Quarterly report pursuant to Section 13 or 15(d)

Leases

v3.20.2
Leases
3 Months Ended
May 02, 2020
Leases  
Leases

15.  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.  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

$

66,823

$

(20,557)

$

46,266

Current assets - discontinued operations

171,376

(197)

171,179

Operating lease right-of-use assets

884,231

884,231

Intangible assets, net

153,711

(6,682)

147,029

Non-current assets - discontinued operations

25,071

12,039

37,110

Current Liabilities:

Accrued expenses and other current liabilities

268,698

(151)

268,547

Current portion of operating lease liabilities

181,379

181,379

Current liabilities - discontinued operations

40,025

2,346

42,371

Noncurrent Liabilities:

Operating lease liabilities

735,482

735,482

Deferred taxes, net and other liabilities

119,545

(59,316)

60,229

Noncurrent liabilities - discontinued operations

5,477

9,496

14,973

Equity:

Accumulated deficit

$

(468,048)

$

(402)

$

(468,450)

The adoption of ASC 842 primarily resulted in the recognition of operating lease liabilities totaling $869.2 million, based upon the present value of the remaining minimum rental payments using discount rates as of the adoption date, with $183.6 million within current liabilities and $685.7 million in noncurrent liabilities.  In addition, we recorded corresponding right-of-use assets totaling $868.8 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 fiscal 2031.  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.

During the first quarter of fiscal 2020, we negotiated rent deferrals (primarily for April and May lease payments) for some of our stores, with repayment of such deferred amounts beginning at the end of 2020 into 2021. In April 2020, the FASB allowed entities to make a policy election regarding how to account for lease concessions resulting directly from COVID-19.  Rather than analyzing each lease contract individually, entities can elect to apply the modification framework under

ASC 842 or account for concessions outside of the modification framework.  We elected the relief provided by the FASB to not review each lease contract individually.  As the rent deferrals result in cash flows that are substantially the same as the original lease agreement, we were permitted to account for the rent deferrals either within the modification framework under ASC 842 or outside the modification framework and elected to treat the negotiated rent deferrals as modifications under ASC 842 resulting in re-measurement of the lease liability and a corresponding change to the right-of-use asset.

 

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.  

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

For the Three Months Ended

For the Three Months Ended

May 2, 2020

May 4, 2019

Operating lease cost

$

62,195

$

62,111

Variable lease cost

18,294

19,149

Total lease cost

$

80,489

$

81,260

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):

May 2, 2020

Operating lease right-of-use assets

$

842,088

Current portion of operating lease liabilities

$

209,434

Noncurrent portion operating lease liabilities

689,264

Total operating lease liabilities

$

898,698

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

May 2, 2020

Weighted average remaining lease term

4.9 years

Weighted average discount rate

5.25%

At May 2, 2020, we have approximately $898.7 million of non-cancelable operating lease commitments and no finance leases.  The following table summarizes the undiscounted annual future minimum lease payments, as of May 2, 2020, for each of the next five years and in the aggregate (in thousands):

Operating Leases 

Year 1

$

246,914

Year 2

233,005

Year 3

186,720

Year 4

140,744

Year 5

98,021

Thereafter

117,090

Total lease payments

$

1,022,494

Less: Interest 

(123,796)

Present value of lease liabilities

$

898,698