Leases

12 Months Ended

Feb. 03, 2024

3. 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 incremental 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 254 full size Sephora shops within our Kohl's stores during 2023 and now have 860 full size Sephora shops open as of the end of the fiscal year. Due to the investments we made 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	February 3, 2024	January 28, 2023
Assets
Operating leases	Operating leases	$2,499	$2,304
Finance leases	Property and equipment, net	1,883	2,033
Total operating and finance leases		4,382	4,337
Liabilities
Current
Operating leases	Current portion of operating leases	102	111
Finance leases	Current portion of finance leases and financing obligations	74	76
Noncurrent
Operating leases	Operating leases	2,781	2,578
Finance leases	Finance leases and financing obligations	2,242	2,344
Total operating and finance leases		$5,199	$5,109


Consolidated Statement of Operations
(Dollars in Millions)	Classification	2023	2022	2021
Operating leases	Selling, general, and administrative	$271	$264	$298
Finance Leases
Amortization of leased assets	Depreciation and amortization	121	126	98
Interest on leased assets	Interest expense, net	144	140	111
Total operating and finance leases		$536	$530	$507


Consolidated Statement of Cash Flows
(Dollars in Millions)	2023	2022	2021
Cash paid for amounts included in measurement of leased liabilities
Operating cash flows from operating leases	$272	$266	$311
Operating cash flows from finance leases	140	133	105
Financing cash flows from finance leases	78	86	93

The following table summarizes future lease payments by fiscal year:


	February 3, 2024
(Dollars in millions)	Operating Leases	Finance Leases	Total
2024	$268	$213	$481
2025	263	208	471
2026	256	206	462
2027	256	205	461
2028	254	202	456
After 2028	3,902	3,303	7,205
Total lease payments	$5,199	$4,337	$9,536
Amount representing interest	(2,316)	(2,021)	(4,337)
Lease liabilities	$2,883	$2,316	$5,199

Total lease payments include $3.9 billion related to options to extend operating lease terms that are reasonably certain of being exercised and $3.2 billion related to options to extend finance lease terms that are reasonably certain of being exercised. Additionally, total lease payments exclude $13 million of legally binding lease payments for leases signed but not yet commenced.

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


	February 3, 2024	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:


(Dollars in Millions)	2023	2022	2021
Property and equipment acquired (disposed) through exchange of:
Finance lease liabilities	(36)	714	841
Operating lease liabilities	278	179	2

Financing Obligations

Historical failed sale-leasebacks that did not qualify for sale-leaseback accounting upon adoption of ASC 842 continue to be accounted for as 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	February 3, 2024	January 28, 2023
Assets
Financing obligations	Property and equipment, net	$44	$49
Liabilities
Current	Current portion of finance leases and financing obligations	9	18
Noncurrent	Finance leases and financing obligations	438	442
Total financing obligations		$447	$460


Consolidated Statement of Operations
(Dollars in millions)	Classification	2023	2022	2021
Amortization of financing obligation assets	Depreciation and amortization	$5	$7	$10
Interest on financing obligations	Interest expense, net	70	58	41
Total financing obligations		$75	$65	$51


Consolidated Statement of Cash Flows
(Dollars in millions)	2023	2022	2021
Cash paid for amounts included in measurement of financing obligations
Operating cash flows from financing obligations	$68	$56	$40
Financing cash flows from financing obligations	15	20	32
Proceeds from financing obligations	21	11	15

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


	February 3, 2024
(Dollars in millions)	Financing Obligations
2024	$73
2025	79
2026	79
2027	79
2028	76
After 2028	1,163
Total lease payments	$1,549
Non-cash gain on future sale of property	115
Amount representing interest	(1,217)
Financing obligation liability	$447

Total payments exclude $21 million of legally binding payments for contracts signed, but not yet commenced.

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


	February 3, 2024	January 28, 2023
Weighted-average remaining term (years)	16	13
Weighted-average discount rate	16%	14%

The following table shows the cash rent out flows for the operating leases, finance leases, and financing obligations:


Consolidated Statement of Cash Flows
(Dollars in millions)	2023	2022	2021
Operating cash flows from operating leases	$272	$266	$311
Operating cash flows from finance leases	140	133	105
Financing cash flows from finance leases	78	86	93
Operating cash flows from financing obligations	68	56	40
Financing cash flows from financing obligations	15	20	32
Total cash rent	$573	$561	$581