Leases

9 Months Ended

Oct. 28, 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 opened 56 full size Sephora at Kohl's shop-in-shops ("Sephora shops") in the third quarter of 2023 and now have 857 full size Sephora shops open as of the end of the third quarter of 2023. Due to the investments we are making in the full size Sephora 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, which are predominately store related, and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	October 28, 2023	January 28, 2023	October 29, 2022
Assets
Operating leases	Operating leases	$2,492	$2,304	$2,318
Finance leases	Property and equipment, net	1,923	2,033	2,066
Total operating and finance leases		$4,415	$4,337	$4,384
Liabilities
Current
Operating leases	Current portion of operating leases	94	111	109
Finance leases	Current portion of finance leases and financing obligations	75	76	78
Noncurrent
Operating leases	Operating leases	2,780	2,578	2,595
Finance leases	Finance leases and financing obligations	2,270	2,344	2,346
Total operating and finance leases		$5,219	$5,109	$5,128


Consolidated Statement of Operations		Three Months Ended		Nine Months Ended
(Dollars in Millions)	Classification	October 28, 2023	October 29, 2022	October 28, 2023	October 29, 2022
Operating leases	Selling, general, and administrative	$68	$64	$202	$197
Finance leases
Amortization of leased assets	Depreciation and amortization	30	33	92	94
Interest on leased assets	Interest expense, net	36	36	108	104
Total operating and finance leases		$134	$133	$402	$395


Consolidated Statement of Cash Flows	Nine Months Ended
(Dollars in Millions)	October 28, 2023	October 29, 2022
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$202	$200
Operating cash flows from finance leases	105	99
Financing cash flows from finance leases	59	65

The following table summarizes future lease payments by fiscal year:


	October 28, 2023
(Dollars in Millions)	Operating Leases	Finance Leases	Total
2023	$56	$52	$108
2024	267	213	480
2025	260	207	467
2026	254	206	460
2027	255	206	461
After 2027	4,097	3,530	7,627
Total lease payments	$5,189	$4,414	$9,603
Amount representing interest	(2,315)	(2,069)	(4,384)
Lease liabilities	$2,874	$2,345	$5,219

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


	October 28, 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:


	Nine Months Ended
(Dollars in Millions)	October 28, 2023	October 29, 2022
Property and equipment acquired (disposed) through exchange of:
Finance lease liabilities	$(23)	$714
Operating lease liabilities	247	167

Financing Obligations

The following tables summarize our financing obligations, which are all store related, and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	October 28, 2023	January 28, 2023	October 29, 2022
Assets
Financing obligations	Property and equipment, net	$45	$49	$50
Liabilities
Current	Current portion of finance leases and financing obligations	9	18	17
Noncurrent	Finance leases and financing obligations	444	442	445
Total financing obligations		$453	$460	$462


Consolidated Statement of Operations		Three Months Ended		Nine Months Ended
(Dollars in Millions)	Classification	October 28, 2023	October 29, 2022	October 28, 2023	October 29, 2022
Amortization of financing obligation assets	Depreciation and amortization	1	1	4	5
Interest on financing obligations	Interest expense, net	19	16	52	43
Total financing obligations		$20	$17	$56	$48


Consolidated Statement of Cash Flows	Nine Months Ended
(Dollars in Millions)	October 28, 2023	October 29, 2022
Cash paid for and proceeds from amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$51	$42
Financing cash flows from financing obligations	9	16
Proceeds from financing obligations	19	9

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


	October 28, 2023
(Dollars in Millions)	Financing Obligations
2023	$19
2024	78
2025	79
2026	79
2027	79
After 2027	1,242
Total lease payments	$1,576
Non-cash gain on future sale of property	115
Amount representing interest	(1,238)
Financing obligation liability	$453

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


	October 28, 2023	January 28, 2023
Weighted-average remaining term (years)	17	13
Weighted-average discount rate	16%	14%