Big, expensive jewels are not selling well in this recession. Tiffany & Co. (TIF) lost some sparkle in the second quarter, but still managed to beat Wall Street's expectations, thanks to sales of small items.

The jeweler reported net income of $56.8 million for the quarter ended July 31, down 29.7 percent from $80.8 million the same time last year. Earnings per share were down to 46 cents, from 66 cents last year; but that still easily beat analysts' expectations of 33 cents per share.
Net sales were down 16 percent to $612.5 million and same-store sales were down 17 percent. Same-store sales in the U.S. were down 25 percent, while Asian stores were only down two percent and Europe dropped 10 percent. Executives noted sales in Asia and Europe are showing signs of recovery and Asian markets outside Japan have turned to positive sales trends recently.

The drop in U.S. sales came across product lines and regions and was due to both a decline in transactions and smaller amounts per transaction, said Mark Aaron, Tiffany's VP of investor relations. But he added that biggest decline in transactions came in large sales -- which Tiffany defines as price tags over $60,000 -- with smaller declines in the cheaper items. Sales of "statement jewelry" dropped at a faster clip than total sales, while sales of "fashion" jewelry dropped less than the average. Engagement ring sales dropped in line with the company's total sales.

So regardless of conventional wisdom, luxury has not been recession-resistant this time around. If reports are to be believed, the wealthy are feeling the pinch, too.

In a conference call with analysts Aaron noted sales in Tiffany's Fifth Avenue flagship were down 30 percent below last year's "for obvious local economic reasons" and noted Tiffany saw an identical drop in its Wall Street store.

Tiffany had been preparing for a worse quarter than it had. James Fernandez, the chain's chief financial officer, said profit margins and expenses came in as expected, it was the better-than-expected sales performance that helped the company beat earnings expectations.

Aaron noted same-store sales in the U.S. seemed to improve through the quarter, from a drop of 31 percent year-over-year in May to a drop of 24 percent in July. Also, the second half will benefit from a comparison to a steep sales decline the same time last year, he said.

Fernandez noted the company will benefit from this year's drop in diamond and metals prices, but not until next year. Meanwhile, it is not factoring any economic improvement into its forecast.

Tiffany adjusted its guidance for the full year, projecting a 10 percent drop in sales for the year, better than 20 percent it had forecast before, with net income of $1.65 to $1.75 per share, higher than its previous forecast of $1.50 to $1.60 per share.

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