Leases

12 Months Ended

Feb. 01, 2020

The Company adopted ASC 842 as of February 3, 2019, using the modified retrospective method and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning on February 3, 2019 are reported and presented under ASC 842, while prior period amounts and disclosures are not adjusted and continue to be reported and presented under ASC 840.

As part of the adoption, the Company elected the following practical expedients:

1. A package of practical expedients allowing the Company to: a) carry forward its historical lease classification; b) avoid reassessing whether any expired or existing contracts are or contain leases; and c) avoid reassessing initial direct costs for any existing leases.

2. A practical expedient related to land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and eliminating the need to reassess existing lease contracts to determine if land easements are separate leases under ASC 842.

The Company did not elect the following practical expedients:

1. A practical expedient that would allow the Company to use hindsight in determining the lease term and to assess impairment of the entity's ROU assets, since election of this expedient could make adoption more complex given that re-evaluation of the lease term.

2. A practical expedient allowing the Company to not separate lease components from nonlease components (e.g., common area maintenance costs) since currently the Company does not combine lease and nonlease components for any of its real estate leases.

In accordance with ASC 842, the Company determines if an arrangement is a lease at inception or modification of a contract and classifies each lease as either an operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. The Company has operating and finance leases for the Company's clubs, and operating leases for the Company's distribution centers, corporate office, and stand-alone gas stations. Operating leases, net of accumulated amortization, are included in operating lease ROU assets, and current and non-current operating lease liabilities, on the consolidated balance sheet. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other non-current liabilities on the consolidated balance sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of the ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term, which amortizes the ROU asset by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in selling general and administrative expense on the consolidated statement of operations and comprehensive income. Leases with an initial term of twelve months or less are not recorded on the balance sheet.

The Company is generally obligated for the cost of property taxes, insurance, and maintenance relating to its leases, which are often variable lease payments. Such costs are presented as occupancy costs for finance and operating leases included in SG&A expense on the consolidated statement of operations and comprehensive income.

Certain of the Company's lease agreements provide for lease payments based on future sales volumes at the leased location, or include rental payments adjusted periodically for inflation or based on an index, which are not measurable at the inception of the lease. The Company expenses such variable amounts in the period incurred, which is the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Where the Company's leases do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate ("IBR") to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis at the measurement date, and that the Company adjusts quarterly with a yield curve that approximates the Company's market risk profile.

In calculating the present value of the lease payments, the Company has elected to utilize its estimated IBR based on the original lease term and not the remaining lease term. The initial primary term of the Company's operating leases ranges from 5 to 44 years, with most of these leases having an initial term of 20 years. The initial primary term of the Company's two finance leases are 20 years.

The adoption of ASC 842 resulted in the initial recognition of $2.040 billion of operating lease ROU assets and $2.071 billion of operating lease liabilities as of February 3, 2019. The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets. The Company derecognized assets and liabilities of $94.7 million and $125.8 million, respectively, in connection with the non-cash transitional adjustment. As a result of adopting ASC 842, the Company also recorded a benefit to retained earnings of $11.6 million, primarily associated with the net of tax impact of the Company's deferred gain on prior years' sale leaseback transactions. Finance leases were not impacted by the adoption of the new guidance, as finance lease liabilities and the corresponding assets were recorded on the consolidated balance sheet under the previous guidance. The adoption of this standard did not materially impact the Company's consolidated statements of operations and comprehensive income, or the Company's consolidated statements of cash flows.

As of February 1, 2020, assets recorded under finance leases were $19.3 million and accumulated amortization associated with finance leases was $9.5 million, while ROU assets recorded as operating leases were $2.209 billion and accumulated amortization associated with operating leases was $148.7 million. As of February 1, 2020, the Company also recorded non-cash increases of $176.2 million to ROU assets and liabilities resulting from lease reassessments and decreases of $9.6 million to ROU assets resulting from lease impairment charges.

The following table is a summary of the Company’s components of total lease costs for the year ended February 1, 2020 (in thousands):



	February 1, 2020
Operating lease cost	$	322,346
Finance lease cost:
Amortization of right-of-use assets	1,128
Interest on lease liabilities	2,503
Total finance lease costs	3,631
Variable lease costs	98
Net lease costs	$	326,075

The weighted average remaining lease term and weighted average discount rate for operating and finance leases as of February 1, 2020 were as follows:



	Operating Leases		Finance Leases
Weighted average remaining lease term in years	8.6		9.3
Weighted average discount rate percentage	8.2	%	8.3	%

Cash paid for amounts included in the measurement of lease liabilities were as follows (in thousands):



Operating cash flows paid for operating leases	$	311,971
Operating cash flows paid for interest portion of finance leases	2,503
Financing cash flows paid for principal portion of finance leases	612

Future lease commitments to be paid by the Company as of February 1, 2020 were as follows (in thousands):



Fiscal year	Operating Leases			Finance Leases
2020	$	319,628		$	3,412
2021	319,632			3,439
2022	310,109			3,439
2023	296,508			3,439
2024	274,258			3,439
Thereafter	1,943,641			16,842
Total future minimum lease payments	3,463,776			34,010
Less: imputed interest	(1,353,236		)	(17,795		)
Present value of lease liabilities	$	2,110,540		$	16,215

As of February 1, 2020, the Company had certain executed real estate and gas station leases that have not yet commenced and therefore are not reflected in the tables above. These leases are expected to commence between fiscal year 2020 and fiscal year 2021 with lease terms ranging from 13 years to 20 years.

The following table represents the Company's lease commitments under its previous presentation of its operating and finance lease agreements as of February 2, 2019 (in thousands):



Fiscal Year	Operating Leases		Finance Leases
2019	$	309,785	$	4,510
2020	310,956		4,807
2021	299,410		4,833
2022	282,841		4,894
2023	264,363		4,956
Thereafter	1,778,207		34,377
Total	$	3,245,562	$	58,377

Leases