Lease

Obligations

The Company leases most of its stores, a bulk food repackaging facility and distribution center and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from

years, with scheduled increases in minimum rent payments.

Operating lease liabilities represent the present value of lease payments

not

yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating lease assets.

Most leases include

one

or more options to renew, with renewal terms normally expressed in periods of

five

year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.

Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are

not

included in the measurement of the lease liability or asset and are expensed as incurred.

As most of the Company’s lease agreements do

not

provide an implicit discount rate, the Company uses an estimated incremental borrowing rate, which is derived from

third

-party lenders, to determine the present value of lease payments. We use other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.

Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of

months or less (“short-term leases”) are

not

presented on the balance sheet. The Company’s short-term leases relate primarily to embedded leases. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.

The Company’s lease agreements do

not

contain any material residual value guarantees or material restrictive covenants.

The Company subleases certain real estate or portions thereof to

third

parties. Such subleases have all been classified as operating leases. Remaining lease terms extend through fiscal year

2030.

Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.

The Company has

five

operating leases with Chalet Properties, LLC (Chalet),

one

operating lease with the Isely Family Land Trust LLC (Land Trust) and

one

operating lease with FTVC, LLC, each of which is a related party (see Note

). The leases began at various times with the earliest commencing in

November 1999,

continue for various terms through

February 2027

and include various options to renew. These leases account for

$7.6

million of right-of-use assets and

$7.8

million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was

$0.3

million for the

three

months ended

December 31, 2019.

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The components of total lease cost for the

three

months ended

December 31, 2019

were as follows, dollars in thousands:

Lease cost	Classification	Three months ended December 31, 2019
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,666
	Store expenses		80
	Administrative expenses		82
Finance lease cost:
Depreciation of right-of-use assets	Store expenses		761
Interest on lease liabilities	Interest expense, net		418
Short-term lease cost	Store expenses		85
Variable lease cost	Cost of goods sold and occupancy costs (1)		1,238
Sublease income	Store expenses		(93	)
Total lease cost			13,237

Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

Additional information related to the Company’s leases for the

three

months ended

December 31, 2019

was as follows, dollars in thousands:

	Three months end ed December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,001
Operating cash flows from finance leases		418
Financing cash flows from finance leases		518
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		5,438
Finance leases		1,322

Weighted-average remaining lease term (in years):
Operating leases		12.2
Finance leases		11.8
Weighted-average discount rate:
Operating leases		3.6	%
Finance leases		5.5	%

In addition, during the

three

months ended

December 31, 2019,

the Company purchased

one

store building that had previously been leased. This resulted in: (i) a

$2.5

million reduction in operating lease liability and (ii) the reclassification of

$2.4

million of corresponding operating right-of-use asset to property and equipment.

Future lease payments under non-cancellable leases as of

December 31, 2019

were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2020	$	33,226			2,993			36,219
2021		43,985			4,007			47,992
2022		43,278			4,029			47,307
2023		42,395			4,073			46,468
2024		40,292			4,139			44,431
Thereafter		263,902			26,604			290,506
Total future undiscounted lease payments		467,078			45,845			512,923
Less tenant improvement allowance receivable from landlord		(695	)		(217	)		(912	)
Less imputed interest		(93,249	)		(12,176	)		(105,425	)
Total reported lease liability		373,134			33,452			406,586
Less current portion		(31,419	)		(2,374	)		(33,793	)
Noncurrent lease liability		341,715			31,078			372,793

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The table above excludes

$17.9

million of legally binding minimum lease payments for leases that had been executed as of

December 31, 2019

but whose terms had

not

yet commenced.

Prior to the Company’s adoption of ASC

842,

the Company’s leases were designated as either capital, financing or operating. Consistent with the guidance provided in ASC

842,

previously designated capital lease obligations are now classified as finance leases, while previously designated capital lease finance obligations have been derecognized and reclassified as operating or finance leases. The designation of operating leases remains substantially unchanged under ASC

842.

The future minimum lease payments by fiscal year, as determined prior to the adoption of ASC

842

under the Company’s previously designated capital, capital financing and operating leases (as disclosed in the Company’s Annual Report on Form

-K for the fiscal year ended

September 30, 2019)

are presented below.

Minimum rental commitments and sublease rental income under the terms of the Company’s operating leases as of

September 30, 2019

were as follows, dollars in thousands:

Fiscal Year	Third parties		Related parties		Sublease rental income			Total operating leases
2020	$	41,646		1,081		(422	)		42,305
2021		41,484		1,058		(418	)		42,124
2022		41,081		1,056		(424	)		41,713
2023		40,175		1,056		(413	)		40,818
2024		38,012		1,056		(257	)		38,811
Thereafter		262,086		2,062		(772	)		263,376
Total payments	$	464,484		7,369		(2,706	)		469,147

Future payments under the terms of the leases for opened stores included in capital lease finance obligations and capital lease obligations as of

September 30, 2019

were as follows, dollars in thousands:

Fiscal Year	Interest expense on capital lease finance obligations		Principal payments on capital lease finance obligations		Interest expense on capital lease obligations		Principal payments on capital lease obligations		Total future payments on capital lease finance and capital lease obligations
2020	$	3,871		569		605		333		5,378
2021		3,816		656		570		368		5,410
2022		3,751		747		532		407		5,437
2023		3,675		880		488		460		5,503
2024		3,578		1,095		439		515		5,627
Thereafter		15,088		8,244		2,142		3,889		29,363
Non-cash derecognition of capital lease finance obligations at end of lease term		—		27,367		—		—		27,367
Total future payments	$	33,779		39,558		4,776		5,972		84,085

Future payments under the terms of the leases for the store locations at which construction was in progress as of

September 30, 2019,

based on the

two

stores' planned opening date in fiscal year

2020,

were as follows, dollars in thousands:

Fiscal Year	Interest expense on capital lease finance obligations for assets under construction		Principal payments on capital lease finance obligations for assets under construction		Interest expense on capital lease obligations for assets under construction		Principal payments on capital lease obligations for assets under construction
2020	$	118		18		237		123
2021		161		26		236		132
2022		160		28		228		139
2023		158		30		221		147
2024		155		33		213		155
Thereafter		1,368		756		1,827		3,944
Non-cash derecognition of capital lease finance obligations at end of lease term		—		1,459		—		—
Total future payments	$	2,120		2,350		2,926		4,640

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