Leases

We lease all our retail store locations; nearly all of which are operating leases. Store leases typically provide for initial terms of five to ten years. Many of our store leases contain the following provisions:

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scheduled increases in rent payments over the lease term,

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tenant inducements,

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free rent periods,

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contingent rent based on net sales in excess of stipulated amounts,

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renewal options at our discretion, and

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payments for common area maintenance, insurance and real estate taxes, most of which are variable in nature.

Our store leases typically contain one or more options for us to renew the lease beyond the initial five to ten year term. In addition, most of our store leases contain provisions that allow for early termination between the third and fifth year of the term if predetermined sales levels are not met, or upon the occurrence of other specified contingent events. When we have the option to extend the lease term (including by not exercising an available termination option) or purchase the leased asset, and it is reasonably certain that we will do so, we consider these options in determining the classification and measurement of the lease. However, generally at store lease commencement, it is not reasonably certain that we will exercise an extension or purchase option. When considering contingent termination provisions, we generally consider both the likelihood of the contingency occurring in addition to the economic factors we consider when assessing any other termination or renewal option.

We also lease certain office space, office equipment and transportation equipment under operating and finance leases. Generally, these leases have initial terms of two to six years.

We determine whether a contract is or contains a lease at contract inception. Beginning in Fiscal 2020, operating lease liabilities are recognized based on the present value of remaining fixed lease payments over the lease term. Operating lease ROU assets are recognized based on the calculated lease liability, as adjusted for lease prepayments, initial direct costs and landlord incentives. Because the implicit rate is generally not readily determinable for our leases, we use our estimated incremental borrowing rate as the discount rate for the leases when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over a similar term as the lease term. Operating lease cost for fixed lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred.

None of our leases contain material residual value guarantees or material restrictive covenants. ROU lease assets are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, to determine when to test ROU assets (or asset groups that contain one or more ROU assets) for impairment, whether ROU assets are impaired, and if so, the amount of the impairment loss to recognize. This review resulted in a related asset impairment charge of approximately $1.1 million recognized in the 13 weeks ended May 4, 2019.

Total store operating lease cost and logistics-related transportation equipment operating lease cost are included in cost of goods sold in the unaudited condensed consolidated statement of operations. Office equipment and other transportation equipment operating lease cost is included in store operating, selling and administrative expenses in the unaudited condensed consolidated statement of operations.

	13 Weeks Ended May 4, 2019
Operating lease cost	$	17,138
Finance lease cost:
Amortization of assets		237
Interest on lease liabilities		65
Variable lease cost		385
	$	17,825

Short-term lease cost was immaterial.

The following tables provide supplemental balance sheet information related to leases (in thousands):

	Balance Sheet Classification	May 4, 2019
Assets:
Operating right-of-use assets	Operating right-of-use assets		$	224,870
Finance right-of-use assets, net ⁽¹⁾	Finance right-of-use assets, net			2,228

Liabilities:
Current:
Operating leases	Operating lease liabilities		$	66,268
Finance leases	Finance/capital lease obligations			973
Noncurrent:
Operating leases	Operating lease liabilities			188,839
Finance leases	Finance/capital lease obligations			1,777

(1)	Net of $237 accumulated amortization

Weighted average remaining lease term (in years):
Operating leases			5
Finance leases			4

Weighted average discount rate:
Operating leases			4.2%
Finance leases			11.6%

The following tables provide supplemental cash flow and other information related to leases for the 13 weeks ended May 4, 2019 (in thousands):

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases	$	17,269
Operating cash flows from finance leases	$	65
Financing cash flows from finance leases	$	242

ROU assets obtained in exchange for lease liabilities, net
Operating leases	$	10,142
Finance leases	$	-

Maturities of lease liabilities as of May 4, 2019 (in thousands):

	Operating		Finance		Total
Remainder of Fiscal 2020	$	57,071	$	911	$	57,982
Fiscal 2021		67,037		932		67,969
Fiscal 2022		53,489		453		53,942
Fiscal 2023		38,767		413		39,180
Fiscal 2024		25,997		310		26,307
Thereafter		45,236		217		45,453
Total minimum lease payments		287,597		3,236		290,833
Less amount representing interest		32,490		486		32,976
	$	255,107	$	2,750	$	257,857

Prior to the adoption of ASC 842, we had entered into capital leases for certain property. At February 2, 2019, total capital lease obligations were $3.0 million, of which $1.0 million was included in short-term capital lease obligations and $2.0 million was included in long-term capital lease obligations on our unaudited condensed consolidated balance sheet.

As previously disclosed in our 2019 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments due under non-cancelable capital and operating leases as of February 2, 2019 were as follows:

	Capital		Operating		Total
Fiscal 2020	$	1,259	$	68,002	$	69,261
Fiscal 2021		951		58,666		59,617
Fiscal 2022		451		46,683		47,134
Fiscal 2023		408		34,011		34,419
Fiscal 2024		306		22,426		22,732
Thereafter		217		40,181		40,398
Total minimum lease payments		3,592		269,969		273,561
Less amount representing interest		581		-		581
	$	3,011	$	269,969	$	272,980