Tiffany & Co reported higher-than-expected quarterly earnings on cost cuts, and the retailer raised its full-year outlook as demand for jewelry increased, sending its shares up more than 7 percent.

The company, which reduced selling, general and administrative expenses by 14 percent in the quarter, said it was pursuing a more modest pace of store expansion this year because of the recession.

While economic and retail conditions remain challenging, we were encouraged to see many stores achieving either smaller year-over-year rates of sales declines or modest sales growth compared with the past two quarters, Chief Executive Officer Michael Kowalski said.

Net profit fell to $56.8 million, or 46 cents a share, in the second quarter ended July 31, from $80.8 million, or 63 cents a share, a year earlier.

Excluding items, the profit was 39 cents a share, beating the analysts' average forecast of 33 cents, according to Reuters Estimates.

Net sales fell 16 percent to $612.5 million. Analysts on average had expected $604.9 million.

Tiffany has said that its U.S. sales decline will ease a little in the second half of the year, as it comes up against dismal results from a year ago.

The company forecast full-year earnings of $1.65 to $1.75 a share from continuing operations, up from its prior forecast of $1.50 to $1.60. Analysts on average were expecting $1.58.

Tiffany now sees sales declining about 10 percent this year. It had earlier forecast a drop of 11 percent.

Jewelers have suffered in the recession as consumers stay away from pricey purchases and save money for essentials like groceries instead.

New York-based Tiffany has vowed to hold the line on prices even as rivals tried to attract shoppers with discounts and bankrupt chains such as Whitehall Jewelers and Friedman's Inc held fire sales to get rid of merchandise.

Analysts expect the continued consolidation and store closings in the jewelry business to help Tiffany gain market share.

Tiffany shares were up 7.1 percent at $36.15 in premarket trading.

(Reporting by Dhanya Skariachan in Bangalore and Aarthi Sivaraman in Seattle, editing by Gerald E. McCormick and Lisa Von Ahn)