Despite its well-publicized troubles over the past two years, J.C. Penney (NYSE:JCP) investors are enjoying the turnaround management is engineering in 2014, a performance that's even outpacing the stock market as a whole, which itself continues to climb to record highs.

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So, has this stock wrung all the value it can for investors or is there still more upside ahead?

Substantial risk remains
J.C. Penney is still financially fragile. It just announced it was raising capital for a debt tender offer, but it took a gang of nine banks to put together a deal worth only $350 million, suggesting lending institutions remain very wary of its ability to continue as a going concern. No one apparently wanted to be on the hook all by itself for all the money.

What Penney will be doing with the funds is buying up existing notes that are due over the next three years. That should seemingly be a simple task to accomplish, but having to round up such a large passel of managers and co-managers to get this deal worked out means they're worried about the retailer's high debt load, which sees its long-term debt closing in on $5.5 billion, and its debt-to-equity ratio standing at a sky-high 2.09. In comparison, Macy's (NYSE:M) D/E ratio is 1.24 and Kohl's (NYSE:KSS) is at 0.84.

With retail being so cyclical, let alone Penney's own personal woes, a downturn in the economy again, or even consumers souring on the department store's product offerings, could jeopardize its ability to repay principal and interest.

Thus far Penney has negotiated through the debris of its broken down financial statements and earlier this summer it restructured its debt that served to lower its cost, showing it can still do what's necessary to regain the trust of its customers, suppliers, and apparently, its creditors. Let's just hope the hole it's put itself in isn't too deep.

A recent convert
In the face of such risk, however, J.C. Penney is cobbling together a recovery that continues to impress, and in fact is performing better than its rivals, from which it is stealing market share. 

Considering this is still very early in the turnaround program makes it a remarkable achievement. Winning back customers you've lost is no small feat, and though store traffic remains negative (it's down industry wide, too) conversion is actually positive.

Conversion measures how many of its customers coming into a store end up buying something while they're there. Penney's conversion, average transaction size, and average unit retail for the second quarter were all higher compared to last year, meaning that once it gets a customer in its stores they're liking what they find and buying.

The customer is responding to the changes the retailer's made. Data: J.C. Penney quarterly SEC filings

That ought to allay some of the concerns its lenders have about the possibility Penney falls out of fashion and favor again. Add in that it's also seeing higher sales and comps, and the case for a firmer financial footing becomes more clear.

Ready to school the competition
The back-to-school season pretty much just ended, and Penney witnessed a pretty strong response to its offering. It noted July ended well with the final weeks of the second quarter finished strong suggesting that would carry over right up till the school bell rang to start the new school year.

With spring doing well -- the 26th week of the year is one of its biggest sales periods of the season, second only to Easter, and it saw double-digit comp growth then -- followed by a good summer performance, it's only right to expect the momentum will continue as it heads into Christmas.

It's forecasting comp growth for the third quarter, which would represent its fourth straight quarter of rising same store sales, and respectable gross margins of 36% are expected.  It's also anticipating to be free cash flow positive by year's end. 

Although Macy's isn't exactly struggling, it's not performing at the same level as Penney at the moment, no doubt having lost a number of the customers that flocked to it when Penney's went through its changes. Kohl's, on the other hand, has been following its rival's playbook down and while not in such financial peril as Penney had been, is still stumbling badly.

Date: J.C. Penney and Kohl's quarterly SEC filings

Imitation may be the sincerest form of flattery, but Kohl's investors would much prefer it return to its own roots. That creates opportunity for Penney, however, to build on the gains it's already made and convert more customers to its own.

J.C. Penney is a risk, but one worth taking
If the economy turns sour once more or J.C. Penney's clothes, home goods, or online stores fail to resonate with consumers, we would expect to see further downside in the stock. But given the fact that CEO Myron Ullman has proven himself adept at finding the pulse of his customer and keeping his finger on it, I believe J.C. Penney is well positioned.

The debt on the retailers balance sheet is definitely worth keeping an eye on, but despite the sheer number of lenders it took to raise capital to make the debt tender offer, the fact it was still able to do so means there's still hope alive for Penney, just so long as the risk is spread out. That's a lesson individual investors should learn as well.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.