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LEASES
 9 Months Ended
Mar. 31, 2021
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 includes the following:
Three Months Ended March 31,Nine Months Ended March 31,
2021202020212020
(Dollars in thousands)
Minimum rent$8,400 $13,571 $28,605 $48,638 
Percentage rent based on sales3 298 78 2,145 
Real estate taxes and other expenses1,989 3,672 7,147 9,842 
Lease termination (benefit) expense (1)(154)44 6,484 123 
Lease liability benefit (2)(3,009)— (11,295)— 
Corporate segment rent671 904 2,046 1,909 
Franchise segment non-reimbursable rent101 176 1,063 767 
Total$8,001 $18,665 $34,128 $63,424 
_______________________________________________________________________________
(1)During the three and nine months ended March 31, 2021, the Company terminated the leases for 15 and 244 company-owned salons, respectively, before the lease end dates. During the three and nine months ended March 31, 2020, the Company terminated the leases for 3 and 60 company-owned salons, respectively, before the lease end dates. For the three and nine months ended March 31, 2021, lease termination fees include $0.3 and $4.9 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations. For the three and nine months ended March 31, 2021, lease termination fees also include $(0.5) and $1.5 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating. The early termination payments made in the nine months ended March 31, 2021 decreased the future minimum rent liability by $9.5 million plus saved the Company from the associated real estate taxes and other lease expenses.
(2)For the three and nine months ended March 31, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $3.2 and $13.3 million, respectively, and lease liabilities of $5.2 and $19.7 million, respectively, that resulted in a net gain of $2.0 and $6.4 million, respectively. In addition, the Company recognized a benefit from lease liabilities decreasing in excess of previously impaired ROU assets. The benefit recognized was $1.0 and $4.9 million in the three and nine months ended March 31, 2021, 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 March 31, 2021 and 2020, franchise rental income and franchise rent expense were $31.3 and $31.8 million, respectively. For the nine months ended March 31, 2021 and 2020, franchise rental income and franchise rent expense were $95.9 and $96.9 million. These leases generally have lease terms of approximately 5 years. The Company expects to renew SmartStyle and Supercuts franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. This represents a Board-approved change in estimate that occurred in the second quarter of fiscal year 2021 and was intended to reduce lease exposure. The change in estimate resulted in a decrease to lease liabilities and right of use assets of $72.9 million, with no impact to net income.
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 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 $629.0 and $786.2 million as of March 31, 2021 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 the original lease term. The weighted average remaining lease term was 6.44 and 6.87 years and the weighted average discount rate was 4.07% and 3.95% for all salon operating leases as of March 31, 2021 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. Poor salon performance, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. As a result, management assessed underperforming 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 estimated when determining 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 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 properties with no recently negotiated leases, and a discount rate.
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 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 and nine months ended March 31, 2021, the Company recognized a long-lived impairment charge of $0.8 and $9.8 million, respectively, which included $0.3 and $6.3 million, respectively, related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three and nine months ended March 31, 2021 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations.
As of March 31, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):
Fiscal YearLeases for Franchise SalonsLeases for Company-owned SalonsCorporate LeasesTotal Operating Lease PaymentsSublease Income To Be Received From FranchiseesNet Rent Commitments
Remainder of 2021$30,985 $6,537 $976 $38,498 $(30,985)$7,513 
2022116,803 22,514 3,566 142,883 (116,803)26,080 
2023103,418 16,936 3,550 123,904 (103,418)20,486 
202491,108 11,803 3,616 106,527 (91,108)15,419 
202577,655 5,911 3,683 87,249 (77,655)9,594 
Thereafter216,156 12,559 27,331 256,046 (216,156)39,890 
Total future obligations$636,125 $76,260 $42,722 $755,107 $(636,125)$118,982 
Less amounts representing interest78,998 6,462 10,189 95,649 
Present value of lease liabilities$557,127 $69,798 $32,533 $659,458 
Less current lease liabilities99,351 21,705 2,168 123,224 
Long-term lease liabilities$457,776 $48,093 $30,365 $536,234 
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 includes the following:
Three Months Ended March 31,Nine Months Ended March 31,
2021202020212020
(Dollars in thousands)
Minimum rent$8,400 $13,571 $28,605 $48,638 
Percentage rent based on sales3 298 78 2,145 
Real estate taxes and other expenses1,989 3,672 7,147 9,842 
Lease termination (benefit) expense (1)(154)44 6,484 123 
Lease liability benefit (2)(3,009)— (11,295)— 
Corporate segment rent671 904 2,046 1,909 
Franchise segment non-reimbursable rent101 176 1,063 767 
Total$8,001 $18,665 $34,128 $63,424 
_______________________________________________________________________________
(1)During the three and nine months ended March 31, 2021, the Company terminated the leases for 15 and 244 company-owned salons, respectively, before the lease end dates. During the three and nine months ended March 31, 2020, the Company terminated the leases for 3 and 60 company-owned salons, respectively, before the lease end dates. For the three and nine months ended March 31, 2021, lease termination fees include $0.3 and $4.9 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations. For the three and nine months ended March 31, 2021, lease termination fees also include $(0.5) and $1.5 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating. The early termination payments made in the nine months ended March 31, 2021 decreased the future minimum rent liability by $9.5 million plus saved the Company from the associated real estate taxes and other lease expenses.
(2)For the three and nine months ended March 31, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $3.2 and $13.3 million, respectively, and lease liabilities of $5.2 and $19.7 million, respectively, that resulted in a net gain of $2.0 and $6.4 million, respectively. In addition, the Company recognized a benefit from lease liabilities decreasing in excess of previously impaired ROU assets. The benefit recognized was $1.0 and $4.9 million in the three and nine months ended March 31, 2021, 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 March 31, 2021 and 2020, franchise rental income and franchise rent expense were $31.3 and $31.8 million, respectively. For the nine months ended March 31, 2021 and 2020, franchise rental income and franchise rent expense were $95.9 and $96.9 million. These leases generally have lease terms of approximately 5 years. The Company expects to renew SmartStyle and Supercuts franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. This represents a Board-approved change in estimate that occurred in the second quarter of fiscal year 2021 and was intended to reduce lease exposure. The change in estimate resulted in a decrease to lease liabilities and right of use assets of $72.9 million, with no impact to net income.
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 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 $629.0 and $786.2 million as of March 31, 2021 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 the original lease term. The weighted average remaining lease term was 6.44 and 6.87 years and the weighted average discount rate was 4.07% and 3.95% for all salon operating leases as of March 31, 2021 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. Poor salon performance, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. As a result, management assessed underperforming 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 estimated when determining 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 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 properties with no recently negotiated leases, and a discount rate.
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 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 and nine months ended March 31, 2021, the Company recognized a long-lived impairment charge of $0.8 and $9.8 million, respectively, which included $0.3 and $6.3 million, respectively, related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three and nine months ended March 31, 2021 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations.
As of March 31, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):
Fiscal YearLeases for Franchise SalonsLeases for Company-owned SalonsCorporate LeasesTotal Operating Lease PaymentsSublease Income To Be Received From FranchiseesNet Rent Commitments
Remainder of 2021$30,985 $6,537 $976 $38,498 $(30,985)$7,513 
2022116,803 22,514 3,566 142,883 (116,803)26,080 
2023103,418 16,936 3,550 123,904 (103,418)20,486 
202491,108 11,803 3,616 106,527 (91,108)15,419 
202577,655 5,911 3,683 87,249 (77,655)9,594 
Thereafter216,156 12,559 27,331 256,046 (216,156)39,890 
Total future obligations$636,125 $76,260 $42,722 $755,107 $(636,125)$118,982 
Less amounts representing interest78,998 6,462 10,189 95,649 
Present value of lease liabilities$557,127 $69,798 $32,533 $659,458 
Less current lease liabilities99,351 21,705 2,168 123,224 
Long-term lease liabilities$457,776 $48,093 $30,365 $536,234