I finally got around to fixing it up a little. I think it looks a lot better.
Here's what I did--I cut off the sleeves but left them intact. Using a shirt she wears, I cut the shirt down to size. (Okay, I accidentally cut it a little bit smaller than her size. So I added in the decorative black contrast panels, which I think actually look pretty good.)I added some elastic into the ends of the sleeves, stretching the elastic taut as I attached it. And that's how you can take a large, shapeless T-shirt:
and turn into a cute, girlie shirt: