Lease Accounting

9 Months Ended

Oct. 29, 2022

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 September 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 32%.

In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $15.6 million for leases where the Company has not yet taken possession of the underlying asset as of October 29, 2022. 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 29, 2022.

The components of leases are (in thousands):

		Oct 29, 2022		Jan 29, 2022
Assets	Balance Sheet Location
Operating	Operating lease right-of-use assets	$	614,705	$	685,799
Finance	Property and equipment, net	19,264		21,898
Total lease assets		$	633,969	$	707,697
Liabilities	Balance Sheet Location
Current:
Operating	Current portion of operating lease liabilities	$	159,152	$	195,516
Finance	Current portion of borrowings and finance lease obligations	5,888		5,806
Noncurrent:
Operating	Long-term operating lease liabilities	519,594		582,757
Finance	Long-term debt and finance lease obligations	14,559		17,137
Total lease liabilities		$	699,193	$	801,216

The components of lease costs are (in thousands):

		Three Months Ended				Nine Months Ended
	Income Statement Location	Oct 29, 2022		Oct 30, 2021		Oct 29, 2022		Oct 30, 2021
Operating lease costs	Cost of product sales	$	43,361	$	44,729	$	131,450	$	137,189
Operating lease costs	Selling, general and administrative expenses	6,000		6,300		18,582		18,846
Operating lease costs1	Net (gains) losses on lease modifications	(146)		3,006		(1,654)		441
Finance lease costs
Amortization of leased assets	Cost of product sales	21		5		60		33
Amortization of leased assets	Selling, general and administrative expenses	1,510		1,233		4,585		4,000
Interest on lease liabilities	Interest expense	209		474		747		1,103
Variable lease costs2	Cost of product sales	21,682		19,321		64,462		51,700
Variable lease costs2	Selling, general and administrative expenses	669		552		2,438		1,571
Short-term lease costs	Cost of product sales	87		99		273		330
Short-term lease costs	Selling, general and administrative expenses	1,722		1,341		4,600		3,635
Total lease costs		$	75,115	$	77,060	$	225,543	$	218,848

______________________________________________________________________

Notes:

1During the three and nine months ended October 29, 2022 and October 30, 2021, 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.

2During the three and nine months ended October 29, 2022, variable lease costs included certain rent concessions of approximately $1.1 million and $4.6 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic. During the three and nine months ended October 30, 2021, variable lease costs included certain rent concessions of approximately $2.6 million and $14.5 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 October 29, 2022 are (in thousands):

	Operating Leases
Maturity of Lease Liabilities	Non-Related Parties		Related Parties		Finance Leases		Total
Fiscal 2023	$	53,046	$	1,842	$	2,142	$	57,030
Fiscal 2024	167,666		7,766		6,950		182,382
Fiscal 2025	123,561		7,158		5,180		135,899
Fiscal 2026	92,423		6,766		4,788		103,977
Fiscal 2027	74,777		7,467		2,401		84,645
After fiscal 2027	190,441		28,294		725		219,460
Total lease payments	701,914		59,293		22,186		783,393
Less: Interest	70,574		11,887		1,739		84,200
Present value of lease liabilities	$	631,340	$	47,406	$	20,447	$	699,193

Other supplemental information is (in thousands):

Lease Term and Discount Rate	Oct 29, 2022
Weighted-average remaining lease term
Operating leases	6.1 years
Finance leases	3.8 years
Weighted-average discount rate
Operating leases	3.9%
Finance leases	4.7%

	Nine Months Ended
Supplemental Cash Flow Information	Oct 29, 2022		Oct 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	166,910	$	167,444
New operating ROU assets obtained in exchange for lease liabilities	$	106,427	$	99,603

Impairment

During the three and nine months ended October 29, 2022, there were immaterial ROU asset impairment charges recorded primarily related to Europe. During the three and nine months ended October 30, 2021, there were $0.7 million ROU asset impairment charges recorded primarily related to 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 September 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 32%.

In addition to the amounts as disclosed below, the Company has estimated additional operating lease commitments of approximately $15.6 million for leases where the Company has not yet taken possession of the underlying asset as of October 29, 2022. 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 29, 2022.

The components of leases are (in thousands):

		Oct 29, 2022		Jan 29, 2022
Assets	Balance Sheet Location
Operating	Operating lease right-of-use assets	$	614,705	$	685,799
Finance	Property and equipment, net	19,264		21,898
Total lease assets		$	633,969	$	707,697
Liabilities	Balance Sheet Location
Current:
Operating	Current portion of operating lease liabilities	$	159,152	$	195,516
Finance	Current portion of borrowings and finance lease obligations	5,888		5,806
Noncurrent:
Operating	Long-term operating lease liabilities	519,594		582,757
Finance	Long-term debt and finance lease obligations	14,559		17,137
Total lease liabilities		$	699,193	$	801,216

The components of lease costs are (in thousands):

		Three Months Ended				Nine Months Ended
	Income Statement Location	Oct 29, 2022		Oct 30, 2021		Oct 29, 2022		Oct 30, 2021
Operating lease costs	Cost of product sales	$	43,361	$	44,729	$	131,450	$	137,189
Operating lease costs	Selling, general and administrative expenses	6,000		6,300		18,582		18,846
Operating lease costs1	Net (gains) losses on lease modifications	(146)		3,006		(1,654)		441
Finance lease costs
Amortization of leased assets	Cost of product sales	21		5		60		33
Amortization of leased assets	Selling, general and administrative expenses	1,510		1,233		4,585		4,000
Interest on lease liabilities	Interest expense	209		474		747		1,103
Variable lease costs2	Cost of product sales	21,682		19,321		64,462		51,700
Variable lease costs2	Selling, general and administrative expenses	669		552		2,438		1,571
Short-term lease costs	Cost of product sales	87		99		273		330
Short-term lease costs	Selling, general and administrative expenses	1,722		1,341		4,600		3,635
Total lease costs		$	75,115	$	77,060	$	225,543	$	218,848

______________________________________________________________________

Notes:

1During the three and nine months ended October 29, 2022 and October 30, 2021, 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.

2During the three and nine months ended October 29, 2022, variable lease costs included certain rent concessions of approximately $1.1 million and $4.6 million, respectively, received by the Company, primarily in Europe, related to the COVID-19 pandemic. During the three and nine months ended October 30, 2021, variable lease costs included certain rent concessions of approximately $2.6 million and $14.5 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 October 29, 2022 are (in thousands):

	Operating Leases
Maturity of Lease Liabilities	Non-Related Parties		Related Parties		Finance Leases		Total
Fiscal 2023	$	53,046	$	1,842	$	2,142	$	57,030
Fiscal 2024	167,666		7,766		6,950		182,382
Fiscal 2025	123,561		7,158		5,180		135,899
Fiscal 2026	92,423		6,766		4,788		103,977
Fiscal 2027	74,777		7,467		2,401		84,645
After fiscal 2027	190,441		28,294		725		219,460
Total lease payments	701,914		59,293		22,186		783,393
Less: Interest	70,574		11,887		1,739		84,200
Present value of lease liabilities	$	631,340	$	47,406	$	20,447	$	699,193

Other supplemental information is (in thousands):

Lease Term and Discount Rate	Oct 29, 2022
Weighted-average remaining lease term
Operating leases	6.1 years
Finance leases	3.8 years
Weighted-average discount rate
Operating leases	3.9%
Finance leases	4.7%

	Nine Months Ended
Supplemental Cash Flow Information	Oct 29, 2022		Oct 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	166,910	$	167,444
New operating ROU assets obtained in exchange for lease liabilities	$	106,427	$	99,603

Impairment

During the three and nine months ended October 29, 2022, there were immaterial ROU asset impairment charges recorded primarily related to Europe. During the three and nine months ended October 30, 2021, there were $0.7 million ROU asset impairment charges recorded primarily related to 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.