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On Apr 9, we upgraded our recommendation on Tiffany & Company (TIF - Analyst Report), the designer, manufacturer and retailer of fine jewelry, to Neutral, following better-than-expected fourth-quarter fiscal 2012 results attributable to a surge in demand in the Asia-Pacific region. The company also currently retains a Zacks Rank #3 (Hold).

Why the Upgrade?

After four straight quarters of negative earnings surprises, Tiffany delivered a positive surprise on Mar 22, wherein earnings of $1.40 per share surpassed the Zacks Consensus Estimate of $1.37 by 2.2%, and rose marginally by 0.7% from the prior-year quarter.

Tiffany’s net sales of $1,235.8 million climbed 4% from the year-ago quarter, on the heels of healthy performance of stores in the Americas, Asia-Pacific and Europe regions and due to new collection launches.

We believe Tiffany is well positioned to support robust sales and earnings growth in the long run by leveraging on capital investments made over the past several years in distribution, manufacturing and diamond sourcing processes. Moreover, with nearly half of the total sales generated internationally, we believe that the company is well diversified from a regional perspective as well.

Tiffany remains committed to attain long-term objectives of at least 15% earnings growth and a 10% to 12% sales increase annually. Management now projects earnings per share to mark an increase of 6% to 9% and total net sales growth of 6% to 8% in fiscal 2013.

However, the near-term concern on the stock that keeps us on the sidelines is its shrinking gross margin that is weighing upon its bottom-line performance. Tiffany registered a contraction of 130 basis points in gross margin of 59.1% during the fourth quarter.

Management anticipates fiscal 2013 gross margin to be modestly lower than the previous year due to a shift in product sales mix toward higher priced categories carrying lower margin. Consequently, due to gross margin pressure and increase in marketing costs, the company forecasted a decline of 15% – 20% in net earnings from operations during the first quarter of fiscal 2013.

Other Stocks to Consider

The stocks worth considering in the non-food retail, wholesale sector include Lumber Liquidators Holdings Inc. (LL - Snapshot Report), Macy’s, Inc. (M - Analyst Report) and Cabela’s Incorporated (CAB - Analyst Report), all of which carry a Zacks Rank #1 (Strong Buy). These companies are expected to continue with their upbeat performances.

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