZLC-NILE-COH0901.aspx