The economy stinks.

More than a year after the worst recession since the Great Depression, the economy is sputtering again. Unemployment still hovers at 9.6% and the housing market continues to languish.

Economic growth is so sluggish in fact that the Federal Reserve considers the risk of deflation to be greater than the risk of inflation at this point.

Yet, amidst this stagnation, business is somehow booming for a company that sells wildly expensive and completely unnecessary extravagances.

How can this be?

The main reason is China. More than 20 years of stratospheric economic growth has catapulted Chinese incomes “particularly at the top end,” according to one Oxford University economist. These nouveau riche have risen to the forefront of conspicuous consumers lately as the Chinese economy still booms while Western economies sputter. In London, wealthy Chinese citizens are reportedly spending three to four times more than last year’s level in the wealthy shopping districts, outspending even Arab royalty.

The newly rich have always displayed an insatiable appetite for the trappings of luxury, and the Chinese are no different. This new and growing class of big spenders is helping turn bad times into boom times for one of the world’s most iconic luxury brands.

Tiffany & Co. (NYSE: TIF), or Tiffany’s, is an international jeweler and specialty retailer. The company designs and sells its own distinctive brand of primarily fine jewelry (90% of 2009 sales) as well as china, timepieces, fragrances and other luxury items. Operating since 1837, Tiffany’s is one of the world’s most recognized luxury brands. The jeweler sells its goods exclusively through its stores and boutiques (as well as the Internet) in more than 20 countries all over the world and at its flagship store located in Manhattan.

Tiffany’s world famous “little blue box” high-end brand helps it stand out among the competition and command a price premium.

The company is geographically diversified, as most of sales come from outside the United States. For 2009, sales were generated in the following regions: The Americas (52%), Asia-Pacific (35%) and Europe (12%). The main tenet of Tiffany’s growth strategy is to expand in the most promising markets.

Why buy it now?

Tiffany’s is as much associated with luxury as just about any other brand in the world, and luxury items have been outselling regular mass market items in this market. For example, Wal-Mart (NYSE: WMT) reported second quarter same store sales that were lower than the year ago quarter. By contrast, luxury department store chain Neiman Marcus recorded a +7.6% rise in second-quarter sales. For a closer comparison, take Zales Corporation (NYSE: ZLC), a seller of lower-priced mass market jewelry. Zales has recorded lower sales so far in 2010 than in 2009, while Tiffany’s reported a +9% increase in revenue and profits that were +19% higher in the second quarter versus a year ago.

In fact, the same dynamic has been true within Tiffany’s itself. The company reported solid growth in sales of items priced at $50,000 and higher, while sales of items below $500 are slowing. Perhaps wealthier spenders aren’t feeling the soft economy as badly or perhaps wealthy Chinese spenders are tipping the balance.

In fact, the company reported that higher profits were driven by strong overseas sales and tourists, both of which bear the fingerprint of wealthy Chinese. The strongest region in the quarter was Asia, led by China, where sales rocketed +21% from last year. Sales increased +8% in the New York flagship store, largely because of Chinese tourists. Sales in Europe increased +14%, largely because of strong sales in the U.K., where the Chinese have reportedly been spending like crazy.

Looking forward, there is good reason for optimism. Tiffany’s raised 2010’s earnings guidance by $0.05 after the second quarter from $2.60 to $2.65 per share. The jeweler opened seven new stores in Asia in the past year and plans to open seven more before the year is over. The company also said that sales were already up by the low single digits so far in the third quarter.

Tiffany & Co. shares have gained +22% in the past year, and has outperformed Morningstar’s jewelry store category by a whopping margin (the category has returned less than +5% in the same period). Yet despite the recent outperformance, Tiffany’s multiple of 16 times 2010 earnings is much lower compared to the jewelry store sector’s multiple of more than 26. The stock also pays a quarterly dividend that has risen more than +500% in the past decade and now yields about 2.3%.

Action to Take –>Tiffany’s operates in what has turned out to be a relatively defensive niche in today’s environment — the rich. The stock is about 15% off its recent high, pays a growing dividend and should continue to grow earnings in the “new normal.” The stock is a buy anywhere under $45.