Leases

9 Months Ended

Nov. 02, 2019

In the first quarter of 2019, the Company adopted ASC 842, Leases, using the modified retrospective approach. Results for 2019 are presented under ASC 842, while prior period consolidated financial statements have not been adjusted and continue to be presented under the accounting standard in effect at that time.

The Company leases retail space, office space, warehouse facilities, storage space, equipment and certain other items under operating leases. A substantial portion of the Company’s leases are operating leases for its stores, which generally have an initial term of 10 years. Annual store rent consists of a fixed minimum amount and/or variable rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally also require additional payments covering certain operating costs such as common area maintenance, utilities, insurance and taxes. Certain leases contain predetermined fixed escalations of minimum rentals or require periodic adjustments of minimum rentals depending on an index or rate. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property.

At lease commencement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of the unpaid fixed lease payments. Operating lease costs are recognized on a straight-line basis as lease expense over the lease term. Variable lease payments associated with the Company's leases are recognized upon occurrence of the event or circumstance on which the payments are assessed. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet, and lease expense is recognized on a straight-line basis over the lease term.

The Company uses its incremental borrowing rate, adjusted for collateral, to determine the present value of its unpaid lease payments.

The Company’s store leases often include options to extend the initial term or to terminate the lease prior to the end of the initial term. The exercise of these options is typically at the sole discretion of the Company. These options are included in determining the initial lease term at lease commencement if the Company is reasonably certain to exercise the option. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term.

For leases entered into or reassessed after the adoption of the new standard, the Company has elected the practical expedient allowed by the standard to account for all fixed consideration in a lease as a single lease component. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed operating costs such as common area maintenance and utilities.

The Company has provided residual value guarantees in connection with noncancelable operating leases of certain assets. For additional information, see Note 16, “Commitments and Contingencies.”

The following table provides the components of lease cost for operating leases for the third quarter and year-to-date 2019:



	Third Quarter		Year-to-Date
	(in millions)
Operating Lease Costs (a)	$	206	$	557
Variable Lease Costs	27		67
Short-term Lease Costs	9		19
Total Lease Cost	$	242	$	643

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(a)	As discussed in Note 7, “Property and Equipment, Net," the Company recognized operating lease asset impairment charges of $30 million during the third quarter of 2019. These charges are included as additional operating lease costs for the third quarter and year-to-date 2019.

The following table provides future maturities of operating lease liabilities as of the third quarter of 2019:



Fiscal Year	(in millions)
2019	$	115
2020	720
2021	676
2022	605
2023	546
Thereafter	1,907
Total Lease Payments	$	4,569
Less: Interest	(1,001		)
Present Value of Operating Lease Liabilities	$	3,568

As of November 2, 2019, the Company has additional operating lease commitments that have not yet commenced of approximately $49 million.

The following table provides the weighted-average remaining lease term and discount rate for operating leases with lease liabilities as of the third quarter of 2019:



Weighted Average Remaining Lease Term (years)	7.4
Weighted Average Discount Rate	6.2	%

Year-to-date 2019, the Company paid $528 million for operating lease liabilities recorded on the balance sheet. These payments are included within the Operating Activities section of the 2019 Consolidated Statement of Cash Flows.

Year-to-date 2019, the Company obtained $248 million of additional lease assets as a result of new operating lease obligations.

Disclosures for 2018

The following table provides rent expense, as presented under the prior accounting standard, for the third quarter and year-to-date 2018:



	Third Quarter		Year-to-Date
	(in millions)
Store Rent:
Fixed Minimum	$	167	$	500
Contingent	15		45
Total Store Rent	182		545
Office, Equipment and Other	25		69
Total Rent Expense	$	207	$	614

The following table provides future minimum rent commitments under noncancelable operating leases in the next five fiscal years and the remaining years thereafter, as determined under the prior accounting standard, as of February 2, 2019:



Fiscal Year (a)	(in millions)
2019	$	698
2020	676
2021	630
2022	562
2023	504
Thereafter	$	1,738

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(a)	Excludes additional payments covering taxes, common area costs and certain other expenses generally required by store lease terms.

Finance Leases

The Company leases certain fulfillment equipment under finance leases that expire at various dates through 2023. The Company records finance lease assets, net of accumulated amortization, in Property and Equipment, Net on the Consolidated Balance Sheet. Additionally, the Company records finance lease liabilities in Accrued Expenses and Other and Other Long-term Liabilities on the Consolidated Balance Sheet. Finance lease costs are comprised of the straight-line amortization of the lease asset and the accretion of interest expense under the effective interest method.

The Company recorded $23 million and $28 million of finance lease assets, net of accumulated amortization, in Property and Equipment, Net on the November 2, 2019 and November 3, 2018 Consolidated Balance Sheets, respectively. Additionally, the Company recorded finance lease liabilities of $8 million and $8 million in Accrued Expenses and Other and $15 million and $21 million in Other Long-term Liabilities, on the November 2, 2019 and November 3, 2018 Consolidated Balance Sheets, respectively.

Asset Retirement Obligations

The Company has asset retirement obligations related to certain company-owned stores that contractually obligate the Company to remove leasehold improvements at the end of a lease. The Company’s liability for asset retirement obligations totaled $22 million as of November 2, 2019 and $17 million as of November 3, 2018. These liabilities are included in Other Long-term Liabilities on the Consolidated Balance Sheets.