Women's clothing retailer AnnTaylor Stores Corp beat Wall Street's profit expectations on Friday, helping to send shares up 1.5 percent.

The company, reporting for the second quarter, said it would continue to focus on managing inventory and cutting costs, as sales trends are likely to improve only slightly in the third quarter.

Shares were up 1.5 percent at $13.01 in midday trade on the New York Stock Exchange after falling as much as 5 percent earlier in the session.

With second-quarter earnings beating expectations and shares up about 77 percent since mid-July, Wall Street has high hopes for the operator of the Ann Taylor and Loft chains.

The company needs to deliver, said Jefferies analyst Randal Konik in a note to clients. Top line trends will be key to the next big move in AnnTaylor's stock. Hope is high, visibility is low.

AnnTaylor's results come a day after Gap Inc , Aeropostale Inc and Pacific Sunwear of California Inc
reported slightly better than expected results, with Aeropostale the only one to see higher sales.

Like Chico's FAS Inc , Talbots Inc and other apparel chains targeting adult women, AnnTaylor has suffered in the recession as some customers reduce spending on themselves before cutting back on purchases for their families.

In addition, the namesake Ann Taylor chain has been hit by weaker demand for suits and other professional clothes as unemployment increases.

Sales at stores open at least a year, a key gauge of retail health, fell 22.5 percent in the second quarter.

Same-store sales, also known as comps, fell a whopping 38 percent at the Ann Taylor chain and 15.4 percent at the less-expensive and more casual Loft chain.

We could have comped better with more product, absolutely, said Chief Financial Officer Michael Nicholson on a conference call. But as we've said previously, our second-quarter strategy was focused on maximizing gross margin dollars, not comp performance.

Nicholson said the company was planning for comps in its Ann Taylor division to decline at a double-digit rate in the current quarter, albeit less steeply than in the first half of the year.

While tight inventory is likely to limit sales improvements going forward, UBS analyst Roxanne Meyer said corresponding gains in gross margins would move the needle more on (earnings). She also said changes at Loft, which accounts for more than half of total sales, should help.

We view Loft as the key catalyst for AnnTaylor despite the Street's focus on (the Ann Taylor division) in assessing a turn, Meyer said.

We are encouraged by Loft's fashion, improved fits and value pricing, which we expect to lead to market share gains in the current environment.

Improved merchandise at both chains is already catching the eyes of analysts, in more ways than one.

Let me add my congratulations, Piper Jaffray analyst Neely Tamminga said on the conference call. This is the first time I've bought Ann in the last 12 months. I really appreciate the better assortment.

Overall, the company said it expects a slight sequential improvement in sales and gross margins in the third quarter.

BEATING THE STREET

On a net basis, AnnTaylor posted a loss of $18.0 million, or 32 cents per share, for the quarter ended on August 1, versus a year-earlier profit of $29.3 million, or 50 cents per share.

Excluding restructuring charges, AnnTaylor earned 6 cents per share, topping analysts' average forecast of 2 cents, according to Reuters Estimates.

The company said in July that, excluding items, it expected quarterly profit to be slightly above break-even on revenue of $470 million.

Sales came in at $470.2 million, down from $592.3 million a year earlier.

To offset weak sales, AnnTaylor is working on a three-year restructuring plan designed to shave $125 million a year in costs by cutting jobs, closing stores and reducing inventory.

For the rest of the year, the company expects margins to improve due to tight inventory management, improved merchandise at both chains and an expectation that the retail sector overall will see less deep promotions.

(Reporting by Martinne Geller; Editing by Lisa Von Ahn, Ted Kerr and Matthew Lewis)