Jeweler Tiffany & Co. (TIF) said Monday poor sales in Japan combined with high platinum and gold prices ate into its quarterly earnings, offsetting good U.S. business, and sending its shares lower.

Fourth-quarter net earnings at Tiffany, known for its diamond engagement rings and its New York flagship store, were boosted by a one-time gain and rose to $217.0 million, or $1.48 per share, from $110.5 million, or 74 cents per share, a year earlier.

Excluding one-time items, Tiffany earned 81 cents a share, 2 cents above the average forecast among analysts polled by Reuters Estimates.

The biggest one-time item was a gain of 85 cents a share from the sale of Aber Diamond Corp. (search) shares.

Sales in the quarter, ended Jan. 31, rose 11 percent to $810.1 million from $731.6 million. Excluding the impact of foreign exchange rates, sales were up 9 percent.

U.S. sales increased 10 percent to $397 million, and U.S. same-store sales rose 7 percent. International sales rose 10 percent to $300 million, and same-store sales in the region rose 1 percent

Sales at stores in Japan open at least a year fell 7 percent, the 4th straight quarter they have dropped, while total sales in Japan rose just fractionally. Japan is Tiffany's second most important market, after the United States.

"Sales in Japan have been clearly disappointing although it remains a highly profitable market," Michael Kowalski, chairman and chief operating officer, told a conference call, noting unit volume of Tiffany silver jewelry was down.

Kowalski said the retail and consumer environment remained challenging in Japan, adding that average monthly wages had fallen for the fourth straight year in 2004 while luxury goods competition was more intense than ever.

But he said, "We believe we have taken the critical step to begin turning things around in Japan," noting a new focus on product development and marketing, moves to upgrade the store base and the appointment of a new president of Tiffany Japan.

Shares in Tiffany fell 68 cents, or 2.2 percent, to $30.24 on the New York Stock Exchange (search) .

Gross margin in the fourth quarter was 57.1 percent, down from 59.5 percent a year earlier. For the full year, gross margin fell to 56 percent from 57.9 percent in the prior year. Inventory charges related to higher precious metals prices were $15.8 million in the quarter compared to $2.9 million in the previous year.

"The only surprising thing was (that) in their gross margin ... their charges because of metal prices going up were a lot higher than I thought they would be," said Stacey Widlitz, an analyst at Fulcrum Global Partners.

James Fernandez, chief financial officer of Tiffany, said the gross margin was slightly worse than expected. "Throughout 2004 inventory costs have been pressured by higher costs of precious metals and diamonds, much of which we have not yet passed through to consumers," he said.

Tiffany is particularly affected by big swings in the cost of platinum and gold. Gold prices in early December hit a 16-1/2 year high, while NYMEX platinum prices ended 2004 up nearly 6 percent from the previous year.

Fernandez said margins had also been squeezed by the continued shift in sales towards higher priced but lower margin diamond jewelry as well as continued sales weakness in Japan.

Tiffany forecast net sales growth of between 8 percent and 10 percent for 2005, and net earnings of $1.45 to $1.55 per share. According to Reuters Estimates, analysts' average forecast is $1.44 per share.

Tiffany said it expected first-quarter earnings to be "somewhat below" 25 cents per share due to continued challenging conditions in Japan and the effect on margins of higher prices for precious metals and diamonds.

According to Reuters Estimates, analysts were forecasting 2005 first-quarter earnings per share of 28 cents, but Widlitz said the guidance did not come as a surprise because Tiffany was up against difficult U.S. comparisons.

The jeweler said it expects earnings per share growth of at least 12 percent annually over the years 2006-2008.