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Note 7 - Lease Obligations

9 Months Ended

Jun. 30, 2021

Lessee, Operating and Finance Leases [Text Block]

7. 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 10 to 25 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 12 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 four operating leases and one finance lease with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through July 2040 and include various options to renew. These leases account for $7.9 million of right-of-use assets and $8.2 million of lease liabilities included in the disclosures below. Cash rent paid pursuant to the related party leases was $0.3 million for each of the three months ended June 30, 2021 and 2020, and $1.0 million for each of the nine months ended June 30, 2021 and 2020.

The components of total lease cost for the three and nine months ended June 30, 2021 and 2020 were as follows, dollars in thousands:

		Three months ended June 30,						Nine months ended June 30,
Lease cost	Classification	2021			2020			2021			2020
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,698			10,677			31,937			31,929
	Store expenses		98			80			257			239
	Administrative expenses		71			76			223			235
	Pre-opening and relocation expenses		41			32			195			154
Finance lease cost:
Depreciation of right-of-use assets	Store expenses⁽¹⁾		927			797			2,758			2,284
Interest on lease liabilities	Interest expense, net ⁽¹⁾		484			431			1,477			1,234
Short-term lease cost	Store expenses		776			626			1,934			1,154
Variable lease cost	Cost of goods sold and occupancy costs⁽²⁾		1,469			1,407			4,176			4,012
Sublease income	Store expenses		(72	)		(91	)		(235	)		(276	)
	Total lease cost	$	14,492			14,035			42,722			40,965

¹ Immaterial balances related to stores not yet open are included in pre-opening and relocation expenses.

² 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 and nine months ended June 30, 2021 and 2020 were as follows, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,121		11,114		33,310		33,118
Operating cash flows from finance leases		484		456		1,477		1,305
Financing cash flows from finance leases		733		587		2,102		1,669
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		1,925		—		9,212		7,230
Finance leases		—		—		106		5,232

Additional information related to the Company’s leases as of June 30, 2021 and 2020 were as follows:

	June 30, 2021			June 30, 2020
Weighted-average remaining lease term (in years):
Operating leases		11.2			11.8
Finance leases		11.8			11.8
Weighted-average discount rate:
Operating leases		3.6	%		3.6
Finance leases		5.1	%		4.9

In the nine months ended June 30, 2021, the Company paid $0.3 million in lease termination costs to terminate the lease associated with one store that closed in the first quarter of fiscal year 2019. In association with the lease termination, the Company wrote off $0.6 million in operating right-of-use assets and $0.8 million in operating lease liabilities and recorded a $0.2 million gain in store expenses.

In addition, during the nine months ended June 30, 2020, 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 June 30, 2021 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2021	$	11,165			1,220			12,385
2022		44,743			4,893			49,636
2023		43,970			4,937			48,907
2024		42,144			5,002			47,146
2025		40,441			5,012			45,453
Thereafter		239,082			32,452			271,534
Total future undiscounted lease payments		421,545			53,516			475,061
Less imputed interest		(78,076	)		(13,266	)		(91,342	)
Total reported lease liability		343,469			40,250			383,719
Less current portion		(33,072	)		(3,040	)		(36,112	)
Noncurrent lease liability	$	310,397			37,210			347,607

The table above excludes $34.1 million of legally binding minimum lease payments for leases that had been executed as of June 30, 2021 but whose terms had not yet commenced.