Leases

3 Months Ended

Apr. 29, 2023

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.

We have 607 full size Sephora shop-in-shops within our Kohl's stores as of the end of the first quarter of 2023. We plan on opening at least 250 of the full size 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	April 29, 2023	January 28, 2023	April 30, 2022
Assets
Operating leases	Operating leases	$2,368	$2,304	$2,224
Finance leases	Property and equipment, net	1,950	2,033	1,883
Total operating and finance leases		4,318	4,337	4,107
Liabilities
Current
Operating leases	Current portion of operating leases	111	111	127
Finance leases	Current portion of finance leases and financing obligations	76	76	82
Noncurrent
Operating leases	Operating leases	2,634	2,578	2,474
Finance leases	Finance leases and financing obligations	2,271	2,344	2,140
Total operating and finance leases		$5,092	$5,109	$4,823


Consolidated Statement of Operations		Quarter Ended
(Dollars in Millions)	Classification	April 29, 2023	April 30, 2022
Operating leases	Selling, general, and administrative	$67	$69
Finance leases
Amortization of leased assets	Depreciation and amortization	32	29
Interest on leased assets	Interest expense, net	36	32
Total operating and finance leases		$135	$130


Consolidated Statement of Cash Flows	Quarter Ended
(Dollars in Millions)	April 29, 2023	April 30, 2022
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$69	$70
Operating cash flows from finance leases	35	30
Financing cash flows from finance leases	21	22

The following table summarizes future lease payments by fiscal year:


	April 29, 2023
(Dollars in Millions)	Operating Leases	Finance Leases	Total
2023	$193	$159	$352
2024	253	208	461
2025	245	202	447
2026	238	201	439
2027	237	202	439
After 2027	3,672	3,439	7,111
Total lease payments	$4,838	$4,411	$9,249
Amount representing interest	(2,093)	(2,064)	(4,157)
Lease liabilities	$2,745	$2,347	$5,092

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


	April 29, 2023	January 28, 2023
Weighted-average remaining term (years)
Operating leases	20	20
Finance leases	20	20
Weighted-average discount rate
Operating leases	6%	6%
Finance leases	6%	6%

Other lease information is as follows:


	Quarter Ended
(Dollars in Millions)	April 29, 2023	April 30, 2022
Property and equipment acquired (disposed) through exchange of:
Finance lease liabilities	$(56)	$472
Operating lease liabilities	74	11

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	April 29, 2023	January 28, 2023	April 30, 2022
Assets
Financing obligations	Property and equipment, net	$47	$49	$53
Liabilities
Current	Current portion of finance leases and financing obligations	17	18	26
Noncurrent	Finance leases and financing obligations	439	442	444
Total financing obligations		$456	$460	$470


Consolidated Statement of Operations		Quarter Ended
(Dollars in Millions)	Classification	April 29, 2023	April 30, 2022
Amortization of financing obligation assets	Depreciation and amortization	2	2
Interest on financing obligations	Interest expense, net	16	12
Total financing obligations		$18	$14


Consolidated Statement of Cash Flows	Quarter Ended
(Dollars in Millions)	April 29, 2023	April 30, 2022
Cash paid for and proceeds from amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$16	$12
Financing cash flows from financing obligations	4	7
Proceeds from financing obligations	5	4

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


	April 29, 2023
(Dollars in Millions)	Financing Obligations
2023	$58
2024	77
2025	75
2026	74
2027	71
After 2027	931
Total lease payments	$1,286
Non-cash gain on future sale of property	157
Amount representing interest	(987)
Financing obligation liability	$456

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


	April 29, 2023	January 28, 2023
Weighted-average remaining term (years)	14	13
Weighted-average discount rate	14%	14%