Papa John's CEO: We're hopeful we can bring founder John Schnatter along after Starboard deal

Key Points
  • Papa John's CEO Steve Ritchie said a $200 million investment from activist hedge fund Starboard Value was in the best interest of shareholders.
  • Ritchie said he is "very hopeful" the company will bring founder John Schnatter around to agreeing with that decision and end a feud that has persisted since Schnatter's ouster last summer. 
  • Starboard Chief Executive Jeffrey Smith is credited with turning around Darden Restaurants.
Steve Ritchie
Source: Papa John's

Papa John's CEO Steve Ritchie said that the company hopes that founder John Schnatter stops feuding with the pizza chain after it announced a deal with hedge fund Starboard Value.

"Obviously, we're very hopeful that we can bring John along," Ritchie told CNBC's David Faber on "Squawk on the Street" Tuesday.

The embattled pizza chain announced a $200 million investment from the activist hedge fund Monday. The deal comes after a turbulent year for Papa John's. Schnatter has been feuding with the company ever since he was ousted as chairman following a series of public scandals, including the use of the N-word on a conference call. The public relations crisis resulted in negative same-store sales growth for every quarter of 2018.

"The decision we arrived at is in the best interest of its shareholders and stakeholders," Ritchie said.

The deal dilutes Schnatter's stake in the company from 31 percent to 26 percent, a person familiar with the matter told CNBC. Schnatter presented a competing plan to Papa John's special committee when he heard about Starboard's proposal, but the company rejected it, according to a filing with the Securities and Exchange Commission.

In addition to the investment, Starboard's chief executive, Jeff Smith, who is credited with turning around Olive Garden's parent company Darden Restaurants, is now chairman of Papa John's board.

Smith said that the current situation with Papa John's is similar to Olive Garden before its turnaround and that Starboard plans to use a similar strategy that focuses on the pizza chain's competitive advantages, like its six simple ingredients.

As the pizza chain prepares for a comeback, Ritchie said it is investing in expanding its menu while sticking to premium ingredients. Next month, the company is launching six new specialty pizzas. That's part of a broader strategy to reintroduce consumers to Papa John's as a pizza company known for high quality.

"They lost the way, not only in terms of image, but also in terms of messaging," Smith said.

For customers looking to taste a Papa John's slice, Smith suggested taking advantage of a competitor's promotion. Domino's is letting its loyalty members rack up points to redeem for a free pizza by eating a pie from anywhere — including Papa John's — for a limited time. Papa John's recently relaunched its own loyalty program.

Domino's has been the leader in the pizza business, and has benefited from its strong technology. About 60 percent of Dominio's U.S. sales come from its digital channels, according to the company's latest earnings release.

"The appointment of Jeffrey Smith as Chairman is particularly welcome as his experience in foodservice will ensure that Papa John's makes the right strategic moves over the next year. In a sense, the company is professionalizing itself after a period of poor management," Neil Saunders, managing director of GlobalData Retail, said.

The pizza company had been pursuing an outright sale before settling on the deal with Starboard. The deal does not rule out a future sale, according to a person familiar with the situation.

— CNBC's Lauren Hirsch contributed to this report.