Meanwhile, Zale - which is completely based in North America - has performed the worst, with soaring debt, dangerously slim profit margins and a sluggish growth forecast for the next five years.

Blue Nile, the world’s largest online diamonds retailer, has fared better, but its margins are surprisingly slim for an e-commerce retailer. Blue Nile's rising revenue and declining profit suggests that it may be overspending on promotions - a classic e-commerce mistake. Blue Nile’s high forward P/E also signals that the stock is overvalued, while its PEG ratio of 2.98 means that analysts aren’t expecting the company to grow by much. In other words, Blue Nile is an overvalued low-growth stock.

Let’s also compare their revenue and EPS growth over the past five years.

TIF EBITDA & Revenue data by YCharts

From these two charts, we can see that Tiffany and Signet have strong revenue growth, although Signet's profit growth has squeezed passed Tiffany's over the past three years. It’s also easy to see why Blue Nile and Zale should not be considered safe investments.

International challenges

China is considered a key market for multinational luxury retailers such as Tiffany. Chinese shoppers recently overtook U.S. consumers as the world’s largest purveyors of luxury goods, accounting for 25% of global luxury sales. The Chinese domestic luxury market was worth an estimated $17 billion in 2011, and is forecast to grow 7% when fiscal 2012 ends.

Therefore it is essential for Tiffany to capture a slice of the Chinese market. In that market, “China’s Tiffany,” Chow Tai Fook , reigns supreme. With a market cap nearly double the size of Tiffany’s, Hong Kong-based Chow Tai Fook is the largest jeweler in the world. While Tiffany mainly offers silver and diamond products, Chow Tai Fook offers a large variety of 24-karat gold jewelry, which is considered auspicious in Chinese culture.

In its third quarter, Tiffany posted a 4% decline in same-store sales in Asia. At the same time, Chow Tai Fook posted an 8% decline in China, its primary market. However, over the holiday season (November and December), Tiffany bounced back strongly, posting 10% same-store sales growth throughout Asia.

In my opinion, if Tiffany adds more gold items to its product line in China, it could capitalize on Chow Tai Fook's current weakness, claiming a slice of the more traditional Chinese market. However, high gold prices - which jewelers usually purchase through hedges - increase the risk substantially.

The bottom line

Simply put, there are better industries to invest in than jewelers. There are just too many factors to consider - metals prices, discretionary spending, shifting tastes, and foreign currency impacts make growth too difficult to accurately forecast.

However, in this tumultuous industry, Tiffany is a decent pick that will likely outperform its peers, owing to its fantastic revenue per square foot, strong same-store sales growth in Asia, and steady ability to keep growing its top and bottom lines. Just watch its operating margins and same-stores sales carefully for any signs of weakness and invest accordingly.

The article Is Tiffany a Diamond or a Cubic Zirconia? originally appeared on Fool.com and is written by Leo Sun.

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