Three Ways to Invest in a Girl's Best Friend

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Jewelry is a timeliness gift and a completely discretionary expense. However, buying fancy baubles never seems to go out of style. Tiffany (NYSE: TIF), Blue Nile (NASDAQ: NILE), and Signet Jewelers (NYSE: SIG) each fill a different niche in the space.

Frivolous

Most people know full well that buying jewelry is an unnecessary expense. Sales are better in good times and worse when the economy cools off, but they never seem to stop.

Engagements, marriages, anniversaries, Valentine's Day, or just because, there are any number of reasons to show someone that you love them with a ring, watch, or necklace. Although not exactly on a firm footing, the U.S. economy is starting to show some signs of strength. That could be good news for jewelry retailers.

The Little Blue Box

There's something about that little blue box from Tiffany that sets a woman's heart aflutter. While you may or may not understand it, there's no denying that a Tiffany anything stands out from the rest of the crowd. And Tiffany works hard to make sure of that.

It positions itself at the very high-end of the jewelry market, even for its famous, and aspirational, silver jewelry. However, the company sells much more, including diamonds, watches, and eating utensils.

Tiffany's sales grew up to the 2007 to 2009 recession, fell for two years, and have since begun to grow again. Although earnings are a little variable because of the commodity nature of what it sells, the company hasn't earned less than $1.45 a share over the last decade and posted earnings of $3.25 last year. It has a history of regular, though not annual, dividend increases.

The company has a global brand and reach, so more than just U.S. economic shifts need to be considered. However, a long history of success and an instantly recognized and respected brand set this company apart.

At the high end of the jewelry market, Tiffany shares are trading near all-time highs and have a price to earnings ratio in the low 20s. Growth investors would do well to consider this one, even if it only winds up on a watch list for a pullback.

Cheap-ish

Blue Nile is at the opposite end of the jewelry spectrum. The company's big focus is on diamonds, though it sells plenty of other trinkets. However, by using the Internet as its sales medium, the company has built a large business and managed to offer customers a good value proposition.

Like Tiffany, Blue Nile's top-line fell during the recession, but has picked up since. Its sales, meanwhile, have grown from $130 million a decade ago to $400 million last year. That's pretty impressive for an upstart jewelry store that doesn't have any stores.

Part of its unique business model is that it doesn't actually take ownership of diamonds until they have been paid for by a customer. That helps reduce costs and limits the impact of commodity price changes, though it doesn't eliminate the issue.

While the top-line has been growing of late, the bottom-line has been a bit weak. Part of the problem is increasing Internet competition. Still, the company has a good brand name and is well respected. With no long-term debt, it has plenty of time to adjust to changing industry dynamics. There's likely to be plenty of upside if the company can get earnings headed higher again. However, with a price to earnings ratio of 55, there's also a risk that investors have already priced in that growth.

In the Moment

Few people go to Tiffany for a spur of the moment diamond. And visiting the web and waiting for the delivery of a ring is a deliberate act. However, jewelry purchases are often driven by emotion, which is where Signet Jewelers comes in. The company is one of the largest store-based retailers in the United States and England, with brands like Kay, Jared, and Signet, among others.

Like the pair above, Signet's top and bottom lines took a hit during the recession. They have since headed sharply higher. Earnings hit $4.35 a share last year on revenue of nearly $4 billion. That compares pretty favorably with Tiffany's $3.8 billion in revenue and $3.25 a share in earnings.

In fact, Signet is not only growing its store base organically, but it is buying competitors, too. For example, it opened twice as many Jared and Kay stores year-over-year last year and recently acquired Ultra. This is a good option for investors seeking a mass market jeweler. The shares are at all-time highs, but the PE is only around 15, so there could be more upside.

The Gift of Love

Jewelry stores pitch their wares at the heart strings. That can be good business. Tiffany is a solid high-end player, Blue Nile is a respectable and cheap option, and Signet fills in the rest. If the economy continues to improve, this trio should see results head higher, too.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

 


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Blue Nile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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