Krispy Kreme Doughnuts (NYSE:KKD) was once a company that promised high-flying returns back when it first went public, though it has suffered from promising more than it delivered. Some tough years of losses and poor management have seen to this. The stock is so unloved that Wall Street no longer has any major analysts regularly following it. So is there any hope for Krispy Kreme?

Bad Earnings Getting Better
Krispy Kreme narrowed its losses in its just-reported third quarter fiscal 2010, as it lost $2.4 million, or 4 cents a share, compared to $5.9 million, or 9 cents a share in last year's same quarter. Cash from operations was up to $5.8 million, from $1.3 million, this year's quarter over last year's. The narrower loss was squeezed out, despite lowered revenues, from $94.3 million in last year's third quarter to $83.6 million in this quarter. The company reduced its long-term debt to $49 million from $75 million a year ago.

Others in the Donut Biz
Donuts haven't exactly been a recession-proof business, as Krispy Kreme has proved by its struggles. Tim Horton's (NYSE:THI), which also struggled with earnings in its recent quarter, did so because it undertook a reorganization of its restaurants, yet the company looks healthy and poised to take advantage of this, as its share repurchase program underscores. Horton's has a good brand and customer loyalty, especially in its Canadian stores. So, too, does Krispy Kreme have a good brand, and while it is trying to get in more on the coffee trade with its small store concept, it should be noted there's fierce competition in coffee too, and Krispy Kreme is a light player in the latte business for now.

Starbucks (NYSE:SBUX), for example, has been buying less coffee from Guatemala, showing there is pricing pressure on the supply end of that commodity, and that it has the scale to do something about it, - buying elsewhere. McDonald's (NYSE:MCD) has obviously added to the coffee pressure, raising indirectly the stakes for the small players in the coffee-and-donut group such as Krispy Kreme.

Krispy Kreme's Possibilities
The actual over-promising by Krispy Kreme in the time after its fevered IPO years ago, really is not that relevant to the company now. It is pursuing a different strategy, and though the recent financial results were mixed with revenues down and earnings still off, these are improving from their worst of just a couple of years ago. Also, the small store strategy coupled with slightly wider offerings such as coffee and other items, along with management tightening up operations and paying down debt, as well with some careful expansion to more stores, are all good signs. (Learn more about IPOs in The Murky Waters Of The IPO Market.)

The Bottom Line: Unloved, Unwanted
Even The Street virtually abandoning the stock isn't a bad thing for investors interested in a possible turnaround play. So Krispy Kreme is a beaten down stock that has been trading in the $2-3 range; The Street is telling us it's unloved, unwanted, but it just might be a bargain.

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