Quarterly report pursuant to Section 13 or 15(d)

Leases

v3.19.2
Leases
6 Months Ended
Aug. 03, 2019
Leases  
Leases

12.  Leases

Adoption of ASC 842

Effective February 3, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), and all related amendments (“ASC 842”) using the modified retrospective approach.  As part of the adoption, we made the following elections:

We elected the package of practical expedients under which we did not reassess our prior conclusions about lease identification, lease classification and initial direct costs.
We elected to not separate lease and non-lease components for all leases.
We elected to exempt leases with an initial term of twelve months or less from balance sheet recognition.
We elected the land easement practical expedient under which we did not reassess whether existing land easements not accounted for as leases under previous guidance are or contain leases under ASC 842.
We did not elect the hindsight practical expedient for all leases.

In addition, in July 2018, the FASB approved an optional transition method that removed the requirement to restate prior period financial statements upon adoption of the standard with a cumulative-effect adjustment to retained earnings in the period of adoption and we elected to apply this transition method.  As a result, the comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented.  The adoption of ASC 842 had no impact to our previously reported results of operations or cash flows.

The following table depicts the cumulative effect of the changes made to our February 2, 2019 balance sheet for the adoption of ASC 842 effective on February 3, 2019 (in thousands):

Reported

Adjusted

Balance at

Impact of

Balance at

February 2,

Adoption of

February 3,

    

2019

    

ASC 842

    

2019

Assets:

Other current assets

$

70,712

$

(20,754)

$

49,958

Operating lease right-of-use assets

896,270

896,270

Intangible assets, net

163,901

(6,682)

157,219

Current Liabilities:

Accrued expenses and other current liabilities

282,029

(151)

281,878

Current portion of operating lease liabilities

183,726

183,726

Noncurrent Liabilities:

Operating lease liabilities

745,116

745,116

Deferred taxes, net and other liabilities

125,022

(59,455)

65,567

Equity:

Accumulated deficit

(468,048)

(402)

(468,450)

The adoption of ASC 842 primarily resulted in the recognition of operating lease liabilities totaling $928.8 million, based upon the present value of the remaining minimum rental payments using discount rates as of the adoption date, with $183.7 million within current liabilities and $745.1 million in noncurrent liabilities.  In addition, we recorded corresponding right-of-use assets totaling $896.3 million based upon the operating lease liabilities adjusted for favorable lease intangible assets, previously included within intangible assets, net and deferred rent and unfavorable lease liabilities, previously included within deferred taxes, net and other liabilities.  In addition, we recorded a $0.4 million cumulative effect of initially applying ASC 842 as an adjustment to the opening balance of accumulated deficit.

Lease Information

We lease store locations, office and warehouse facilities, vehicles and equipment under various non-cancelable operating leases expiring in various years through 2030.  

Substantially all of our stores are leased, generally for five to ten year initial terms.  Certain store leases include one or more options to renew, with renewal terms that range from one to ten years.  Management uses its judgment to determine if a renewal option is reasonably certain of being exercised including consideration of the significant investment related to the identification, opening and operation of these store locations.  In addition, under our real estate leases, we pay costs such as real estate taxes and common area maintenance and certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels.  These costs are generally considered variable lease payments, and are recognized when deemed probable of payment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.  In addition, we sublease certain real estate to third parties.  Amounts related to subleases were immaterial to the condensed consolidated financial statements.

Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date.  Operating lease liabilities represent the present value of lease payments.  Operating lease right-of-use assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, lease incentives and impairment of operating lease right-of-use assets.  To determine the present value of the lease payments, we estimated our incremental borrowing rate based on our current credit rating as well as comparisons to comparable borrowing rates of similarly-rated companies.

The components of lease cost are as follows (in thousands):

For the Three Months Ended

For the Six Months Ended

August 3, 2019

August 3, 2019

Operating lease cost

$

63,326

$

126,230

Variable lease cost

18,397

37,658

Total lease cost

$

81,723

$

163,888

Operating lease expense is recognized on a straight-line basis over the lease term.  Total lease costs for stores and our distribution network are included in cost of sales while other total lease costs are included in SG&A expenses.

Supplemental balance sheet information related to operating leases consists of the following (in thousands):

August 3, 2019

Operating lease right-of-use assets

$

918,541

Current portion of operating lease liabilities

$

185,800

Noncurrent portion operating lease liabilities

763,865

Total operating lease liabilities

$

949,665

Lease term and discount rate for operating leases were as follows:

August 3, 2019

Weighted average remaining lease term

4.4 years

Weighted average discount rate

5.26%

Supplemental disclosures of cash flow information consists of the following (in thousands):

For the Six Months Ended

August 3, 2019

Cash paid for operating leases

$

127,844

Operating lease assets obtained in exchange for operating lease liabilities

$

1,017,124

At August 3, 2019, we have approximately $949.7 million of non-cancelable operating lease commitments and no finance leases.  The following table summarizes the undiscounted annual future minimum lease payments, as of August 3, 2019, for each of the next five years and in the aggregate (in thousands):

Operating Leases 

Year 1

$

234,651

Year 2

242,446

Year 3

204,721

Year 4

159,609

Year 5

114,716

Thereafter

149,230

Total lease payments

$

1,105,373

Less: Interest 

(155,708)

Present value of lease liabilities

$

949,665

As of August 3, 2019, we executed certain real estate leases that had not yet commenced with lease liabilities totaling $1.1 million which are not reflected in the above table.  These leases are expected to commence during fiscal 2019.

Disclosures Related to Periods Prior to Adoption of ASC 842

As previously disclosed in our 2018 Annual Report on Form 10-K and under the accounting standards then in effect, minimum future rental payments under non-cancelable leases as of February 2, 2019 for each of the next five years and in the aggregate are as follows (in thousands):

    

 

Fiscal Year

Operating Leases

2019

$

239,711

2020

 

209,596

2021

 

175,962

2022

 

134,208

2023

 

88,187

Thereafter

 

141,084

Total lease payments

$

988,748