Lease Accounting

3 Months Ended

May 01, 2021

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 3% to 28%, 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 $5.0 million for leases where the Company has not yet taken possession of the underlying asset as of May 1, 2021. 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 May 1, 2021.

The components of leases are as follows (in thousands):

		May 1, 2021		Jan 30, 2021
Assets	Balance Sheet Location
Operating	Operating lease right-of-use assets	$	738,544	$	764,804
Finance	Property and equipment, net	21,405		20,595
Total lease assets		$	759,949	$	785,399
Liabilities	Balance Sheet Location
Current:
Operating	Current portion of operating lease liabilities	$	224,676	$	222,800
Finance	Current portion of borrowings and finance lease obligations	4,551		4,698
Noncurrent:
Operating	Long-term operating lease liabilities	632,574		662,657
Finance	Long-term debt and finance lease obligations	17,870		17,365
Total lease liabilities		$	879,671	$	907,520

The components of lease costs are as follows (in thousands):

		Three Months Ended
	Income Statement Location	May 1, 2021		May 2, 2020
Operating lease costs	Cost of product sales	$	46,684	$	55,369
Operating lease costs	Selling, general and administrative expenses	6,357		5,176
Operating lease costs1, 2	Net (gains) losses on lease modifications	(2,145)		456
Finance lease costs
Amortization of leased assets1, 3	Cost of product sales	11		12
Amortization of leased assets1, 3	Selling, general and administrative expenses	1,361		864
Interest on lease liabilities	Interest expense	366		282
Variable lease costs4	Cost of product sales	15,739		14,348
Variable lease costs4	Selling, general and administrative expenses	574		579
Short-term lease costs	Cost of product sales	105		239
Short-term lease costs	Selling, general and administrative expenses	1,171		1,789
Total lease costs1		$	70,223	$	79,114

____________________________________________________________________

Notes:

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

2During the three months ended May 1, 2021 and May 2, 2020, net (gains) losses 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 months ended May 1, 2021 and May 2, 2020, variable lease costs included certain rent concessions of approximately $6.1 million and $2.7 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic.

Maturities of the Company’s operating and finance lease liabilities as of May 1, 2021 are as follows (in thousands):

	Operating Leases
Maturity of Lease Liabilities	Non-Related Parties		Related Parties		Finance Leases		Total
20221	$	193,515	$	5,965	$	4,294	$	203,774
2023	181,879		7,260		5,974		195,113
2024	146,015		7,678		5,887		159,580
2025	103,560		7,321		3,946		114,827
2026	73,458		6,928		3,034		83,420
After 2026	170,672		36,410		3,158		210,240
Total lease payments	869,099		71,562		26,293		966,954
Less: Interest	71,415		11,996		3,872		87,283
Present value of lease liabilities	$	797,684	$	59,566	$	22,421	$	879,671

______________________________________________________________________

Notes:

1Represents the maturity of lease liabilities for the remainder of fiscal 2022 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the three months ended May 1, 2021.

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

Lease Term and Discount Rate	May 1, 2021
Weighted-average remaining lease term
Operating leases	6.1 Years
Finance leases	4.8 Years
Weighted-average discount rate
Operating leases	3.5%
Finance leases	6.8%

	Three Months Ended
Supplemental Cash Flow Information	May 1, 2021		May 2, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	53,428	$	32,618
New operating ROU assets obtained in exchange for lease liabilities	$	22,596	$	16,332

Impairment

During the three months ended May 1, 2021, there was minimal ROU asset impairment charges recorded. During the three months ended May 2, 2020, the Company recorded ROU asset impairment charges of $28.2 million related primarily to certain retail locations in North America and, to a lesser extent, 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. 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 3% to 28%, 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 $5.0 million for leases where the Company has not yet taken possession of the underlying asset as of May 1, 2021. 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 May 1, 2021.

The components of leases are as follows (in thousands):

		May 1, 2021		Jan 30, 2021
Assets	Balance Sheet Location
Operating	Operating lease right-of-use assets	$	738,544	$	764,804
Finance	Property and equipment, net	21,405		20,595
Total lease assets		$	759,949	$	785,399
Liabilities	Balance Sheet Location
Current:
Operating	Current portion of operating lease liabilities	$	224,676	$	222,800
Finance	Current portion of borrowings and finance lease obligations	4,551		4,698
Noncurrent:
Operating	Long-term operating lease liabilities	632,574		662,657
Finance	Long-term debt and finance lease obligations	17,870		17,365
Total lease liabilities		$	879,671	$	907,520

The components of lease costs are as follows (in thousands):

		Three Months Ended
	Income Statement Location	May 1, 2021		May 2, 2020
Operating lease costs	Cost of product sales	$	46,684	$	55,369
Operating lease costs	Selling, general and administrative expenses	6,357		5,176
Operating lease costs1, 2	Net (gains) losses on lease modifications	(2,145)		456
Finance lease costs
Amortization of leased assets1, 3	Cost of product sales	11		12
Amortization of leased assets1, 3	Selling, general and administrative expenses	1,361		864
Interest on lease liabilities	Interest expense	366		282
Variable lease costs4	Cost of product sales	15,739		14,348
Variable lease costs4	Selling, general and administrative expenses	574		579
Short-term lease costs	Cost of product sales	105		239
Short-term lease costs	Selling, general and administrative expenses	1,171		1,789
Total lease costs1		$	70,223	$	79,114

____________________________________________________________________

Notes:

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

2During the three months ended May 1, 2021 and May 2, 2020, net (gains) losses 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 months ended May 1, 2021 and May 2, 2020, variable lease costs included certain rent concessions of approximately $6.1 million and $2.7 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic.

Maturities of the Company’s operating and finance lease liabilities as of May 1, 2021 are as follows (in thousands):

	Operating Leases
Maturity of Lease Liabilities	Non-Related Parties		Related Parties		Finance Leases		Total
20221	$	193,515	$	5,965	$	4,294	$	203,774
2023	181,879		7,260		5,974		195,113
2024	146,015		7,678		5,887		159,580
2025	103,560		7,321		3,946		114,827
2026	73,458		6,928		3,034		83,420
After 2026	170,672		36,410		3,158		210,240
Total lease payments	869,099		71,562		26,293		966,954
Less: Interest	71,415		11,996		3,872		87,283
Present value of lease liabilities	$	797,684	$	59,566	$	22,421	$	879,671

______________________________________________________________________

Notes:

1Represents the maturity of lease liabilities for the remainder of fiscal 2022 and also includes rent payments that have been deferred due to the COVID-19 pandemic. This amount does not include payments made during the three months ended May 1, 2021.

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

Lease Term and Discount Rate	May 1, 2021
Weighted-average remaining lease term
Operating leases	6.1 Years
Finance leases	4.8 Years
Weighted-average discount rate
Operating leases	3.5%
Finance leases	6.8%

	Three Months Ended
Supplemental Cash Flow Information	May 1, 2021		May 2, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	53,428	$	32,618
New operating ROU assets obtained in exchange for lease liabilities	$	22,596	$	16,332

Impairment

During the three months ended May 1, 2021, there was minimal ROU asset impairment charges recorded. During the three months ended May 2, 2020, the Company recorded ROU asset impairment charges of $28.2 million related primarily to certain retail locations in North America and, to a lesser extent, 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. Refer to Note 15 for more information on the Company’s impairment testing.