Leases, Codification Topic 842

3 Months Ended

Dec. 29, 2019

Leases

The following significant lease accounting policies from our most recent Annual Report on Form 10-K have been updated to reflect the adoption of FASB's new guidance on the recognition and measurement of leases.

The majority of our leases are operating leases for our company-operated retail store locations. We also lease, among other things, roasting, distribution and warehouse facilities and office space for corporate administrative purposes. We do not enter into lease transactions with related parties.

We categorize leases as either operating or finance leases at the commencement date of the lease. Operating lease agreements may contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. We have lease agreements with lease and non-lease components, which are accounted for together as a single lease component for all underlying classes of assets.

We recognize a right-of-use (“ROU”) asset and lease liability for each operating and finance lease with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term. Our leases often include options to extend or terminate at our sole discretion, which are included in the determination of lease term when they are reasonably certain to be exercised.

Our lease liability represents the present value of future lease payments over the lease term. Given our policy election to combine lease and non-lease components, we also consider fixed common area maintenance (“CAM”) part of our fixed future lease payments; therefore, fixed CAM is also included in our lease liability.

We cannot determine the interest rate implicit in each of our leases. Therefore, we use market and term-specific incremental borrowing rates. Our incremental borrowing rate for a lease is the rate of interest we expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not borrow on a collateralized basis, we consider a combination of factors, including our credit-adjusted risk-free interest rate, the risk profile and funding cost of the specific geographic market of the lease, the lease term and the effect of adjusting the rate to reflect consideration of collateral. Our credit-adjusted risk-free rate takes into consideration interest rates we pay on our unsecured long-term bonds as well as quoted interest rates obtained from financial institutions.

Total lease costs recorded as rent and other occupancy costs include fixed operating lease costs, variable lease costs and short-term lease costs. Most of our real estate leases require we pay certain expenses, such as CAM costs, real estate taxes and other executory costs, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs also include amounts based on a percentage of gross sales in excess of specified levels and are recognized when probable and are not included in determining the present value of our lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. A significant majority of our leases are related to our company-operated stores, and their related costs are recorded within store operating expenses.

The ROU asset is measured at the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, initial direct costs, and any tenant improvement allowances received. For operating leases, ROU assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability determined using the effective interest method. For finance leases, ROU assets are amortized on a straight-line basis over the shorter of the useful life of the leased asset or the lease term. Interest expense on each finance lease liability is recognized utilizing the effective interest method. ROU assets are tested for impairment in the same manner as long-lived assets. Additionally, we monitor for events or changes in circumstances that may require a reassessment of one of our leases and determine if a remeasurement is required.

The components of lease costs (in millions):


	Quarter Ended
	Dec 29, 2019
Operating lease costs⁽¹⁾	$	373.1




Variable lease costs	228.8
Short-term lease costs	8.3
Total lease costs	$	610.2

⁽¹⁾Operating lease costs includes an immaterial amount of sublease income.

The following table includes supplemental information (in millions):


	Quarter Ended
	Dec 29, 2019
Cash paid related to operating lease liabilities	$	368.9
Operating lease liabilities arising from obtaining ROU assets⁽¹⁾	226.4

	Dec 29, 2019
Weighted-average remaining operating lease term	9.0 years
Weighted-average operating lease discount rate	2.5		%

⁽¹⁾Excludes the initial impact of adoption. See Note 1, Summary of Significant Accounting Policies for additional information.

Finance lease assets are recorded in property, plant and equipment, net with the corresponding lease liabilities included in accrued liabilities and other long-term liabilities on the consolidated balance sheet. Finance leases were immaterial as of December 29, 2019.

Minimum future maturities of operating lease liabilities (in millions):


Fiscal Year Ending	Dec 29, 2019
2020 excluding the quarter ended December 29, 2019)	$	1,099.2
2021	1,393.3
2022	1,285.7
2023	1,155.5
2024	1,023.4
Thereafter	4,151.1
Total lease payments	10,108.2
Less imputed interest	(1,127.6)
Total	$	8,980.6

As of December 29, 2019, we have entered into operating leases that have not yet commenced of $517.1 million, primarily related to real estate leases. These leases will commence between fiscal year 2020 and fiscal year 2025 with lease terms of 3 years to 20 years.

Previous Lease Guidance Disclosures

Rent expense under operating lease agreements under the previous lease guidance, which excludes certain amounts required under the new guidance, for the quarter ended December 30, 2018 (in millions):


	Dec 30, 2018
Minimum rent	350.8
Contingent rent	55.7
Total	$	406.5

As previously reported in our Annual Report on Form 10-K, the minimum future rental payments under non-cancelable operating leases and lease financing arrangements under the previous lease guidance as of September 29, 2019 (in millions):


Fiscal Year Ending	Operating Leases		Lease Financing Arrangements
2020	$	1,432.9	$	5.2
2021	1,342.2		5.2
2022	1,247.4		5.0
2023	1,124.3		5.0
2024	996.4		4.9
Thereafter	4,087.7		42.6
Total minimum lease payments	$	10,230.9	$	67.9