UPDATE 3-Jo-Ann Stores Q2 loss narrows; raises FY profit view

* Expects gross-margin improvement to continue in Q3

* Q2 loss $0.13/shr vs est loss $0.39/shr

* Q2 sales up 4 pct to $419.4 mln

* Says to open about 20 new stores in 2010

* Shares up 8 pct (Adds analyst comment)

By Vidya Lakshmi

BANGALORE, Aug 26 (Reuters) - Jo-Ann Stores Inc JAS.N posted a narrower-than-expected quarterly loss as cost cuts boosted margins and improved merchandise attracted shoppers to its stores, and raised its outlook for the year, sending its shares up 8 percent. The fabric and crafts retailer also said it expects the improvement in gross margins to continue in the third quarter.

"We are still seeing double-digit decreases in sales trends, but the gross margin is trending in the right directions," Chief Executive Darrell Webb said in a conference call with analysts.

Boenning & Scattergood analyst Holly Guthrie said the company's efforts to give a facelift to its stores also drove customer traffic and solid pricing aided margins.

"Sales was a strong increase...they have been remodelling their stores and when they remodel, the new store gets an 8 percent same-store sales lift, that has been contributing to the total sales increases," Guthrie said by phone. She has an "outperform" rating on the stock.

For the second quarter, the retailer posted a loss of $3.2 million, or 13 cents a share, compared with a loss of $11.7 million, or 47 cents a share, a year ago.

Revenue rose 4 percent to $419.4 million.

Analysts on average had expected a loss of 39 cents a share, before special items, on revenue of $413.9 million, according to Reuters Estimates.

Jo-Ann, whose products include an array of items for home decorating, sees full-year earnings of $1.35 to $1.50 a share, up from its prior outlook of 70 cents to 85 cents a share.

Analysts on average were looking for a full-year profit of $1.09 a share, before items.

The retailer also said it expects to open about 20 new stores and close about 30 stores in 2010.

Shares of the Hudson, Ohio-based company were up $2.00 at $27.65 in after-market trade. They closed at $25.65 Wednesday on the New York Stock Exchange. (Reporting by Vidya Lakshmi in Bangalore; Editing by Maju Samuel, Vinu Pilakkott)