Leases

9 Months Ended

Oct. 29, 2022

4. Leases

We lease certain property and equipment used in our operations. Some of our store leases include additional rental payments based on a percentage of sales over contractual levels or payments that are adjusted periodically for inflation. Our typical store lease has an initial term of 20 to 25 years and four to eight five-year renewal options.

Lease assets represent our right to use an underlying asset for the lease term. Lease assets are recognized at commencement date based on the value of the lease liability and are adjusted for any lease payments made to the lessor at or before commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee.

Lease liabilities represent our contractual obligation to make lease payments. At the commencement date, the lease liabilities equal the present value of minimum lease payments over the lease term. As the implicit interest rate is not readily identifiable in our leases, we estimate our collateralized borrowing rate to calculate the present value of lease payments.

Leases with a term of 12 months or less are excluded from the balance; we recognize lease expense for these leases on a straight-line basis over the lease term. We combine lease and non-lease components for new and modified leases.

Year to date, we opened 399 Sephora shop-in-shops within our Kohl's stores and now have 599 open as of the end of the third quarter. We plan on opening seven additional shop-in-shops in 2022 and at least 250 more shops in 2023. Due to the investments we are making in the shop-in-shops, we reassessed our lease term when construction began as these assets will have significant economic value to us when the lease term becomes exercisable. The impact of these assessments resulted in additional lease term, additional lease assets and liabilities, and, in some cases, changes to the classification.

The following tables summarize our operating and finance leases and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	October 29, 2022	January 29, 2022	October 30, 2021
Assets
Operating leases	Operating leases	$2,318	$2,248	$2,293
Finance leases	Property and equipment, net	2,066	1,442	1,389
Total operating and finance leases		4,384	3,690	3,682
Liabilities
Current
Operating leases	Current portion of operating leases	109	145	142
Finance leases	Current portion of finance leases and financing obligations	78	87	86
Noncurrent
Operating leases	Operating leases	2,595	2,479	2,537
Finance leases	Finance leases and financing obligations	2,346	1,688	1,620
Total operating and finance leases		$5,128	$4,399	$4,385


Consolidated Statement of Operations		Three Months Ended		Nine Months Ended
(Dollars in Millions)	Classification	October 29, 2022	October 30, 2021	October 29, 2022	October 30, 2021
Operating leases	Selling, general, and administrative	$64	$71	$197	$227
Finance leases
Amortization of leased assets	Depreciation and amortization	33	27	94	70
Interest on leased assets	Interest expense, net	36	29	104	81
Total operating and finance leases		$133	$127	$395	$378


Consolidated Statement of Cash Flows	Nine Months Ended
(Dollars in Millions)	October 29, 2022	October 30, 2021
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$200	$236
Operating cash flows from finance leases	99	81
Financing cash flows from finance leases	65	71

The following table summarizes future lease payments by fiscal year:


	October 29, 2022
(Dollars in Millions)	Operating Leases	Finance Leases	Total
2022	$62	$40	$102
2023	253	215	468
2024	243	207	450
2025	233	203	436
2026	228	202	430
After 2026	3,735	3,678	7,413
Total lease payments	$4,754	$4,545	$9,299
Amount representing interest	(2,050)	(2,121)	(4,171)
Lease liabilities	$2,704	$2,424	$5,128

The following table summarizes weighted-average remaining lease term and discount rate:


	October 29, 2022	January 29, 2022
Weighted-average remaining term (years)
Operating leases	20	20
Finance leases	21	20
Weighted-average discount rate
Operating leases	6%	6%
Finance leases	6%	7%

Other lease information is as follows:


	Nine Months Ended
(Dollars in Millions)	October 29, 2022	October 30, 2021
Property and equipment acquired through exchange of:
Finance lease liabilities	$714	$755
Operating lease liabilities	167	8

Financing Obligations

The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	October 29, 2022	January 29, 2022	October 30, 2021
Assets
Financing obligations	Property and equipment, net	$50	$55	$57
Liabilities
Current	Current portion of finance leases and financing obligations	17	31	31
Noncurrent	Finance leases and financing obligations	445	445	452
Total financing obligations		$462	$476	$483


Consolidated Statement of Operations		Three Months Ended		Nine Months Ended
(Dollars in Millions)	Classification	October 29, 2022	October 30, 2021	October 29, 2022	October 30, 2021
Amortization of financing obligation assets	Depreciation and amortization	1	2	5	7
Interest on financing obligations	Interest expense, net	16	11	43	30
Total financing obligations		$17	$13	$48	$37


Consolidated Statement of Cash Flows	Nine Months Ended
(Dollars in Millions)	October 29, 2022	October 30, 2021
Cash paid for amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$42	$30
Financing cash flows from financing obligations	16	25
Proceeds from financing obligations	9	8

The following table summarizes future financing obligation payments by fiscal year:


	October 29, 2022
(Dollars in Millions)	Financing Obligations
2022	$17
2023	78
2024	77
2025	76
2026	74
After 2026	975
Total lease payments	$1,297
Non-cash gain on future sale of property	166
Amount representing interest	(1,001)
Financing obligation liability	$462

The following table summarizes the weighted-average remaining term and discount rate for financing obligations:


	October 29, 2022	January 29, 2022
Weighted-average remaining term (years)	14	10
Weighted-average discount rate	14%	9%