9 Mar, 2019FORTUNE.COM
Elon Musk’s plans to shut down most of Tesla’s retail stores may have been intended to cut costs and help Tesla lower the price of its Model 3 electric sedan to $35,000. Instead, it may expose the company to new headaches. The latest, according to the Wall Street Journal: The risk of legal challenges from its stores’ landlords.
Tesla leases many of its stores from the owners of shopping centers. Robert Taubman, the CEO of Taubmen Centers--which leases space to Tesla in eight of its properties--said at an investment conference this week that the electric automaker “is going to owe a lot of landlords a lot of money." Tesla has a $1.6 billion in lease obligations, with $1.2 billion of that amount due between now and 2023, the Journal reports.
In its securities filings, Tesla has previously warned of the risk that its "various non-cancellable operating lease agreements" could lead to legal battles should the company seek to terminate them. In that case, Tesla may not be able to save as much money as Musk is hoping, and could be offset by its legal bills.
Musk caught investors, customers, and even Tesla’s own employees off guard when he announced the company would close stores. Some sales staff only learned of the move when Tesla posted the news on its company blog. An annual report published nine days before the announcement underscored the importance of the stores to the company’s strategy, saying the network of “highly visible, premium outlets… enables us to better control costs.”
The abruptness of the change in retail strategy caused Tesla’s stock to drop 4% immediately after the announcement. The stock has continued to fall since then, losing 11% of its value, or about $5.5 billion in market cap.
Rather than being taken as a bold move that could help Tesla sell more cars, the decision to shut down retail stores is seen by some investors as a possible sign of financial desperation.
"This was a total 180-degree turn," Alex Chalekian, the CEO of Lake Avenue Financial in Pasadena, CA, told Bloomberg this week. "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."