Last week Tesla announced they’d start selling the $35,000 MSRP Tesla Model 3, and achieving that goal required shifting sales to an online-only model and closing all Tesla retail stores. We were told to believe the shift in sales strategy meant Tesla would have enough profit margin to begin selling the long-promised base-level Model 3. However another Tesla event, that the company is paying off convertible bonds using cash, gives us another possible rationale for closing the stores.
For last weeks announcement see: Tesla does end-run around states prohibiting direct car sales, and starts shipping $35k Model 3
A clear side effect of closing the Tesla retail stores is that many of the employees in those stores will be laid off. Surprisingly it is being reported that Tesla employees did not know the stores would be closed until Tesla posted the announcement to its blog (source: AutoNews). The abruptness of the move shocked some investors, with AutoNews quoting Alex Chalekian, founder and CEO of Lake Avenue Financial in Pasadena, Calif as saying “This was a total 180-degree turn. Tesla had been talking about expanding stores, and all of a sudden, they are closing them. To me, this signals a huge financial concern and a possible cash-flow issue for Tesla.”
The AutoNews report also noted that in its annual report filed on February 19, Tesla said the retail stores was important to its strategies. This was just nine days before announcing closure of the retail stores.
In other words – sudden move, not in comport with other company statements – WTF?
Tesla Convertible Bonds
I mentioned Convertible Bonds earlier. This CleanTechnica article has some useful details: https://cleantechnica.com/2018/10/17/teslas-impossible-task-9-paying-off-debt-in-2018-2019/
As of October 2018, Tesla had $230 million of bonds due in November 2018, and another $920 million due in March 2019. I am writing this in March 2019, and it was just announced Tesla paid off the $920 million block using corporate cash.
The CleanTechnica article suggests five ways to pay off this debt. For example Tesla could have converted the bonds to shares of Tesla stock along with a modest cash payment. That plan required Tesla’s share value to be above 130% of $359.87 for 20 of the last 30 trading days. A brief gander at the TSLA price chart shows it was well below $325 since Jan 16, 2019. Further the Government Shutdown of December 2018 derailed a rally in TSLA’s price — it was at $376 on December 13, 2018 — with the share price plunging to $295 by December 24, 2018. The share price never recovered, and obviously Tesla could not pay off those bonds using TSLA shares.
Another AutoNews report from December 2018 has details of how a cash+stock deal was proposed for paying off the Tesla convertible bonds.
In the CleanTechnica article the option of just paying the bonds in cash was described as the most complicated, and least likely, of the five options.
According to Tesla’s 2018 Annual report (10-K filing for 2018), Tesla had $3.6 billion in cash on December 31, 2018.
In Tesla’s letter to shareholders released in February 2019, this is said:
Free cash flow (operating cash flow less capital expenditures) also improved sequentially in Q4 to $910 million. In the second half of 2018, our cash position improved by $1.45 billion despite the scheduled repayment of a $230 million convertible bond in Q4. We have sufficient cash on hand to comfortably settle in cash our convertible bond that will mature in March 2019.
All of which leads to — the Silicon Valley Business Journal notes that Tesla paid off the convertible bonds using cash.
We went through those details to note that Tesla has plenty of cash on hand to use this method to pay off the bonds.
However, was this Tesla’s real plan? Did they have other uses in mind for that cash? Was Tesla’s hand forced into this move when they might have preferred to pay the convertible bonds using a mix of TSLA stock and cash?
Turning back to Tesla’s annual filing we see that “Selling, general and administrative” costs rose to $2.8 billion in 2018, while falling to 13% of revenues. That is testament to how much Tesla’s revenues rose during 2018. This line item covers “personnel and facilities costs related to our stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, as well as fees for professional and contract services and litigation settlements.“
Therefore by closing the Tesla stores, the company will save a portion of the SG&A expense.
I may be going out on a limb, but it does not seem that closing the stores will save very much money. It is a fraction of the SG&A line item, so let’s assume the expense for the stores is $1 billion a year.
Tesla had $18 billion or so in automotive revenue during 2018, and that figure should rise significantly in 2019 because of increasing Tesla Model 3 sales. I don’t grok the urgency to save maybe $1 billion in the cost of keeping the stores open.
I’ve seen many online reports of how going into a Tesla store was critical to someone choosing to buy a Tesla. Speaking for myself, it doesn’t matter how many news articles I write or read about Tesla’s cars — spending many tens of thousands of dollars on a thing means I want to inspect the thing in person rather than buy it on trust.
Bottom line is I’m suspicious about the real motive for closing the Tesla stores. The rationale may have to do with needing to pay off the bonds using cash. But I have no proof, just some coincidental evidence.
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