LEASES

12 Months Ended

Feb. 01, 2020

LEASES

LEASES

17.  LEASES

Adoption of ASC 842

Effective February 3, 2019, we adopted ASC 842 using the modified retrospective approach.  As part of the adoption, we made the following elections:

● We elected the package of practical expedients under which we did not reassess our prior conclusions about lease identification, lease classification and initial direct costs.

● We elected to not separate lease and non-lease components for all leases.

● We elected to exempt leases with an initial term of twelve months or less from balance sheet recognition.

● We elected the land easement practical expedient under which we did not reassess whether existing land easements not accounted for as leases under previous guidance are or contain leases under ASC 842.

● We did not elect the hindsight practical expedient for all leases.

In addition, in July 2018, the FASB approved an optional transition method that removed the requirement to restate prior period financial statements upon adoption of the standard with a cumulative-effect adjustment to retained earnings in the period of adoption and we elected to apply this transition method.  As a result, the comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented.  The adoption of ASC 842 had no impact to our previously reported results of operations or cash flows.

The following table depicts the cumulative effect of the changes made to our February 2, 2019 balance sheet for the adoption of ASC 842 effective on February 3, 2019 (in thousands):

	Reported				Adjusted
	Balance at		Impact of		Balance at
	February 2,		Adoption of		February 3,
	2019		ASC 842		2019
Assets:
Other current assets	$	66,823	$	(20,557)	$	46,266
Current assets - discontinued operations		171,376		(197)		171,179
Operating lease right-of-use assets		—		884,231		884,231
Intangible assets, net		153,711		(6,682)		147,029
Non-current assets - discontinued operations		25,071		12,039		37,110
Current Liabilities:
Accrued expenses and other current liabilities		268,698		(151)		268,547
Current portion of operating lease liabilities		—		181,379		181,379
Current liabilities - discontinued operations		40,025		2,346		42,371
Noncurrent Liabilities:
Operating lease liabilities		—		735,482		735,482
Deferred taxes, net and other liabilities		119,545		(59,316)		60,229
Noncurrent liabilities - discontinued operations		5,477		9,496		14,973
Equity:
Accumulated deficit	$	(468,048)	$	(402)	$	(468,450)

The adoption of ASC 842 primarily resulted in the recognition of operating lease liabilities totaling $869.2 million, based upon the present value of the remaining minimum rental payments using discount rates as of the adoption date, with $183.6 million within current liabilities and $685.7 million in noncurrent liabilities.  In addition, we recorded corresponding right-of-use assets totaling $868.8 million based upon the operating lease liabilities adjusted for favorable lease intangible assets, previously included within intangible assets, net and deferred rent and unfavorable lease liabilities, previously included within deferred taxes, net and other liabilities.  In addition, we recorded a $0.4 million cumulative effect of initially applying ASC 842 as an adjustment to the opening balance of accumulated deficit.

Lease Information

We lease store locations, office and warehouse facilities, vehicles and equipment under various non-cancelable operating leases expiring in various years through 2032.  

Substantially all of our stores are leased, generally for five to ten year initial terms.  Certain store leases include one or more options to renew, with renewal terms that range from one to ten years.  Management uses its judgment to determine if a renewal option is reasonably certain of being exercised including consideration of the significant investment related to the identification, opening and operation of these store locations.  In addition, under our real estate leases, we pay costs such as real estate taxes and common area maintenance and certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels.  These costs are generally considered variable lease payments, and are recognized when deemed probable of payment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.  In addition, we sublease certain real estate to third parties.  Amounts related to subleases were immaterial to the consolidated financial statements.

Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date.  Operating lease liabilities represent the present value of lease payments.  Operating lease right-of-use assets represent our

right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, lease incentives and impairment of operating lease right-of-use assets.  To determine the present value of the lease payments, we estimated our incremental borrowing rate based on our current credit rating as well as comparisons to comparable borrowing rates of similarly-rated companies.

The components of lease cost are as follows (in thousands):

	February 1, 2020
Operating lease cost	$	248,975
Variable lease cost		73,929
Total lease cost	$	322,904

Operating lease expense is recognized on a straight-line basis over the lease term.  Total lease costs for stores and our distribution network are included in cost of sales while other total lease costs are included in SG&A expenses.

Supplemental balance sheet information related to operating leases consists of the following (in thousands):

	February 1, 2020
Operating lease right-of-use assets	$	880,291
Current portion of operating lease liabilities	$	186,304
Noncurrent portion operating lease liabilities		726,327
Total operating lease liabilities	$	912,631

Lease term and discount rate for operating leases were as follows:

	February 1, 2020
Weighted average remaining lease term	5.6 years
Weighted average discount rate	5.22%

Supplemental disclosures of cash flow information consists of the following (in thousands):

	February 1, 2020
Cash paid for operating leases	$	254,605
Operating lease assets obtained in exchange for operating lease liabilities	$	1,074,670

At February 1, 2020, we have approximately $912.6 million of non-cancelable operating lease commitments and no finance leases.  The following table summarizes the undiscounted annual future minimum lease payments, as of February 1, 2020, for each of the next five years and in the aggregate (in thousands):

	Operating Leases
Year 1	$	228,872
Year 2		237,532
Year 3		196,783
Year 4		149,501
Year 5		106,826
Thereafter		134,146
Total lease payments	$	1,053,660
Less: Interest		(141,029)
Present value of lease liabilities	$	912,631

Disclosures Related to Periods Prior to Adoption of ASC 842

As previously disclosed in our 2018 Annual Report on Form 10-K and under the accounting standards then in effect, our operating leases generally contain rent escalation clauses, rent holidays, contingent rent provisions and occasionally leasehold incentives. Rent expense for operating leases is recognized on a straight-line basis over the term of the lease, which is generally five to ten years based on the initial lease term plus first renewal option periods that are reasonably assured. Rent expense for stores is included in cost of sales as a part of occupancy cost and other rent is included in SG&A. The lease terms commence when we take possession with the right to control use of the leased premises, which normally includes a construction period and, for stores, is approximately 60 days prior to the date rent payments begin.  

Deferred rent that results from recognition of rent expense on a straight-line basis is included in other liabilities. Landlord incentives received for reimbursement of leasehold improvements is also included in other liabilities and amortized as a reduction to rent expense over the term of the lease. Contingent rentals are generally based on percentages of sales and are recognized as store rent expense as they accrue.

Rent expense for operating leases for fiscal 2018 and 2017 was $247.9 million and $251.3 million respectively, and includes contingent rentals of $1.8 million and $2.1 million, respectively. Minimum future rental payments under non-cancelable leases as of February 2, 2019 for each of the next five years and in the aggregate are as follows (in thousands):

Fiscal Year	Operating Leases
2019	$	236,539
2020		206,652
2021		173,294
2022		131,800
2023		86,127
Thereafter		140,256
Total lease payments	$	974,668