J.C. Penney stock caught a major break Thursday.
Shares ended the trading session more than 25 percent higher, making it the stock's best day in more than four decades. (Click here to track the company's share price in after-hours trading.)
The surge comes after the chain assured investors that its turnaround is on course, with the most difficult part behind it. During the crucial holiday quarter, the retailer reported a smaller-than-expected loss along with improving margins. Its outlook called for an improvement in comparable-store sales, a key industry measure.
(Read more: JCP reports smaller loss than expected; stock jumps)
According to the latest available data, short interest as a share of J.C. Penney's float stands at about 43 percent.
Brian Nagel, a managing director at Oppenheimer, said it's a "pretty fair assumption" that some of this stock gain is related to investors' closing out short positions following the quarterly report.
"I would assume the answer is yes," he said in a phone interview. "Just because some of the short interest is betting that J.C. Penney would have to raise additional capital or declare bankruptcy."
Nagel, who has a perform rating on Penney's stock, called the report "a step in the right direction" but warned that it "by no means means that J.C. Penney is in the clear."
Since taking over in April, CEO Mike Ullman has fought an uphill battle in coaxing back J.C. Penney's core customers after a botched revamping by ex-CEO Ron Johnson. The former Apple executive had jettisoned Penney's traditional model of heavy discounts in favor of everyday low prices and new brands that didn't resonate.
(Watch: JCP's stock price depends on margins: Expert)
In the midst of a multiyear turnaround, the retailer still needs to prove it can drive sustained sales growth without destroying margins, Nagel said.
Still, the report did cast a more positive light on its efforts.
"They showed evidence of a stabilization in the business, both in sales and margins," Nagel said. "And ... probably more importantly, the comments from management suggest that from a capital or cash standpoint they should be fine."
Still, Morgan Stanley analysts said 2014 guidance appeared to be "aggressive."
"JCP is running out of easy comparisons, and must deliver genuine sales and margin improvement to become [cash flow] neutral. We are yet to be convinced," analysts wrote in a report to clients, reiterating an underweight rating on the company.
—By CNBC's Katie Little. Follow her on Twitter @KatieLittle