Restaurants May Have Served Tainted Desserts

Cheesecake Factory Inc. said Tuesday that its cheesecakes contaminated with the potentially deadly listeria bacteria may have been served to Olive Garden customers at 19 restaurants in the Midwest and the South.

The news could stain the Calabasas Hills-based chain’s reputation and eventually hurt its sales and stock, some analysts said.

The chain’s statement that consumers may have eaten the white chocolate raspberry cheesecakes sold to Olive Garden came just a day after Cheesecake Factory said it was confident nobody had eaten the contaminated products.

Cheesecake Factory executives declined to comment further Tuesday.

A serious case of listeriosis takes one to six weeks to develop, according to the Food and Drug Administration and other government agencies. An estimated 500 people annually die from it, with the elderly, pregnant women, children and those with weakened immune systems most at risk. Serious infections also can result in meningitis and miscarriages.

In a related development, Darden Restaurants Inc., parent of Olive Garden and Red Lobster restaurants, has stopped selling Cheesecake Factory products at its restaurants since learning of the tainted cakes on Thursday. The Orlando, Fla.-based chain has dispatched two scientists to California to inspect Cheesecake Factory’s manufacturing plant in Calabasas Hills today, said Darden spokesman Jim DeSimone.

“We need to be thoroughly satisfied that the proper standards have been reestablished,” he said.

On Monday, Cheesecake Factory announced it had recalled a batch of contaminated cheesecakes sold to Olive Garden. It also recalled all of its baked goods made from July 18 to July 21 as a precautionary measure. The company, which said it has been working with the FDA and Olive Garden, said the tainted batch was shipped because of “human error.”

None of the contaminated cakes was sent to Cheesecake Factory or any other wholesaler, the company said. There have been no reports of illness due to the cakes.

Because of all the uncertainty, analyst David Rose of JMP Securities in San Francisco said he downgraded his rating on Cheesecake Factory’s stock to “market underperform” from “market perform,” even though he said the company is among the strongest in the restaurant industry.

“The halo has been tarnished,” he said.

Rose said the negative publicity generated by the recall could hurt Cheesecake Factory’s restaurant and wholesale businesses. Wholesale bakery sales account for about 8% of the company’s revenue.

Bryan Elliott, an analyst with Raymond James & Associates, said Tuesday he lowered his third-quarter profit estimate for Cheesecake Factory by 1 cent, to 25 cents, because of the expected lost business and other costs associated with the recall.

“The jury’s out on how much it’s going to hurt the company, but it certainly can’t help,” said Dennis Milton, a Standard & Poor’s analyst with an “accumulate” rating on the stock.

But not all analysts subscribe to the doom-and-gloom scenario.

Allan Hickok of U.S. Bancorp Piper Jaffray in Minneapolis said Cheesecake Factory is so well managed and enjoys such a stellar reputation with consumers that it should continue to fare well.

The typical outlet generates annual revenue of $11 million, more than four times the average for a casual-dining chain, analysts said.

After dropping 9% Monday on news of the recall, company shares roared back. Cheesecake Factory stock rose $2.49 Tuesday to close at $30.69 on Nasdaq.

Unless somebody falls ill, the worst is probably behind the company, said Lynne Collier, an analyst with Stephens Inc. in Dallas. “I’m not overly concerned,” she said.

The contaminated cakes reached the 19 Olive Garden restaurants in six states--mostly in Texas but also in Missouri, Arkansas, Kansas, Oklahoma and Louisiana--between July 26 and July 31.

Although Olive Garden removed and destroyed about 2,500 white chocolate raspberry cakes from its restaurants and distributors after learning of the contamination, “we can’t absolutely rule out the possibility that somebody consumed one of these products before we got notice from the Cheesecake Factory,” Darden spokesman DeSimone said.

People most commonly contract listeriosis by eating contaminated food. Healthy people rarely fall ill from it.

There have been several high-profile cases, including one in Los Angeles in 1985 that resulted in 46 deaths. The outbreak was traced to soft Mexican-style cheese manufactured with contaminated milk.