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Lease Accounting

6 Months Ended

Aug. 01, 2020

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’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 lease payments 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 lease payments primarily based upon a percentage of annual sales volume, which averages approximately 35%.

In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $24.4 million for leases where the Company has not yet taken possession of the underlying asset as of August 1, 2020. 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 1, 2020.

As of August 1, 2020 and February 1, 2020, the components of leases are as follows (in thousands):



	Balance Sheet Location	Aug 1, 2020		Feb 1, 2020
Assets
Operating	Operating lease right-of-use assets	$	766,853	$	851,990
Finance	Property and equipment, net	15,451		15,972
Total lease assets		$	782,304	$	867,962

Liabilities
Current:
Operating	Current portion of operating lease liabilities	$	235,749	$	192,066
Finance	Current portion of borrowings and finance lease obligations	2,524		2,273
Noncurrent:
Operating	Long-term operating lease liabilities	659,118		714,079
Finance	Long-term debt and finance lease obligations	13,729		14,262
Total lease liabilities		$	911,120	$	922,680

As of August 1, 2020 and August 3, 2019, the components of lease costs are as follows (in thousands):



		Three Months Ended				Six Months Ended
	Income Statement Location	Aug 1, 2020		Aug 3, 2019		Aug 1, 2020		Aug 3, 2019
Operating lease costs	Cost of product sales	$	50,005	$	58,749	$	105,374	$	117,565
Operating lease costs	Selling, general and administrative expenses	5,355		5,720		10,531		10,984
Finance lease costs
Amortization of leased assets^{1, 2}	Cost of product sales	20		44		32		87
Amortization of leased assets^{1, 2}	Selling, general and administrative expenses	474		637		1,338		1,180
Interest on lease liabilities	Interest expense	208		286		490		573
Variable lease costs³	Cost of product sales	13,209		25,083		27,557		49,908
Variable lease costs³	Selling, general and administrative expenses	638		628		1,217		1,455
Short-term lease costs	Cost of product sales	181		—		420		—
Short-term lease costs	Selling, general and administrative expenses	170		183		1,959		395
Total lease costs		$	70,260	$	91,330	$	148,918	$	182,147

____________________________________________________________________

Notes:


¹	The Company has made certain reclassifications to prior period amounts to conform to the current period presentation.


²	Amortization of leased assets related to finance leases are included in depreciation expense within cost of product sales or selling, general and administrative expenses depending on the nature of the asset in the Company’s condensed consolidated statements of income (loss).


³	During the three and six months ended August 1, 2020, variable lease costs included certain rent concessions received by the Company, primarily in Europe, related to the COVID-19 pandemic of approximately $7.7 million and $10.5 million, respectively. Refer to Note 1 for further information.

Maturities of the Company’s operating and finance lease liabilities as of August 1, 2020 are as follows (in thousands):



Maturity of Lease Liabilities	Operating Leases		Finance Leases		Total
2021¹	$	155,961	$	1,618	$	157,579
2022	207,825		3,904		211,729
2023	172,592		3,483		176,075
2024	144,021		3,260		147,281
2025	99,851		2,446		102,297
After 2025	201,665		5,229		206,894
Total lease payments	981,915		19,940		1,001,855
Less: Interest	87,048		3,687		90,735
Present value of lease liabilities	$	894,867	$	16,253	$	911,120

______________________________________________________________________

Notes:


¹	Represents the maturity of lease liabilities for the remainder of fiscal 2021 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the six months ended August 1, 2020.

Other supplemental information is as follows (dollars in thousands):



Lease Term and Discount Rate	Aug 1, 2020
Weighted-average remaining lease term (years)
Operating leases	5.7 years
Finance leases	5.9 years
Weighted-average discount rate
Operating leases	3.7%
Finance leases	7.0%



	Six Months Ended
Supplemental Cash Flow Information	Aug 1, 2020		Aug 3, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	70,890	$	124,687
New operating ROU assets obtained in exchange for lease liabilities	$	19,566	$	99,951

Impairment

During the three and six months ended August 1, 2020, the Company recorded asset impairment charges of $8.2 million and $36.5 million, respectively, related to ROU assets at certain retail locations in North America and Europe. The asset impairment charges were determined based on the excess of carrying value over the fair value of the ROU assets. The Company uses estimates of market participant rents to calculate fair value of the ROU assets. There were no asset impairment charges recorded related to the Company’s ROU assets during the three and six months ended August 3, 2019. Refer to Note 15 for more information on the Company’s impairment testing.

Lease Accounting

As of August 1, 2020 and February 1, 2020, the components of leases are as follows (in thousands):



	Balance Sheet Location	Aug 1, 2020		Feb 1, 2020
Assets
Operating	Operating lease right-of-use assets	$	766,853	$	851,990
Finance	Property and equipment, net	15,451		15,972
Total lease assets		$	782,304	$	867,962

Liabilities
Current:
Operating	Current portion of operating lease liabilities	$	235,749	$	192,066
Finance	Current portion of borrowings and finance lease obligations	2,524		2,273
Noncurrent:
Operating	Long-term operating lease liabilities	659,118		714,079
Finance	Long-term debt and finance lease obligations	13,729		14,262
Total lease liabilities		$	911,120	$	922,680

As of August 1, 2020 and August 3, 2019, the components of lease costs are as follows (in thousands):



		Three Months Ended				Six Months Ended
	Income Statement Location	Aug 1, 2020		Aug 3, 2019		Aug 1, 2020		Aug 3, 2019
Operating lease costs	Cost of product sales	$	50,005	$	58,749	$	105,374	$	117,565
Operating lease costs	Selling, general and administrative expenses	5,355		5,720		10,531		10,984
Finance lease costs
Amortization of leased assets^{1, 2}	Cost of product sales	20		44		32		87
Amortization of leased assets^{1, 2}	Selling, general and administrative expenses	474		637		1,338		1,180
Interest on lease liabilities	Interest expense	208		286		490		573
Variable lease costs³	Cost of product sales	13,209		25,083		27,557		49,908
Variable lease costs³	Selling, general and administrative expenses	638		628		1,217		1,455
Short-term lease costs	Cost of product sales	181		—		420		—
Short-term lease costs	Selling, general and administrative expenses	170		183		1,959		395
Total lease costs		$	70,260	$	91,330	$	148,918	$	182,147

____________________________________________________________________

Notes:


¹	The Company has made certain reclassifications to prior period amounts to conform to the current period presentation.


²	Amortization of leased assets related to finance leases are included in depreciation expense within cost of product sales or selling, general and administrative expenses depending on the nature of the asset in the Company’s condensed consolidated statements of income (loss).


³	During the three and six months ended August 1, 2020, variable lease costs included certain rent concessions received by the Company, primarily in Europe, related to the COVID-19 pandemic of approximately $7.7 million and $10.5 million, respectively. Refer to Note 1 for further information.

Maturities of the Company’s operating and finance lease liabilities as of August 1, 2020 are as follows (in thousands):



Maturity of Lease Liabilities	Operating Leases		Finance Leases		Total
2021¹	$	155,961	$	1,618	$	157,579
2022	207,825		3,904		211,729
2023	172,592		3,483		176,075
2024	144,021		3,260		147,281
2025	99,851		2,446		102,297
After 2025	201,665		5,229		206,894
Total lease payments	981,915		19,940		1,001,855
Less: Interest	87,048		3,687		90,735
Present value of lease liabilities	$	894,867	$	16,253	$	911,120

______________________________________________________________________

Notes:


¹	Represents the maturity of lease liabilities for the remainder of fiscal 2021 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the six months ended August 1, 2020.

Other supplemental information is as follows (dollars in thousands):



Lease Term and Discount Rate	Aug 1, 2020
Weighted-average remaining lease term (years)
Operating leases	5.7 years
Finance leases	5.9 years
Weighted-average discount rate
Operating leases	3.7%
Finance leases	7.0%



	Six Months Ended
Supplemental Cash Flow Information	Aug 1, 2020		Aug 3, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	70,890	$	124,687
New operating ROU assets obtained in exchange for lease liabilities	$	19,566	$	99,951

Impairment