If memory serves it gzips whatever file it is and then base64 encodes the gzipped data. I did not tinker with image files but it did alright with other media files. I get what you mean though.
The last thing that I was working on was this: https://github.com/txtatech/qr-weaver which takes an input file and turns it into an animated gif of QR codes that can be decoded back to the original file.
Now that would be cool to be able offer QR codes that could summon an image from the blockchain. You have my wheels spinnin'. :)
They can store entire files as an animated gif. I have another project that also makes QR code videos for storing entire files. Pretty neat stuff really.
EDIT: Oh I forgot that qr-weaver project has the video creation in it as well.