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Tiffany's Shine Is Tarnished, But Only Temporarily

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When upscale buyers come back, the little blue box will still be there.

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Tiffany & Co.'s (TIF) latest earnings are expected to be downbeat, but the long-term outlook for the company remains strong.

On Wednesday, analysts expect the upscale marketer of jewelry, crystal, china, silverware, watches, and other luxury items to report third-quarter 2009 earnings of $0.23 a share, down from $0.35 for the same period a year ago. A conference call will be held at 8:30 a.m. Eastern Time.

Second-quarter sales fell 16% to $612.5 million. Same-store sales, or sales at stores open at least a year, also declined 16%. The company earned $56.7 million, or $0.46 a share.

Despite the downbeat sales, Tiffany declared a regular quarterly dividend of $0.17 a share on its common stock last week.

There's no mystery to Tiffany's current slump: Consumers remain cautious during the recession, especially with the unemployment rate hitting 10.2%. The good news: The year-over-year rate of decline is slowing at many stores. This may be the first indication of a turnaround among upscale buyers. So far, weak US sales have been countered by a smaller decline in Asia and growth in Europe.

In the past two years, the company began opening Tiffany's Collection stores, which are smaller outlets seeking to attract buyers with lower price points, between $500 and $15,000. Worldwide, there are about 70 such stores so far. The tactic could tarnish the company's exclusive image, but is more likely to fill the void created by the closure of independent jewelers during the recession and attract new customers. Earlier this year, Finlay Enterprises and Fortunoff went bankrupt. Tiffany is also focused on opening boutiques at high-traffic locations, and next month plans to open a second at London's Heathrow Airport.

Tiffany appears well-positioned to weather the worldwide economic downturn and to rebound strongly when conditions improve.

"We expect continued weak economic fundamentals to hurt discretionary spending for another 12 months," Standard & Poor's says in a research report. "We see muted demand resulting from recession-like economic trends in most developed nations. We see Tiffany & Co. gaining domestic market share as the retail jewelry industry contracts. Globally, we believe Tiffany & Co.'s strong brand is under-penetrated, with lucrative expansion opportunities in Asia and continental and eastern Europe."

S&P expects the company to open 13 new stores in fiscal year 2010, or about half this year's pace. It believes Tiffany & Co. will open at least three new stores in the US and seven in Asia. It rates the company's stock as a "Hold."

Tiffany has seen bad times before and survived. "These cyclical downturns are not new to Tiffany, which has built a luxury brand by delivering high-quality, distinctly designed products to Americans for more than 170 years," Kimberly Picciola, an analyst at Morningstar, said in a research report. "The company's namesake brand is a key competitive advantage, in our view, as it enables this jeweler to charge premium prices for commodity-based products such as diamond engagement rings."

In mid-day trading, Tiffany & Co.'s edged up to $41.83 a share.

Tiffany & Co.'s major competitors include LVMH Moet Hennessey Louis Vuitton, Compagnie Financiere Richemont, Bulgari, and De Beers.


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