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Next On J.C. Penney’s Improvement List: Fixing Its Awful Finances

J.C. Penney (JCP) certainly wowed Wall Street with its fourth quarter results and 2016 projections on Friday.

The retailer’s shares rose as much as 16% on Friday, hitting their highest levels since October. But the jump had more to do with what’s next on Penney’s to-do list. As it continues to heal from an ill-advised reinvention attempt in 2012 and 2013 that wiped out one-third of its sales, J.C. Penney is planning to make a few more big dents in its gigantic debt load.

Penney reported better comparable sales growth than any of its direct competitors, including Macy’s (M) and Kohl’s (KSS), during the holiday season. What’s more, the department store said it expected EBITDA (earnings before interest, taxes, depreciation, and amortization—a key measurement for bankers) would hit $1 billion on 2016 on sales that Wall Street expects to reach $13 billion, thanks to additional sales improvements. This suggests the business is getting healthy and will be able to generate sufficient cash to placate lenders. (Penney has promised Wall Street EBITDA would hit $1.2 billion next year.)

Chief Financial Officer Ed Record told analysts on Friday that the department store would pay down a big chunk of its $4.8 billion long-term debt load this year, reducing it between $400 million and $500 million, as it did in 2015.

This is no small matter for the company: Penney’s debt load, the gift that keeps on giving from its failed reinvention under former CEO Ron Johnson, has hampered its ability to invest in tech. Having a state-of-the-art shopping app and equipping stores to help with e-commerce are essential for any brick-and-mortar chain to compete with each other and with (AMEN). And until recently, Penney was far behind its peers on several e-commerce fronts.

Last year, Penney spent about $400 million on debt interest and more than the $300 million or so on capital projects like tech and store improvements. At the height of its crisis in 2013, Penney borrowed a lot of money at very high interest rates (more than 8% for one tranche), reflecting its high risk of insolvency.

A big chunk of its debt payments this year will come from a previously announced plan to sell its home office in booming Plano, Texas (20 miles north of Dallas) and lease back the space it needs. (After several rounds of layoffs, Penney’s offices are cavernous and can be easily consolidated.) This follows a move a few years ago to sell adjacent land the company owned in one of the fastest growing industrial parks in the country. Last year, just a few months into CEO Marvin Ellison’s tenure, Penney also reduced its pension obligations by about $1.5 billion.

The moves have helped improve Penney’s debt load, which had persistently weighed on its stock. The retailer has since reported nine straight quarters of comparable sales growth, but it didn’t get much credit from Wall Street. That had to do with grave concerns about the size of the company’s debt load in relation to its sales, which hit $12.6 billion in 2015.

Delving into some math nerdiness, J.C. Penney’s debt-to-EBITDA ratio is now 5.4, Record said. If Penney reaches its targets for 2016, that would fall to less than 3, marking an enormous improvement.

Penney is not out of the woods by any means, but its stock move this week shows growing faith in its turnaround. (Shares are up nearly 50% in 2016 though still way below historic levels.) In fact, one Wall Street analyst even asked about the prospect of Penney buying back shares, quite a concept for a company that, not even three years ago, many assumed would land in bankruptcy protection.

“So we continue to work on how do we monetize more assets and pay down debt,” Record said on the conference call.

Referring to the debt-to-EBITDA ratio, he added: “We need to get at least below a three-times-leverage before we consider doing any type of buyback. I think it’s great that we’re talking about a buyback already.”