AnnTaylor Stores Corp. (ANN) on Friday posted a smaller-than-expected drop in its earnings and said improved inventory management would lift profit margins through the second half of the year, sending its shares up 8 percent to a 5-month high.

The company said full-priced sales at its Ann Taylor division have been growing since May and that the improvement has continued into August.

That improvement is a positive sign, Neely Tamminga, retail analyst at Piper Jaffray & Co. wrote in a research note.

In addition, "the mechanics of the product assortment at both divisions are trending in the right direction," with more neutral colors, improved pant fits, and more competitive prices, Tamminga said.

The women's apparel retailer, which operates the Ann Taylor and Ann Taylor Loft chains, has been battling fashion missteps and weak sales for more than a year. Slack demand for its merchandise continued into the second quarter, forcing it to take deep markdowns that cut into its profit.

Earnings fell to $7.1 million, or 10 cents per share, in the second quarter ended on July 30 from $30.1 million, or 41 cents per share, a year earlier.

Excluding a $9.5 million charge for lease costs from relocating corporate offices, the company earned 18 cents per share, a penny better than analysts' average forecast, according to Reuters Estimates.

Net sales rose 7.6 percent to $508.7 million.

Sales at stores open at least a year, a key gauge known as same-store sales, fell 3.9 percent. Same-stores sales dropped 6.1 percent for the company's Ann Taylor division and fell 3.2 percent at the lower-priced Ann Taylor Loft division.

At Ann Taylor stores, the company has gradually brought in more full-priced product, AnnTaylor's president, Kay Krill, said in a statement, but at Loft stores, "we did not have the appropriate balance that our client expects from us."

The company stood by its earnings forecast of $1.17 per share for the fiscal year, compared with analysts' average forecast of $1.09. It also said it expects gross margins to rise from current levels in both the third and fourth quarters as it keeps a closer watch on its inventory levels in order to boost full-priced selling.

On the company's conference call, Krill said that Ann Taylor Stores was planning to buy more appropriate amounts of merchandise and to bring items into its Ann Taylor stores on a more consistent basis. She also said that the company plans to lower its starting prices on some items at its Ann Taylor stores in order to "help move the business away from continual promotions."

AnnTaylor shares were up $2.06 at $27.10 in midday New York Stock Exchange trade after rising as high as $27.40 earlier in the session.