Tiffany & Co posted a 62 percent drop in quarterly earnings on Friday, worse than Wall Street had expected, as jewelry sales languished in the recession.

The upscale retailer said sales trends had improved slightly in May, but not enough to boost its weak full-year outlook as rough economic conditions persist.

Tiffany, which has already said that its U.S. sales decline would ease a little in the second half of the year, saw its New York flagship store suffer the most with a 42 percent drop in revenue. Sales of jewelry over $50,000 faced the steepest drop, a company spokesman said in a conference call.

Despite the slight improvement in May, any meaningful pickup in sales at Tiffany would take time, said Edward Jones analyst Matt Arnold.

The consumer is likely to slowly open their wallet back up when things improve, Arnold said. It would be a leap for a budget-conscious consumer to resume shopping in the highest of high end.

High-end stores like Tiffany and even more-affordable peers such as Zale Corp have taken a painful blow to sales in the past year as consumers confine their buying to necessities like groceries. When they do spend, shoppers want discounts.

As other jewelers cut prices to win shoppers, and some like Whitehall Jewelers Holdings and Friedman's Inc went bankrupt and held fire sales, Tiffany earlier this year vowed to hold the line on prices.

Many investors and analysts argue that discounting would tarnish the Tiffany brand in the long term.

Given the economic uncertainty, Tiffany's outlook, though depressed, was realistic, Arnold said.

I don't think it is wise for any management team to be trying to raise the bar and raise expectations from investors, he added.

Still, investors may be troubled by its sales drop in the United States and the flagship store, Arnold said.

PROFIT DROP

Tiffany's net profit fell to $24.3 million, or 20 cents per share, in the first quarter ended on April 30 from $64.4 million, or 50 cents per share, a year earlier.

Analysts' average earnings forecast was 21 cents per share, according to Reuters Estimates.

Sales dropped 22 percent to $523.1 million and were down 18 percent on a constant-currency basis. U.S. sales at stores open at least one year declined 34 percent.

Sales fell 9 percent in the Asia-Pacific region, while they were down 8 percent in Tiffany's Europe markets.

While the weak economy has hammered sales, the rate of decline is easing, with results in the Americas improving slightly and other markets improving more, Tiffany Chief Executive Michael Kowalski said in a statement.

But he warned it was too early to draw conclusions.

Despite the current sales pressure, Tiffany stands to benefit when the economy improves, said Pali Capital analyst Stacey Widlitz.

This is a company that has seen a lot of competition wash out, she said. At the end of the tunnel, you have a market share story and a brand that is intact.

Tiffany said it still expects full-year earnings of $1.50 to $1.60 per share from continuing operations, and a worldwide sales decline of about 11 percent. Analysts on average expect a profit of $1.57 per share.

Tiffany expects full-year sales declines at a mid-teen percentage rate in the Americas region and in the high single digits in Europe. It also forecast about a 33 percent drop in capital expenditures to $100 million.

Earlier in May, Tiffany said it had bought bankrupt handbag maker Lambertson Truex to expand its array of leather goods.

Tiffany shares were down 94 cents, or 3.3 percent, at $27.19 on the New York Stock Exchange.

(Reporting by Aarthi Sivaraman; Editing by Lisa Von Ahn and John Wallace)

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