Lease Accounting

6 Months Ended

Aug. 03, 2019

The Company primarily leases its showrooms, advertising, licensing, sales and merchandising offices, remote distribution and warehousing facilities and retail and factory outlet store locations under operating lease agreements expiring on various dates through January 2039. The Company also leases some of its equipment as well as computer hardware and software under operating and finance lease agreements expiring on various dates through May 2027.

The Company determines whether an arrangement is a lease at inception of the agreement and reassesses that conclusion if the agreement is modified. The term of the Company’s leases represents the non-cancelable period of the lease, including any rent-free periods and any options to renew, extend or terminate the lease that the Company is reasonably certain to exercise. The Company determines the term of each lease at lease commencement and revisits that term in subsequent periods if a triggering event occurs which would require reassessment.

Leases with an initial contractual term in excess of 12 months are accounted for as either an operating or finance lease based on certain criteria. Under this new guidance, leases the Company previously referred to as “capital leases” are now referred to as “finance leases.” In connection with the adoption of the new lease standard, the Company elected to apply the group of practical expedients which allows the Company to carry forward its identification of existing contracts that are or contain leases, its historical lease classification and its initial direct costs for existing leases. The Company has also elected to recognize leases with an initial term of 12 months or less on a straight-line basis without recognizing a ROU asset or operating lease liability.

The Company’s lease agreements primarily provide for lease payments based on a minimum annual rental amount, a percentage of annual sales volume, periodic adjustments related to inflation or a combination of such lease payments. Certain retail store leases provide for rents based upon the minimum annual rental amount and a percentage of annual sales volume, generally ranging from 3% to 23%, when specific sales volumes are exceeded. The Company’s retail concession leases also provide for rents primarily based upon a percentage of annual sales volume which average approximately 35% of annual sales volume. Some of these leases require the Company to make periodic payments for insurance, property taxes, sales promotion and common area maintenance charges. The Company has elected the practical expedient to not separate non-lease components from lease components in the measurement of liabilities for its directly operated real estate leases. Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly secured borrowings available to the Company. Lease ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable lease liability or lease ROU asset. Lease ROU assets are amortized over the life of the lease and tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $9.6 million for leases where the Company has not yet taken possession of the underlying asset as of August 3, 2019. As such, the related operating lease ROU assets and operating lease liabilities have not been recognized in the Company’s condensed consolidated balance sheet as of August 3, 2019.

As of August 3, 2019, the components of leases and lease costs are as follows (in thousands):



	Balance Sheet Location	Aug 3, 2019
Assets
Operating	Operating lease right-of-use assets	$	900,062
Finance	Property and equipment, net	17,402
Total lease assets		$	917,464

Liabilities
Current:
Operating	Current portion of operating lease liabilities	$	213,912
Finance	Current portion of borrowings and finance lease obligations	2,465
Noncurrent:
Operating	Long-term operating lease liabilities	747,791
Finance	Long-term debt and finance lease obligations, net	15,618
Total lease liabilities		$	979,786



	Income Statement Location	Three Months Ended Aug 3, 2019		Six Months Ended Aug 3, 2019
Operating lease costs¹	Cost of product sales	$	58,749	$	117,565
Operating lease costs¹	Selling, general and administrative expenses	5,720		10,984
Finance lease costs
Amortization of leased assets²	Cost of product sales	44		87
Amortization of leased assets²	Selling, general and administrative expenses	637		1,180
Interest on lease liabilities	Interest expense	286		573
Variable lease costs¹	Cost of product sales	25,083		49,908
Variable lease costs¹	Selling, general and administrative expenses	628		1,455
Short-term lease costs¹	Selling, general and administrative expenses	183		395
Total lease costs		$	91,330	$	182,147

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Notes:

Rental expense for all property and equipment operating leases during the three and six months ended August 4, 2018 aggregated $70.6 million and $142.8 million, respectively, including percentage rent of $15.5 million and $31.9 million, respectively. During the three and six months ended August 4, 2018, the Company also recognized insurance, taxes, sales promotion and common area maintenance charges totaling $16.4 million and $31.3 million, respectively, related to its operating leases.


²	Amortization of leased assets related to finance leases are included in depreciation expense in the Company’s condensed consolidated statements of income.

Maturities of the Company’s operating and finance lease liabilities as of August 3, 2019 are as follows (in thousands):



Maturity of Lease Liabilities	Operating Leases		Finance Leases		Total
2020¹	$	131,202	$	1,825	$	133,027
2021	201,770		3,342		205,112
2022	189,492		3,646		193,138
2023	158,132		3,255		161,387
2024	132,342		3,092		135,434
After 2024	255,194		7,577		262,771
Total lease payments	1,068,132		22,737		1,090,869
Less: Interest	106,429		4,654		111,083
Present value of lease liabilities	$	961,703	$	18,083	$	979,786

______________________________________________________________________

Notes:


¹	Represents the maturity of lease liabilities for the remainder of fiscal 2020 and does not include payments made during the six months ended August 3, 2019.

Other supplemental information as of August 3, 2019 is as follows (dollars in thousands):



Lease Term and Discount Rate	Aug 3, 2019
Weighted-average remaining lease term (years)
Operating leases	6.0 years
Finance leases	6.8 years
Weighted-average discount rate
Operating leases	3.6%
Finance leases	7.1%



Supplemental Cash Flow Information	Six Months Ended Aug 3, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	124,687
New operating ROU assets obtained in exchange for lease liabilities	$	99,951

Lease Accounting

As of August 3, 2019, the components of leases and lease costs are as follows (in thousands):



	Balance Sheet Location	Aug 3, 2019
Assets
Operating	Operating lease right-of-use assets	$	900,062
Finance	Property and equipment, net	17,402
Total lease assets		$	917,464

Liabilities
Current:
Operating	Current portion of operating lease liabilities	$	213,912
Finance	Current portion of borrowings and finance lease obligations	2,465
Noncurrent:
Operating	Long-term operating lease liabilities	747,791
Finance	Long-term debt and finance lease obligations, net	15,618
Total lease liabilities		$	979,786



	Income Statement Location	Three Months Ended Aug 3, 2019		Six Months Ended Aug 3, 2019
Operating lease costs¹	Cost of product sales	$	58,749	$	117,565
Operating lease costs¹	Selling, general and administrative expenses	5,720		10,984
Finance lease costs
Amortization of leased assets²	Cost of product sales	44		87
Amortization of leased assets²	Selling, general and administrative expenses	637		1,180
Interest on lease liabilities	Interest expense	286		573
Variable lease costs¹	Cost of product sales	25,083		49,908
Variable lease costs¹	Selling, general and administrative expenses	628		1,455
Short-term lease costs¹	Selling, general and administrative expenses	183		395
Total lease costs		$	91,330	$	182,147

______________________________________________________________________

Notes:


²	Amortization of leased assets related to finance leases are included in depreciation expense in the Company’s condensed consolidated statements of income.

Maturities of the Company’s operating and finance lease liabilities as of August 3, 2019 are as follows (in thousands):



Maturity of Lease Liabilities	Operating Leases		Finance Leases		Total
2020¹	$	131,202	$	1,825	$	133,027
2021	201,770		3,342		205,112
2022	189,492		3,646		193,138
2023	158,132		3,255		161,387
2024	132,342		3,092		135,434
After 2024	255,194		7,577		262,771
Total lease payments	1,068,132		22,737		1,090,869
Less: Interest	106,429		4,654		111,083
Present value of lease liabilities	$	961,703	$	18,083	$	979,786

______________________________________________________________________

Notes:


¹	Represents the maturity of lease liabilities for the remainder of fiscal 2020 and does not include payments made during the six months ended August 3, 2019.

Other supplemental information as of August 3, 2019 is as follows (dollars in thousands):



Lease Term and Discount Rate	Aug 3, 2019
Weighted-average remaining lease term (years)
Operating leases	6.0 years
Finance leases	6.8 years
Weighted-average discount rate
Operating leases	3.6%
Finance leases	7.1%



Supplemental Cash Flow Information	Six Months Ended Aug 3, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	124,687
New operating ROU assets obtained in exchange for lease liabilities	$	99,951