A Diamond and a Rough Jeweler

Tiffany (NYSE: TIF) and Zale (NYSE: ZLC) both operate jewelry stores, and both reported impressive earnings yesterday. But that's where the similarity ends. One is on pace to become a preeminent global brand, while the other will likely remain locked in combat with domestic rivals for long-term relevancy.

If you guessed that Tiffany is the sparkling gem in this scenario, you probably know that items wrapped in its little blue boxes have become some of the jewelry industry's most recognized gifts. Tiffany's overall upscale appeal is currently sweeping across the globe, which helped the company post an 11% increase in second-quarter sales. Revenue jumped 17% in the Asia Pacific region, and an even stronger 35% in Europe.

Better-than-expected top-line trends helped leverage fixed costs, contributing to a 21% earnings improvement when you back out a charge in last year's quarter. This figure also beat expectations, giving management enough confidence to boost its full-year outlook a couple of cents. Guidance now falls between $2.82 and $2.92 per share, as the company predicts more strong sales abroad and a return to positive U.S. same-store sales by the fourth quarter.

At first glance, Zale is doing much better than Tiffany domestically, but its 6.1% fourth-quarter same-store sales growth owed largely to clearing out excess inventory on the cheap. Top-line results still managed to beat expectations, but earnings were negative for the year, even after a number of one-time gains.

Management expects a much smoother year ahead, with positive earnings and $145 million to $155 million in free cash flow. But one has to wonder how much improvement Zale is capable of over the long term. It has been in restructuring mode for a few years now, and though there have been plenty glimmers of hope, net profit margins have historically averaged less than 5%.

That's probably because Zale has to slug it out in the middle of the market, where retail giants such as Wal-Mart (NYSE: WMT), Sears (Nasdaq: SHLD), and Target (NYSE: TGT) can use volume to lower costs. So can online rivals such as Blue Nile (Nasdaq: NILE), which avoid bricks-and-mortar expenses. Tiffany's high-end focus leaves it much better-positioned, and its global reach is proving that it also has name recognition. That asset is definitely top-drawer  in the cutthroat jewelry industry.