Leases (Notes)

6 Months Ended

Aug. 03, 2019

LEASES

Our lease agreements include leases for our retail stores, distribution centers and corporate headquarters. As of August 3, 2019, all of our leases were classified as operating leases. Our store leases typically have an initial term of 10 years and often have two renewal options of five years each. The exercise of a lease renewal option is at our 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 we will exercise that option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.

We recognize a lease liability for our obligation to make lease payments arising from the lease and a related asset for our right to use the underlying asset for the lease term. The lease liability is measured based on the present value of lease payments over the lease term, and the asset is measured based on the value of the lease liability, net of landlord allowances. As the implicit interest rate in our lease agreements is not readily identifiable, we use our estimated collateralized incremental borrowing rate in determining the present value of lease payments. For all current lease classes, we made an accounting policy election not to separate lease and non-lease components.

The majority of our leases include fixed rent payments. A number of store leases provide for escalating minimum rent payments at pre-determined dates. Certain store leases provide for contingent rent payments based on a percentage of retail sales over contractual levels. Some of our leases include variable payments for maintenance, taxes and insurance.

Operating lease payments are expensed on a straight-line basis over the lease term. Variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.

We sublease our former corporate office building to a third party and recognize sublease income on a straight-line basis over the lease term.

ASC 842 Disclosures

Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost were as follows (in thousands):



	Three Months Ended			Six Months Ended
	August 3, 2019			August 3, 2019
Operating lease cost	$	26,163		$	52,457
Variable lease cost	9,784			19,441
Short-term lease cost	24			24
Sublease income	(369		)	(737		)
Total net lease cost	$	35,602		$	71,185

Net lease cost in cost of sales and related buying, occupancy and distribution expenses	$	34,818		$	68,876
Net lease cost in selling, general and administrative expenses	784			2,309
Total net lease cost	$	35,602		$	71,185

Cash and non-cash activities associated with our leases were as follows (in thousands):



	Six Months Ended
	August 3, 2019
Cash paid for operating leases	$	55,139
Cash received from sublease	724
Lease assets obtained in exchange for lease liabilities ^(a)	12,701

^(a)Excludes operating lease assets of $344.2 million recognized on February 3, 2019 as a result of the adoption of ASU 2016-02, Leases (Topic 842). See Note 1 for further disclosures regarding the adoption impact.

The weighted average remaining lease term and weighted-average discount rate associated with our leases as of August 3, 2019 were as follows:



Weighted average remaining lease term	5.3 years
Weighted average discount rate	10.1	%

Maturities of operating leases as of August 3, 2019 were as follows (in thousands):



Fiscal Year	Operating Leases		Sublease
2019 (remainder of year)	$	54,535	$	(723	)
2020	102,731		(1,492		)
2021	87,965		(1,582		)
2022	71,781		(1,582		)
2023	50,986		(1,054		)
2024	33,063		—
Thereafter	59,818		—
Total lease payments	460,879		$	(6,433	)
Less: Effects of discounting	106,964
Present value of lease liabilities	353,915
Less: Current portion of lease liabilities	74,906
Long-term lease liabilities	$	279,009

As of August 3, 2019, there were no leases that had not yet commenced.

Comparative Period Disclosures Reported Under ASC 840

Future minimum rental commitments on long-term, non-cancelable operating leases at February 2, 2019, were as follows (in thousands):



Fiscal Year	Commitments		Sublease Income			Net Minimum Lease Commitments
2019	$	108,541	$	(1,447	)	$	107,094
2020	98,859		(1,492		)	97,367
2021	83,377		(1,582		)	81,795
2022	67,447		(1,582		)	65,865
2023	46,887		(1,054		)	45,833
Thereafter	77,910		—			77,910
Total	$	483,021	$	(7,157	)	$	475,864

While infrequent in occurrence, occasionally we are responsible for the construction of leased stores and for paying project costs. ASC 840-40-55, The Effect of Lessee Involvement in Asset Construction, requires us to be considered the owner (for accounting purposes) of such build-to-suit arrangements during the construction period. The leases are accounted for as finance obligations with the amounts received from the landlord being recorded in debt obligations. Interest expense is recognized at a rate that will amortize the finance obligation over the initial term of the lease. Where ASC 840-40-55 was applicable, we have recorded finance obligations with interest rates of 6.1% and 12.3% on our condensed consolidated financial statements related to two store leases as of February 2, 2019.

Future minimum annual payments required under existing finance obligations as of February 2, 2019 were as follows (in thousands):



Fiscal Year	Minimum Payments		Less: Interest		Principal Payments
2019	$	580	$	26	$	554