The pace of change in technology and business is continually accelerating, and if your company isn't leading the disruption, odds are good that it's the target of it. Case in point: three stalwart segment leaders that need to figure out how to adapt. First up, we have Facebook (META -1.41%). In a fascinating blog post, CEO Mark Zuckerberg just announced he wants to redesign the whole company to be more privacy focused -- which sounds great in theory, but could make profits much harder to come by. Next, leading U.S. supermarket operator Kroger (KR 1.82%) disappointed on earnings and revenue Thursday, in part because of how much it's spending on e-commerce, delivery, and other areas to stay competitive. And as for Barnes & Noble (BKS), well, the last giant bookstore chain may be profitable, but it's still in dire need of a map so it can get out of its long decline.

In this Market Foolery podcast, host Mac Greer and senior Motley Fool analysts Ron Gross and Jason Moser discuss the latest news around those companies, dig into their businesses and plans, and consider the next stages of their evolutions.

Check out the latest earnings call transcripts for Facebook, Kroger, and Barnes & Noble.

A full transcript follows the video.

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This video was recorded on March 7, 2019.

Mac Greer: It's Thursday, March 7. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Ron Gross and Jason Moser. Gentlemen, welcome! How are we doing? 

Jason Moser: Hey!

Ron Gross: Well, how are you doing, Mac?

Greer: I'm doing good!

Moser: You're looking good! 

Gross: You've got a new shirt!

Greer: Thank you! You have to say that, right? I will tell you this. I do have a new shirt on, and I'm feeling better than Barnes & Noble and Kroger are feeling today. 

Gross: Right down to business, is what you're saying. Let's go!

Greer: Right down to business. 

Moser: Is that a Kirkland shirt?

Greer: It is not a Kirkland shirt.

Moser: Ooh! On the day that Costco earnings come out at market close, I thought maybe a Kirkland shirt would give them a little extra boost.

Greer: You think I'm a one-trick-pony? You think that's the only place --

Moser: No! I think you have a lot of tricks, no question there.

Greer: That's not true!

Moser: I just know your loyalty to Kirkland. I admire it!

Greer: OK, guys, it was and is a bad day for Barnes & Noble and Kroger. We're going to get to that.

But we begin with big news from Facebook. In a blog post on Wednesday, Facebook founder and CEO Mark Zuckerberg said he wanted Facebook to become a "privacy-focused communications platform." Hmm...

Gross: [laughs] Curiouser and curiouser!

Greer: Curiouser and curiouser. Here's the money quote from his blog post. "I believe the future of communication will increasingly shift to private encrypted services where people can be confident what they say to each other stays secure and their messages and content won't stick around forever."

Jason, we do not have a lot in the way of specifics, but this sounds like this could have huge implications for the business.

Moser: Yeah, I think you're right. If, in fact, he does end up pursuing this type of strategy, it would have material impacts on the business. Now, because of that, I don't think he will ultimately end up pursuing this strategy. But I do appreciate what he's saying. I appreciate that he's getting out there and talking about privacy because obviously, Facebook has a lot of issues in regard to privacy recently. 

The problem I have is... I don't mean to sound so skeptical, but when you think about what Facebook is, when you think about what Facebook has become today, privacy basically runs counter to the company's DNA completely. 

Greer: Why is that? 

Moser: Because Facebook was built on you putting all of those pictures out there for everyone to see. [laughs] They mentioned it more than a couple of times in that blog post. It's been that public square where you just put that stuff out there for the world to see. And I agree, I think that as we're seeing the evolution of social media, we're seeing people starting to prioritize privacy over living their life for everyone to see. There's more of a premium on me being able to communicate with someone or a small group of people intimately as opposed to having to yell it out there and tell everyone what I just had for breakfast. And that's fine, but remember, if you go to that private side, and you're talking about encrypting data to where Facebook can't even see it, well, that business model has been built solely on advertising to this point. If you don't have that data, then you're not lobbying up relevant ads, which completely throws their business model into total, total chaos. 

Gross: Obviously, they've been under a lot of stress here over the last couple of years with respect to privacy. This may be an over-correction on Zuckerberg's part. I don't doubt that they will move toward some of this. But they've got $22 billion of net income to protect. If they move too quickly and that starts to plummet, obviously the stock will get crushed, a lot of implications would reverberate down the road from moving too quickly. Whatever happens will be slow because they're going to protect that cash flow.

A lot of thoughts out there about how they could potentially monetize this new privacy world that Zuckerberg has in mind. Ads will always be a big part of that. A lot of talk about how the Stories platform, kind of like the Snapchat platform, would be a good place where ads could still be delivered up. Conversations about a cryptocurrency to allow people to transfer money from one person to another, perhaps through the WhatsApp feature, but it could be in a number of different places. 

A third way Facebook could make money is focus on private messaging and shopping. He's been talking more about shopping lately than I've seen him do in the past. Again, if you're going to move to this, you have to figure out how to make some money here. It's a multi-billion dollar company that you need to protect. 

Greer: Along those lines, it's worth reminding everyone that when we're talking Facebook, we're not just talking about Facebook, the core platform. We're talking Instagram and WhatsApp. Jason, we were talking before the show, WhatsApp, people love the service. There's only one problem, right? 

Moser: Yeah. The word you heard Ron mentioned multiple times there was "could," as in maybe. I would encourage anyone who's interested in this, please go actually read the blog post that Zuckerberg wrote. Don't read the articles talking about it, read the actual post. I think you'll see what I saw, which was essentially a very long-winded look at privacy.

Greer: So you like the post?

Moser: Generally speaking, no. I think brevity wins out. But to me, he continued to equivocate all the way through. He never really committed to anything. I think this was more of a PR move than anything else because once you get to the nuts and bolts of what this would mean for the business, it would have a material impact on the business model itself. It's not to say that you can't make money doing these things like commerce and payments or whatnot, but it's also not like this is the first time we've heard Facebook throw the idea out there that they'd like to be able to make money in commerce and payments. There's a reason why companies like PayPal and Square and Amazon and Wayfair are succeeding. They're e-commerce and payments businesses. Facebook is not. 

When you talk about a company that has really flushed a lot of trust down the toilet here the past couple of years, I don't know why you would be able to get someone from one of those platforms that does something so well over to the Facebook universe. We've talked a lot about how messaging is an extremely difficult platform to monetize, whether it's Messenger or WhatsApp or direct messaging on Twitter or Instagram or whatever. Messaging inherently is difficult to monetize because it's so personal in nature. People don't want that invasion of privacy. That's why I ultimately don't think there's going to be much that comes of this. I think it was a great PR move. It makes him look a little bit better. It sounds like he cares. And I don't doubt that he does. But I don't think that they're going to fundamentally change much of what the business is all about.

Greer: I was a little hurt because you left me hanging on My WhatsApp comment. I said there was one problem with WhatsApp and I think you got there at the end. What's the one big problem with WhatsApp? 

Moser: It's a messaging platform.

Greer: Right. And from a business standpoint?

Moser: It doesn't make any money.

Greer: Thank you!

Moser: Is that important?

Greer: You're killing me!

Moser: I guess I didn't lead with my strongest statement.

Greer: It's OK, we got there.

Moser: Your point is a very good one. WhatsApp just doesn't make any money. They paid $20 billion for that platform --

Gross: That's just details.

Moser: -- with the promise of, "Well, eventually we'll figure it out." And that's a lot of what this blog post is. "Well, eventually we'll figure it out." I'm one of those big grudging bulls on Facebook. I don't like being a bull on Facebook because I don't like Facebook. But I also can't deny the fact that when you have two billion people on the face of the planet using one or more of your services, it's very difficult not to make money. But, you want to know how you don't make money? You pivot and start trying to make money on messaging. That's where you don't make money, so that's why I don't think they ultimately will be able to follow through with this. It's just not the most lucrative market opportunity, and he has a business to run. 

Greer: We'll call you cautiously pessimistic. 

Gross: I actually do want to comment on the stock just for a second. Because it's a FAANG stock, and we think of it as one of these go-go stocks, which may or may not be cash flow positive or have operating profits, it gets thought of incorrectly. Facebook is a company that generates gobs of cash flow, $30 billion of cash flow. It's a stock that trades at 22X earnings. Not expensive. Not a go-go stock. Not a stock that doesn't have profits. It's different. Again, I get back to what I said earlier. Because of that, they're going to protect those profits. They're not going to all of a sudden become an unprofitable company with ideas for their future, lofty goals, lofty growth goals. They're going to protect that valuable cash flow, move into this either very slowly or perhaps, in the end, not at all. 

Greer: One more data point there, Ron. Queen Elizabeth just posted on Instagram for the first time on Thursday. How great is that?

Gross: Market top? 

Greer: Yes. She posted a letter sent to her great-great-grandfather, Prince Albert, in 1843. Ron, I apologize because I always, always forget, so I apologize asking you this -- Queen Elizabeth, was she your year in high school? Or the year behind you?

Moser: Man!

Gross: You're older than me! How dare you!

Moser: Quick question for you, because you hit on something really important there. Facebook makes a ton of money. They do have to consider that when they look at strategies like this. All of that being considered, do you feel like the low-hanging fruit with Facebook has probably been picked at this point with investors? I mean, it's a big company. We're talking about close to a $500 billion market cap. Do you think the low-hanging fruit has been picked? 

Gross: Yep. I do. It's not the go-go stock of old. I still think they'll continue to generate tons of cash going forward, but it's a different stock than it was five, six, seven years ago. 

Moser: Yeah, we talked a lot on Motley Fool Money before about how a while back, we thought they had aspirations to get into the payments business. And that was probably a good strategy. I don't think they've shown that they're quite responsible enough to handle something like that. But, we figured that the easiest way for them to get access was to acquire either something like PayPal or something like Square. PayPal is probably too big now and wouldn't want to be a part of that family anyway. Square, I'm quite certain Jack Dorsey doesn't want to be a part of that family. And I don't think regulators would allow any of that to happen anyway. They're really stuck between a rock and a hard place. 

Greer: We'll come back to this stock in my desert island question, but let's move on to a rough, rough day for Kroger. Shares down around 12% at the time of our taping. Disappointing earnings and revenue. Guys, Kroger is spending a lot on online sales, on delivery, on improving their stores. They're facing fierce competition from the likes of Walmart and Amazon. What do we think of Kroger?

Moser: As far as grocers go, I like it. I think it's one of the better operators out there. Harris Teeter is a pretty sweet experience, I enjoy it.

Gross: I agree.

Moser: But this is why I don't own any grocer stocks in my portfolio. It's such a tight margin game to begin with on a good day that when you have to start investing in your business like they have to do, it just makes it even that much more difficult to compete. If you're going to look for that grocer exposure in your portfolio -- Mac's going to love this -- you have to go with something like Costco.

Greer: Thank you!

Moser: You have to get that membership model that just breeds that fiercely loyal customer base. We talked a lot about Costco in Austin last week. A lot of people out there still really love it. Good company, good grocer. Raised their dividend for the 12th consecutive year.

Gross: Yes they did!

Moser: They're trying to get to be that dividend aristocrat at some point.

Greer: I will tell you, I was in Costco this week, and I had a feeling that I've never ever had in Costco: disappointment. It's because I think that some of the quality of the clothes is slipping a bit.

Moser: Really?

Greer: Yeah.

Gross: That's a funny thing. Quality of the clothes, it's an oxymoron!

Greer: [laughs] They've always been about value! When we interviewed Jim Sinegal back in the day, they don't like the word cheap. It's all about good value. And if people start feeling like the value is slipping, that they're cutting corners --

Gross: Yeah, that's not good.

Greer: These were just sweatpants --

Gross: Are the rotisserie chickens still good?

Greer: The food is still solid. Not as many samples on weekdays now. That's another complaint.

Moser: I was telling you, I got a couple of those Amazon Essentials dress shirts because honestly, I wanted to see, No. 1, are they a good quality?

Greer: Woof.

Moser: Is it worth my time? Do the measurements hold true? And if so, maybe there's something there, because if I don't have to leave the house to get clothes, I'm not leaving the house to get clothes.

Greer: How'd that work out?

Moser: I have to tell you, I'm very impressed!

Greer: Really?

Moser: I've got two dress shirts. They hold up very nicely. Nice, thick cotton. Fit well, look nice --

Greer: OK, back to Kroger. One more thing on groceries, I want to ask Jason. What do you think about Amazon getting into the actual grocery stores, brick and mortar?

Moser: It's obviously complementary to what they have with Whole Foods. When you look at grocery, you're really looking at scale being a massive competitive advantage. If you can build out that network of distribution, whether it's fulfillment centers or actual stores, you do have that advantage of being able to leverage some of those costs.

Again, if Amazon was just a grocery company, I don't think I'd be interested.

Gross: [laughs] 3% margins doesn't impress you?

Moser: This is just one of those things. They've already committed to it with the Whole Foods acquisition, so hey, why not just try to get every price point?

Greer: OK, guys, speaking of bad days, Barnes & Noble. Wow! They may want to hang out with Kroger at the bar. Shares of Barnes & Noble down around 12% on earnings. Sales were flat for the holidays. Barnes & Noble warning that full-year earnings will be weaker than expected. That's not good. But, there was some good news. Same-store sales up 1.1%, which the company said was its best quarterly performance in several years. I'm trying to square that. 

Gross: That was going to be my lead! Therein lies the problem! 1.1% was their best performance in years! [laughs] 

Greer: That's considered flat-ish for the holiday quarter. Is it that bad? Is it 12% down bad? 

Gross: The guidance going forward is what's killing the stock. Let's not forget, the company still is profitable. Even with the lowered guidance, they're going to do $150 million in EBITDA, probably, on an annual basis. It's just, what are you going to pay for that from a stock perspective? You have a company that is constantly, I mean, the fifth CEO in six years, we're looking for right now. It's tough. 

They do have a special committee that's looking at offers that people have made for the company, including former founder, Leonard Riggio. It's a struggling business. I think there's a place for brick and mortar bookstores still, you just have to get the footprint right and you have to get the number of stores right. Then you can have a nice, little business. The emphasis is on "little" here. Right now, you have the stock trading around 4X EBITDA. Theoretically cheap, but not if guidance is going to continue to be cut downward.

Moser: Yeah. Another dynamic that plays into that -- I agree, I think there's a space for bricks and mortar bookstores. I even still like going, and I'm a Kindle guy, really. 

Greer: I was there last week. I love, love, love being in a bookstore!

Moser: I do, too. When Amazon started building out those little bricks and mortar bookstores here and there -- and they don't have many of them, they have them here and there -- the one thing that they are able to do is, they're able to use the data that they get from their readership, whether it's Amazon or Goodreads. They can basically cater those stores to what they know people are going to be reading. So, they can maintain a much leaner cost structure on those stores that they own. 

Barnes & Noble, that's always been one of the biggest places you've ever been to. You walk in there and just get lost.

Gross: Three floors.

Greer: Nice.

Moser: I love it!

Gross: Maybe stumble on a Starbucks.

Moser: [laughs] I could be in that store all day long and never get bored. But it costs a lot of money to maintain that presence. 

Greer: The cat calendars alone. There's a whole aisle of cat calendars.

Moser: I think you're seeing a little bit of a resurgence for the mom-and-pop bookstore, the bricks and mortar bookstore. Barnes & Noble has continued to hold a brand recognition in that space. If they can right-size the cost structure of the business, it may not be the best growth opportunity in the world, but like Ron said, there's a space for it.

Greer: Let's talk about that a bit more as we wrap up. We are a show for investors. If I'm an investor, if I'm looking at this stock, I'm looking at Barnes & Noble, do they have to get more people into the stores? Or, as you say, do they have to basically radically change their business model and move toward online, which hasn't worked in the past for them that well? How do they get people in the stores?

Gross: They have to have an online presence. People still go to the stores. They're still profitable, let's not forget.

Greer: But they need more people.

Gross: They need less stores and the stores don't need to be as big. Nationalize the operating cost structure, maintain your profitability, and just settle on being a nice business, not a huge growth business, but a nice business that could generate relatively stable cash flow on an annualized basis. 

Moser: I've got the answer. You just partner up with Costco, sublet a little space in every Costco around the country. 

Greer: I like that!

Moser: Boom! Problem solved!

Greer: Or Dave & Buster's, maybe?

Gross: [laughs] Not so much.

Moser: I'm more of a Costco guy.

Greer: OK. We've got our desert island question. Once again, do not invest this way at home. It's just a fun, whimsical question.

Gross: It's fun!

Greer: OK, you're on a desert island. You have five years, and you have one stock that you can buy: Facebook, Kroger, or Barnes & Noble? I think this is going to be a slam dunk, but maybe not. Surprise me!

Gross: I'm a Facebook shareholder. Of these three, I'm going with Facebook. But it's not steep competition here.

Greer: The new, private, encrypted Facebook?

Gross: [laughs] Right. It's going to be an interesting next five years. It's not a slam dunk, buying Facebook right here. But, again, 22X earnings, and I think their cash flow will at least be steady, not get crushed, no matter where they go here. So I go Facebook. 

Moser: I'm buying the dip. I'm going Kroger. That dividend, baby! The one thing I will say about grocery stores, while I don't own them, everybody has to eat. Kroger and Harris Teeter have a big presence around the country, pretty loyal shoppers. They're building out their private label brands. They're partnering up with Alibaba and Tmall to get some international distribution there. I still think there's an opportunity for Kroger to grow. But if you're talking about a company that's prioritizing growing their dividend every year, and you're thinking they want to get to that dividend aristocrat status, basically you're telling me that for the next 13 years, they're going to raise their dividend every year. I'm in!

Greer: I don't know about the stock, but I love Kroger stores! They're really nice!

Moser: They are nice!

Greer: And I have a soft spot because I think a Kroger was the first place where I ever saw where you could mix and match and make your own six pack. I'll never forget. You can pull different craft beers and assemble it as a six pack. I'm like, "What will we think of next?"

Gross: [laughs] "We put a man on the moon."

Greer: "We put a man on the moon, and now you can build your own six pack." I think we're Rome. I think we've hit our peak. 

Moser: Every once in a while, I go home, and my lovely wife comes home with one of those six packs that she's put together for me. And I just remember how lucky I am!

Greer: You cannot do that at Costco. OK, Ron, Jason, thanks for joining me!

Gross: Thank you, Mac!

Moser: Thank you!

Greer: As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we'll see you tomorrow!