Lease Accounting

9 Months Ended

Oct. 31, 2020

Leases [Abstract]

Lease Accounting

Lease Accounting

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 1% to 25%, 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 33%.

In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $3.7 million for leases where the Company has not yet taken possession of the underlying asset as of October 31, 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 October 31, 2020.

As of October 31, 2020 and February 1, 2020, the components of leases are as follows (in thousands):

		Oct 31, 2020		Feb 1, 2020
Assets	Balance Sheet Location
Operating	Operating lease right-of-use assets	$	789,742	$	851,990
Finance	Property and equipment, net	20,933		15,972
Total lease assets		$	810,675	$	867,962
Liabilities	Balance Sheet Location
Current:
Operating	Current portion of operating lease liabilities	$	227,209	$	192,066
Finance	Current portion of borrowings and finance lease obligations	4,414		2,273
Noncurrent:
Operating	Long-term operating lease liabilities	689,251		714,079
Finance	Long-term debt and finance lease obligations	17,748		14,262
Total lease liabilities		$	938,622	$	922,680

As of October 31, 2020 and November 2, 2019, the components of lease costs are as follows (in thousands):

		Three Months Ended				Nine Months Ended
	Income Statement Location	Oct 31, 2020		Nov 2, 2019		Oct 31, 2020		Nov 2, 2019
Operating lease costs	Cost of product sales	$	50,684	$	56,370	$	156,058	$	173,935
Operating lease costs	Selling, general and administrative expenses	5,191		6,746		15,722		17,730
Operating lease costs1, 2	Net gains on lease modifications	(21)		—		(450)		—
Finance lease costs
Amortization of leased assets1, 3	Cost of product sales	5		132		37		219
Amortization of leased assets1, 3	Selling, general and administrative expenses	1,185		561		2,523		1,741
Interest on lease liabilities	Interest expense	353		165		843		738
Variable lease costs4	Cost of product sales	14,755		24,592		42,312		74,500
Variable lease costs4	Selling, general and administrative expenses	33		677		1,250		2,132
Short-term lease costs	Cost of product sales	142		—		562		—
Short-term lease costs	Selling, general and administrative expenses	2,407		208		4,366		603
Total lease costs1		$	74,734	$	89,451	$	223,223	$	271,598

____________________________________________________________________

Notes:

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

2During the three and nine months ended October 31, 2020, net gains on lease modifications related primarily to the early termination of lease agreements for certain of the Company’s retail locations. Operating lease costs for these retail locations prior to the early termination were included in cost of product sales.

3Amortization 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).

4During the three and nine months ended October 31, 2020, variable lease costs included certain rent concessions received by the Company, primarily in Europe, related to the COVID-19 pandemic of approximately $8.0 million and $18.4 million, respectively. Refer to Note 1 for further information.

Maturities of the Company’s operating and finance lease liabilities as of October 31, 2020 are as follows (in thousands):

Maturity of Lease Liabilities	Operating Leases		Finance Leases		Total
20211	$	91,693	$	1,452	$	93,145
2022	215,039		5,809		220,848
2023	180,630		5,327		185,957
2024	154,320		5,148		159,468
2025	110,724		3,285		114,009
After 2025	258,149		5,414		263,563
Total lease payments	1,010,555		26,435		1,036,990
Less: Interest	94,095		4,273		98,368
Present value of lease liabilities	$	916,460	$	22,162	$	938,622

______________________________________________________________________

Notes:

1Represents 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 nine months ended October 31, 2020.

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

Lease Term and Discount Rate	Oct 31, 2020
Weighted-average remaining lease term
Operating leases	6.0 years
Finance leases	5.2 years
Weighted-average discount rate
Operating leases	3.6%
Finance leases	7.1%

	Nine Months Ended
Supplemental Cash Flow Information	Oct 31, 2020		Nov 2, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	133,776	$	187,523
New operating ROU assets obtained in exchange for lease liabilities	$	49,810	$	118,486

Impairment

During the three and nine months ended October 31, 2020, the Company recorded asset impairment charges of $5.6 million and $42.1 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 $0.5 million of asset impairment charges recorded related to the Company’s ROU assets during the three and nine months ended November 2, 2019. Refer to Note 15 for more information on the Company’s impairment testing.

Lease Accounting

Lease Accounting

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 1% to 25%, 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 33%.

In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $3.7 million for leases where the Company has not yet taken possession of the underlying asset as of October 31, 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 October 31, 2020.

As of October 31, 2020 and February 1, 2020, the components of leases are as follows (in thousands):

		Oct 31, 2020		Feb 1, 2020
Assets	Balance Sheet Location
Operating	Operating lease right-of-use assets	$	789,742	$	851,990
Finance	Property and equipment, net	20,933		15,972
Total lease assets		$	810,675	$	867,962
Liabilities	Balance Sheet Location
Current:
Operating	Current portion of operating lease liabilities	$	227,209	$	192,066
Finance	Current portion of borrowings and finance lease obligations	4,414		2,273
Noncurrent:
Operating	Long-term operating lease liabilities	689,251		714,079
Finance	Long-term debt and finance lease obligations	17,748		14,262
Total lease liabilities		$	938,622	$	922,680

As of October 31, 2020 and November 2, 2019, the components of lease costs are as follows (in thousands):

		Three Months Ended				Nine Months Ended
	Income Statement Location	Oct 31, 2020		Nov 2, 2019		Oct 31, 2020		Nov 2, 2019
Operating lease costs	Cost of product sales	$	50,684	$	56,370	$	156,058	$	173,935
Operating lease costs	Selling, general and administrative expenses	5,191		6,746		15,722		17,730
Operating lease costs1, 2	Net gains on lease modifications	(21)		—		(450)		—
Finance lease costs
Amortization of leased assets1, 3	Cost of product sales	5		132		37		219
Amortization of leased assets1, 3	Selling, general and administrative expenses	1,185		561		2,523		1,741
Interest on lease liabilities	Interest expense	353		165		843		738
Variable lease costs4	Cost of product sales	14,755		24,592		42,312		74,500
Variable lease costs4	Selling, general and administrative expenses	33		677		1,250		2,132
Short-term lease costs	Cost of product sales	142		—		562		—
Short-term lease costs	Selling, general and administrative expenses	2,407		208		4,366		603
Total lease costs1		$	74,734	$	89,451	$	223,223	$	271,598

____________________________________________________________________

Notes:

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

2During the three and nine months ended October 31, 2020, net gains on lease modifications related primarily to the early termination of lease agreements for certain of the Company’s retail locations. Operating lease costs for these retail locations prior to the early termination were included in cost of product sales.

3Amortization 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).

4During the three and nine months ended October 31, 2020, variable lease costs included certain rent concessions received by the Company, primarily in Europe, related to the COVID-19 pandemic of approximately $8.0 million and $18.4 million, respectively. Refer to Note 1 for further information.

Maturities of the Company’s operating and finance lease liabilities as of October 31, 2020 are as follows (in thousands):

Maturity of Lease Liabilities	Operating Leases		Finance Leases		Total
20211	$	91,693	$	1,452	$	93,145
2022	215,039		5,809		220,848
2023	180,630		5,327		185,957
2024	154,320		5,148		159,468
2025	110,724		3,285		114,009
After 2025	258,149		5,414		263,563
Total lease payments	1,010,555		26,435		1,036,990
Less: Interest	94,095		4,273		98,368
Present value of lease liabilities	$	916,460	$	22,162	$	938,622

______________________________________________________________________

Notes:

1Represents 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 nine months ended October 31, 2020.

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

Lease Term and Discount Rate	Oct 31, 2020
Weighted-average remaining lease term
Operating leases	6.0 years
Finance leases	5.2 years
Weighted-average discount rate
Operating leases	3.6%
Finance leases	7.1%

	Nine Months Ended
Supplemental Cash Flow Information	Oct 31, 2020		Nov 2, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	133,776	$	187,523
New operating ROU assets obtained in exchange for lease liabilities	$	49,810	$	118,486

Impairment

During the three and nine months ended October 31, 2020, the Company recorded asset impairment charges of $5.6 million and $42.1 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 $0.5 million of asset impairment charges recorded related to the Company’s ROU assets during the three and nine months ended November 2, 2019. Refer to Note 15 for more information on the Company’s impairment testing.