Prada's Practical Accounting Change

New approach to depreciating store costs yields a near-term benefit

Prada has fashioned a helpful accounting change.

The luxury brand has altered the way it writes down the value of its retail premises, and gained a useful boost in the process.

It said late Friday it will now assess depreciation over the life of a lease, which could be up to 18 years, instead of capping the period at 10 years. The average lease is about eight years.

Prada says the change simply reflects reality, and has been done in accordance with both accounting standards and its auditors. It argues that escalators and elevators don't disappear after 10 years, and that the benefits from store features and improvements flow over the entire life of a store.

The new approach cut depreciation and amortization charges by 27.3 million euros ($30.5 million) in the first half of the financial year and the full-year benefit will be about 50 million euros, the company says. That works out to about 11 percent of forecast earnings before interest and tax.

Big Spender

Prada's capital expenditure jumped up in recent years as it expanded its store network

Source: Bloomberg, company data

2017 is a forecast

That's in the near term; Prada will have to contend with depreciation charges for a longer period and so overall things should balance out over time. The change doesn't alter cashflow, the company says.  

But right now, it's a convenient result, coming after a period of shrinking sales and earnings. Prada has been investing heavily over the past five years, including in its store estate, so depreciation is a significant element of its profit and loss account. 

Prada says conditions are improving in Asia, where it generates more than 30 percent of its retail sales. In fact, its shares rose 12 percent on Monday, after chairman Carlo Mazzi said 2016 would be a turning point, and sales and profit should rebound from 2017.

Bottom of the Handbag

Prada shares rose on Monday on hopes that sales and profit would rebound from 2017

Source: Bloomberg

Intraday times are displayed in ET.

But with revenue still under pressure this year, an extra 50 million euros to tuck into the Prada wallet is not to be sniffed at.

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