Tiffany & Co. (NYSE: TIF) is a prototype "affordable luxury" retailer. TIF sells high-end jewelry, diamond rings, and lower-priced silver jewelry in retail stores as well as through catalogs and e-commerce.
Tiffany's international presence was a benefit given the state of the American economy--strong Asian sales have helped make up for slacking American and European sales. On the other hand, TIF's international presence can also be a disadvantage, given the fact that without hedging against exchange rate risk, the firm's balance sheet is at the mercy of fluctuations of the U.S. dollar. Also, higher prices of gold and silver lead to higher production costs, which leads to thinner profit margins.
Tiffany & Co. sells its own brand of jewelry as well as third-party designer brands in company-owned and franchised stores in the United States. Tiffany's flagship store in New York City is a vital source of sales for TIF.. Sales at this store, as well as other locations in major American cities, is heavily dependent on foreign tourist spending.
Tiffany has five reportable geographic segments. The Americas segment covers the U.S., Canada, Mexico and Brazil. Asia-Pacific consists of Japan, China, Korea, Hong Kong, Taiwan, Australia, Singapore, Macau and Malaysia. This segment operates chiefly through Tiffany boutiques in Asian department stores as well as the company website (for customers in Japan and Australia). The Europe segment covers the United Kingdom, Germany, Italy, France, Austria, Switzerland, Belgium, Spain and Ireland.  A geographic net sales breakdown is listed below:
Early 2008 saw the debut of Tiffany's new eyewear line, made possible through a deal with Luxottica Group, S.p.A. (LUX). Tiffany's also partnered with Softbank in 2008 to produce 8 diamond-encrusted cell phones that cost 13 million yen (or $134,000 USD) each and sold out in three days. Starting in 2008, Tiffany also opened two, smaller-format stores that offer a selected product assortment and this is expected to influence the design of new stores that will occupy 3000 - 4000 gross square feet in comparison to full assortment stores that are approximately 5000 gross square feet. Management hopes that this new format will serve a broader set of customers' needs.
The luxury goods market is rebounding from the slump caused by the global recession. Global luxury goods industry sales are expected to grow 4% in 2010 after a painful 8% decline in 2009, according to Bain & Company's Luxury Goods Worldwide Market Study. US retail sales in the luxury segment increased 15.5% year-over-year in April after a 22.7% surge in March. Consulting firm Unity Marketing reports that much of the growth is coming from super-rich households with incomes over $250,000. This group increased spending by 22.6% in Q1 2010. Tiffany, LVMH, Hermes, and Saks all reported strong profit gains in Q1 2010. 
Buoyed by the positive Q1 2010 results Tiffany CFO Jim Fernandez announced plans to launch a leather goods collection including handbags and accessories such as wallets, key holders, business card holders and luggage tags to sell for $100 or $120, less than a typical Tiffany item.
Due to its large international segment exchange rates play a major role in Tiffany's performance. Because of foreign exchange rate fluctuations sales abroad can be worth either more or less when translated back into dollars. In 2009, Tiffany gained 7% on Japanese sales due to favorable exchange rate fluctuations.  In Q1 2010, Japan sales rose 50% year over year with a 13% positive exchange rate effect built into that reported rise.  Tiffany minimizes the potential negative impact of a strengthening U.S. dollar against the Japanese yen by purchasing put option contracts as hedges of forecasted purchases of merchandise over a maximum term of 12 months.
Exchange rates also directly play a part in domestic sales as they influence foreign tourist spending. When the dollar is weak, U.S. goods are relatively cheap for foreign customers and this leads to higher sales from foreign tourists in U.S. cities such as New York, San Francisco, Las Vegas and other tourist-popular cities. This is particularly important in the New York flagship store where a majority of sales are from foreign tourist purchases.
As a jewelry retailer, a large portion of Tiffany's costs relies on the costs of raw materials such as gold, silver and diamond. From April to May 2009, the prices of gold and silver have both increased. The increase in the price of raw materials leads to an increase in production costs, which leads to thinner profit margins. If Tiffany does not raise prices to compensate for the increase in production costs then it makes less money per sale. Raising prices can have an adverse effect on Tiffany's sales given the economic state of the economy in mid-2009. Diamond prices, on the other hand, have returned to 2007 and 2008 levels, meaning majority of production cost increase comes from increased gold and silver prices.
Jewelry shoppers are less price sensitive than consumers of other goods, and cost is often not the major factor in a purchase decision. Important points of differentiation are quality, service and image. Thus, smaller specialized jewelers are able to compete on a store-to-store basis against larger companies such as Tiffany. As such, Tiffany's competition comes from a variety of sources, including other specialty jewelry retail chains, department stores with jewelry operations and small jewelry shops. Tiffany's largest direct competitors include Signet Group (SIG), Zale (ZLC), and Blue Nile (NILE). Signet Group (SIG) Zales Blue Nile (NILE) retailers Tiffany faces competition from upscale and exclusive retailers such as Bvlgari and Cartier.
Speciality Jewelry Retailers: