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LEASES
 3 Months Ended
Sep. 30, 2020
Leases [Abstract]  
LEASES LEASES
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent expense includes the following:

For the Three Months Ended September 30,
20202019
(Dollars in thousands)
Minimum rent$9,721 $19,184 
Percentage rent based on sales731,298
Real estate taxes and other expenses2,6623,307
Lease termination expense (1)5,551—
Lease liability benefit (2)(6,061)—
Corporate segment rent722285
Franchise segment non-reimbursable rent557190
Total$13,225 $24,264 
_______________________________________________________________________________
(1)During the three months ended September 30, 2020 and 2019, the Company terminated the leases for 131 and 37 company-owned salons, respectively, before the lease end dates. Lease termination fees include $3.1 million of future lease payments for underperforming salons that management closed without a termination agreement. Lease termination fees also includes $2.5 million of early termination payments to close salons before lease end date and relieve the Company of future lease obligations. The early termination payments will save the Company approximately $2 million in future minimum rent plus associated real estate taxes and other lease expenses.
(2)Upon termination of previously impaired leases, the Company derecognized ROU assets of $7.1 million and lease liabilities of $10.3 million that resulted in a net gain of $3.2 million. In addition, the Company recognized a benefit from lease liabilities decreasing in excess of previously impaired ROU assets. The benefit recognized was $2.9 million and $0 in the three months ended September 30, 2020 and 2019, respectively.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended September 30, 2020 and 2019, franchise rental income and franchise rent expense were $32.3 and $31.4 million, respectively. These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration.
For franchise and company-owned salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The Right of Use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. The Company's consolidated ROU asset balance was $728.5 and $786.2 million as of September 30, 2020 and June 30, 2020, respectively. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on original lease term. The weighted average remaining lease term was 6.85 and 6.87 years and the weighted-average discount rate was 3.98% and 3.95% for all salon operating leases as of September 30, 2020 and June 30, 2020, respectively.
A lessee’s ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. As a result of the COVID-19 pandemic and the related salon closures that occurred during the fourth fiscal quarter of 2020, the Company determined that a triggering event had occurred pursuant to ASC 360-10-35-21 given that there had been a significant adverse change in the business climate that could affect the value of its salon long-lived asset groups combined with a significant adverse change in the extent or manner in which the salon long-lived groups were being used. As a result, management assessed all salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
Step two of the long-lived asset impairment test requires that the fair value of the asset group be determined when calculating the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company’s own assumptions about how it intends to use the asset group.
The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group’s projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.
In the fourth quarter of fiscal year 2020, the Company recorded a total long-lived asset impairment charge of $22.6 million in the Consolidated Statement of Operations, including $17.4 million related to the right of use asset in the salon asset groups. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown and therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. In the three months ended September 30, 2020, the Company recognized a long-lived impairment charge of $5.8 million, which included $4.6 million related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three months ended September 30, 2020 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified in the quarter to close, and certain salons where franchisees are unable to fulfill their rent obligations.
As of September 30, 2020, future operating lease commitments, including one renewal option when leases are expected to be renewed, to be paid and received by the Company were as follows:
Fiscal YearLeases for Franchise SalonsLeases for Company-owned SalonsCorporate LeasesTotal Operating Lease PaymentsSublease Income to be Received from FranchiseesNet Rent Commitments
Remainder of 2021$91,189 $27,006 $1,329 $119,524 $(91,189)$28,335 
2022113,131 29,362 1,410 143,903 (113,131)30,772 
2023102,742 24,084 1,447 128,273 (102,742)25,531 
202492,788 20,019 1,484 114,291 (92,788)21,503 
202581,429 15,795 1,522 98,746 (81,429)17,317 
Thereafter209,092 46,949 7,818 263,859 (209,092)54,767 
Total future obligations$690,371 $163,215 $15,010 $868,596 $(690,371)$178,225 
Less amounts representing interest87,533 19,456 2,636 109,625 
Present value of lease liabilities$602,838 $143,759 $12,374 $758,971 
Less current lease liabilities98,546 29,900 1,197 129,643 
Long-term lease liabilities$504,292 $113,859 $11,177 $629,328 

Excluding the option period, the Company's operating lease commitments as of September 30, 2020 were approximately $360 and $100 million for franchise salons and company-owned salons, respectively.
LEASES LEASES
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent expense includes the following:

For the Three Months Ended September 30,
20202019
(Dollars in thousands)
Minimum rent$9,721 $19,184 
Percentage rent based on sales731,298
Real estate taxes and other expenses2,6623,307
Lease termination expense (1)5,551—
Lease liability benefit (2)(6,061)—
Corporate segment rent722285
Franchise segment non-reimbursable rent557190
Total$13,225 $24,264 
_______________________________________________________________________________
(1)During the three months ended September 30, 2020 and 2019, the Company terminated the leases for 131 and 37 company-owned salons, respectively, before the lease end dates. Lease termination fees include $3.1 million of future lease payments for underperforming salons that management closed without a termination agreement. Lease termination fees also includes $2.5 million of early termination payments to close salons before lease end date and relieve the Company of future lease obligations. The early termination payments will save the Company approximately $2 million in future minimum rent plus associated real estate taxes and other lease expenses.
(2)Upon termination of previously impaired leases, the Company derecognized ROU assets of $7.1 million and lease liabilities of $10.3 million that resulted in a net gain of $3.2 million. In addition, the Company recognized a benefit from lease liabilities decreasing in excess of previously impaired ROU assets. The benefit recognized was $2.9 million and $0 in the three months ended September 30, 2020 and 2019, respectively.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended September 30, 2020 and 2019, franchise rental income and franchise rent expense were $32.3 and $31.4 million, respectively. These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration.
For franchise and company-owned salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The Right of Use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. The Company's consolidated ROU asset balance was $728.5 and $786.2 million as of September 30, 2020 and June 30, 2020, respectively. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on original lease term. The weighted average remaining lease term was 6.85 and 6.87 years and the weighted-average discount rate was 3.98% and 3.95% for all salon operating leases as of September 30, 2020 and June 30, 2020, respectively.
A lessee’s ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. As a result of the COVID-19 pandemic and the related salon closures that occurred during the fourth fiscal quarter of 2020, the Company determined that a triggering event had occurred pursuant to ASC 360-10-35-21 given that there had been a significant adverse change in the business climate that could affect the value of its salon long-lived asset groups combined with a significant adverse change in the extent or manner in which the salon long-lived groups were being used. As a result, management assessed all salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
Step two of the long-lived asset impairment test requires that the fair value of the asset group be determined when calculating the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company’s own assumptions about how it intends to use the asset group.
The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group’s projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.
In the fourth quarter of fiscal year 2020, the Company recorded a total long-lived asset impairment charge of $22.6 million in the Consolidated Statement of Operations, including $17.4 million related to the right of use asset in the salon asset groups. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown and therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. In the three months ended September 30, 2020, the Company recognized a long-lived impairment charge of $5.8 million, which included $4.6 million related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three months ended September 30, 2020 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified in the quarter to close, and certain salons where franchisees are unable to fulfill their rent obligations.
As of September 30, 2020, future operating lease commitments, including one renewal option when leases are expected to be renewed, to be paid and received by the Company were as follows:
Fiscal YearLeases for Franchise SalonsLeases for Company-owned SalonsCorporate LeasesTotal Operating Lease PaymentsSublease Income to be Received from FranchiseesNet Rent Commitments
Remainder of 2021$91,189 $27,006 $1,329 $119,524 $(91,189)$28,335 
2022113,131 29,362 1,410 143,903 (113,131)30,772 
2023102,742 24,084 1,447 128,273 (102,742)25,531 
202492,788 20,019 1,484 114,291 (92,788)21,503 
202581,429 15,795 1,522 98,746 (81,429)17,317 
Thereafter209,092 46,949 7,818 263,859 (209,092)54,767 
Total future obligations$690,371 $163,215 $15,010 $868,596 $(690,371)$178,225 
Less amounts representing interest87,533 19,456 2,636 109,625 
Present value of lease liabilities$602,838 $143,759 $12,374 $758,971 
Less current lease liabilities98,546 29,900 1,197 129,643 
Long-term lease liabilities$504,292 $113,859 $11,177 $629,328 

Excluding the option period, the Company's operating lease commitments as of September 30, 2020 were approximately $360 and $100 million for franchise salons and company-owned salons, respectively.