Tiffany & Co. (TIF) Diamond Lawsuit Showcases an Unattractive Stock

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Tiffany & Co. (NYSE:TIF) has accused Costco Wholesale Corporation (NASDAQ:COST) of selling counterfeit Tiffany diamonds. It sounds rather shocking, but this isn't the first time either company has run up against the issue of counterfeit merchandise. However, the story also gives plenty of reasons to avoid Tiffany shares right now.

Tiffany chose a cute day to file its lawsuit (happy Valentine's Day, Costco), making heavy allegations about knock-off Tiffany engagement rings showing up under the fluorescent lights and warehouse ambience of Costco stores. Tiffany ponied up for one of the rings, and upon examination, found that the rock didn't include the luxury jeweler's microscopic brand it uses to identify its own diamonds, nor did the platinum band include the Tiffany trademark.

Tiffany & Co. (NYSE:TIF)Although Costco discontinued the rings when Tiffany complained in December, Tiffany has still decided to go forward with the lawsuit, claiming the practice had gone on for many years. It's seeking $2 million in damages, as well as information including the number of fake Tiffany rings the retailer had sold and who supplied them so it can demand triple the profit Costco made on the fakes.

There are plenty of reasons for Tiffany to get sensitive right now, and investors should be paying attention to more than where the Tiffany brand may be showing up. The high-end jeweler's all-important holiday quarter recently fell short. That's not Costco's fault, but it should get Tiffany watchers worried. In January, American Express Company (NYSE:AXP)' decision to lay off 5,400 workers implied a chilly prognostication that affects all luxury brands: higher-income consumers have been cutting back.

In even more difficult news, Tiffany said in its most recent 10-K that the engagement segment is "particularly and increasingly intense," and its edge is to convey quality. For some, that makes Tiffany look better than companies like Blue Nile, Inc. (NASDAQ:NILE), which is a more affordable option for engagement rings. Although Blue Nile also disappointed Wall Street's quarterly expectations in its most recent quarter, its engagement ring sales increased 31%. Maybe some engagement ring shoppers are trading down.

As far as Costco's concerned, it's got a reputation for selling high-end merchandise to eager bargain hunters for a relative steal. Other companies have accused Costco of similar violations. Crocs showed up in Costco stores without Crocs, Inc. (NASDAQ:CROX)' knowledge in 2008, Calvin Klein accused the retailer of stocking fakes, and some companies have cried copyright infringement, too.

Tiffany rabidly defends its brand as a matter of course, since that is one of its key differentiators to begin with. The company went after eBay Inc (NASDAQ:EBAY) in 2004 to try to convince the online auctioneer to get a handle on counterfeit Tiffany merchandise that showed up on the site. Interestingly, Tiffany actually lost the suit when the court put the onus on the manufacturer to keep an eye out for counterfeits on the market.

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