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FINANCE

Musk warns of loss as Tesla shuts stores, cuts Model 3 cost

Musk-warns-of-loss-GBO

The famed Tesla CEO announced that the company won’t post a profit in the first quarter, and contradicted several of his past predictions that the company would turn towards profitability

He made the comments while announcing he long-awaited cheaper Model 3, along with a plan to trim costs by closing stores and cutting more jobs.

 “Given that there was just a lot happening in Q1, and we’re taking a lot of one-time charges and there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable in Q1,” Musk stated on a call with reporters. “But we do think that profitability in Q2 is likely.”

Tesla shares fell as much as 4.1% to $306.80 in late trading, paring gains related to Musk teasing an announcement. The stock is still up from where it was two days earlier, when the CEO tweeted the company had news to share.

Shifting to online-only ordering will enable Tesla to lower the prices of all its vehicles by an average of about 6%, according to a blog post. That’s helping Musk deliver the $35,000 version of the Model 3 for the first time, almost three years after the company started taking orders for the car.

Tesla will also be “significantly reducing” its spending on sales and marketing, which will help make the announced price changes possible, Musk wrote in an email to employees. Some jobs will be cut and some employees will transition to different parts of the company, he said.

“Tesla pioneered direct-to-consumer sales, and the stores were always more of an advertising portal than an actual transaction portal,” said Mike Ramsey, an automotive consultant with researcher Gartner Inc. “Closing the stores themselves is not that crazy; the real issue for Tesla is their service capability.”

The company will wind down many of its stores over the next few months, Musk said. Some of the roughly 130 outlets will remain in high-traffic locations as galleries, showcases and information centers, and others will become service and repair centers.

“There’s no other way for us to achieve the savings required,” the CEO said.

Musk reiterated that improving service in 2019 is Tesla’s top priority and said the company will be adding jobs worldwide to address what’s become one of the biggest concerns of new customers. He said moving away from stores will be “incredibly helpful” toward boosting deliveries.

“In many parts of the US, we are unable to sell effectively because of franchise laws,” he said. “Now anybody can buy the car online anywhere in the US, immediately. This substantially opens up our ability to sell the cars.”

Model 3s on backorder now will all be delivered by the end of June, in time to claim a $3,750 federal tax credit, as the company ramps up production, Musk said. As of July 1, Teslas will be eligible for only an $1,875 US incentive.

Musk issued yet another forecast for how many vehicles Tesla will produce this year, predicting somewhere in the range of 420,000 and 600,000. Three days ago, the US Securities and Exchange Commission asked a federal judge to hold him in contempt of a settlement reached last year over a tweet in which he said the company would make as many as half a million cars.

The CEO doubled down on his defense against the SEC’s claims by reiterating comments he made on a January 30 earnings call that Tesla would sell as many as 500,000 Model 3s this year.

“350,000 to 500,000 Model 3s is what I said in the earnings call,” Musk told reporters. “And we expect to make somewhere between 70,000 to 100,000” Model S sedans and Model X crossovers.

Musk, 47, settled a lawsuit in September with the SEC and agreed to get company approval before communicating material information to investors. The agency alleges he breached that deal with a February 19 tweet, which he corrected hours later with the help of a company lawyer.

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