LEASES

9 Months Ended

May 02, 2020

NOTE 11—LEASES

The Company leases certain of its distribution centers, retail stores, office facilities, transportation equipment, and other operating equipment from third parties. Many of these leases include renewal options. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Lease assets and liabilities are as follows (in thousands):



Lease Type	Balance Sheet Location	May 2, 2020
Operating lease assets	Operating lease assets	$	984,039
Finance lease assets	Property and equipment, net	134,357
Total lease assets		$	1,118,396

Operating liabilities	Current portion of operating lease liabilities	$	138,698
Finance liabilities	Current portion of long-term debt and finance lease liabilities	14,221
Operating liabilities	Long-term operating lease liabilities	877,229
Finance liabilities	Long-term finance lease liabilities	145,672
Total lease liabilities		$	1,175,820

Lease assets and liabilities presented in the table above include lease contracts related to our discontinued operations, as the Company expects to remain primarily obligated under these leases.

The Company’s lease cost under ASC 842 is as follows:



(in thousands)	Statement of Operations Location	13-Week Period Ended			39-Week Period Ended
(in thousands)	Statement of Operations Location	May 2, 2020			May 2, 2020
Operating lease cost	Operating expenses⁽²⁾	$	62,928		$	196,332
Short-term lease cost	Operating expenses	8,021			20,010
Variable lease cost	Operating expenses⁽²⁾	35,392			114,299
Sublease income	Operating expenses⁽²⁾	(7,836		)	(31,034		)
Sublease income	Net sales	(5,991		)	(16,738		)
Net operating lease cost⁽¹⁾		92,514			282,869
Amortization of leased assets	Operating expenses	3,876			12,272
Interest on lease liabilities	Interest expense, net	2,894			6,911
Finance lease cost		6,770			19,183
Total net lease cost		$	99,284		$	302,052

(1)

Rent expense as presented here includes $9.1 million and $33.5 million in the third quarter and year-to-date of fiscal 2020, respectively, of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as the Company expects to remain primarily obligated under these leases. Rent expense as presented here also includes immaterial amounts of variable lease expense of discontinued operations.


(2)	Includes certain lease expense or income that is recorded within Restructuring, acquisition and integration related expenses for surplus, non-operating properties for which the Company is restructuring its obligations and which are not separately material.

The Company leases certain property to third parties and receives lease and subtenant rental payments under operating leases, including assigned leases for which the Company has future minimum lease payment obligations. Future minimum lease payments (“Lease Liabilities”) to be made by the Company or certain third parties in the case of assigned leases for noncancellable operating leases and finance leases have not been reduced for future minimum lease and subtenant rentals (“Lease Receipts”) under certain operating subleases, including lease assignments for stores sold to third parties, which they operate. As of May 2, 2020, these Lease Liabilities and Lease Receipts consisted of the following (in thousands):



Maturity of Lease Liabilities and Lease Receipts	Lease Liabilities						Lease Receipts					Net Lease Obligations
Fiscal Year	Operating Leases⁽¹⁾			Finance Leases⁽²⁾			Operating Leases			Finance Leases		Operating Leases		Finance Leases
Remaining fiscal 2020	$	62,422		$	6,991		$	(14,801	)	$	—	$	47,621	$	6,991
2021	217,690			22,777			(50,944		)	—		166,746		22,777
2022	206,416			119,387			(45,784		)	—		160,632		119,387
2023	179,364			15,292			(35,889		)	—		143,475		15,292
2024	153,729			14,228			(27,871		)	—		125,858		14,228
Thereafter	990,394			15,541			(62,184		)	—		928,210		15,541
Total undiscounted lease liabilities and receipts	$	1,810,015		$	194,216		$	(237,473	)	$	—	$	1,572,542	$	194,216
Less interest ⁽³⁾	(794,088		)	(34,323		)
Present value of lease liabilities	1,015,927			159,893
Less current lease liabilities	(138,698		)	(14,221		)
Long-term lease liabilities	$	877,229		$	145,672


(1)	Operating lease payments include $11.4 million related to extension options that are reasonably certain of being exercised and exclude $38.5 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)

Finance lease payments include $0.0 million related to extension options that are reasonably certain of being exercised and exclude $0.5 million of legally binding minimum lease payments for leases signed but not yet commenced. This table excludes payments related to a facility the Company is deemed the accounting owner, which is recognized as a residual obligation, and is subject to an underlying lease.


(3)	Calculated using the interest rate for each lease.

As of August 3, 2019, future minimum lease payments to be made by the Company or certain third parties in the case of assigned leases for noncancellable operating leases and finance leases, which have not been reduced for future minimum subtenant rentals under certain operating subleases, including assignments, consisted of the following amounts (in thousands):



	Lease Obligations					Lease Receipts						Net Lease Obligations
Fiscal Year	Operating Leases		Capital Leases			Operating Leases			Capital Leases			Operating Leases		Capital Leases
2020	$	223,612	$	41,550		$	(55,922	)	$	(319	)	$	167,690	$	41,231
2021	190,845		32,804			(41,425		)	—			149,420		32,804
2022	179,326		29,869			(35,998		)	—			143,328		29,869
2023	154,812		26,699			(25,591		)	—			129,221		26,699
2024	135,795		23,095			(18,183		)	—			117,612		23,095
Thereafter	1,063,674		46,999			(59,186		)	—			1,004,488		46,999
Total future minimum obligations (receipts)	$	1,948,064	$	201,016		$	(236,305	)	$	(319	)	$	1,711,759	$	200,697
Less interest			(68,138		)
Present value of capital lease obligations			132,878
Less current capital lease obligations			(24,670		)
Long-term capital lease obligations			$	108,208

The following tables provide other information required by ASC 842:



Lease Term and Discount Rate	May 2, 2020
Weighted-average remaining lease term (years)
Operating leases	10.7 years
Finance leases	3.4 years
Weighted-average discount rate
Operating leases	10.7	%
Finance leases	8.8	%



Other Information	39-Week Period Ended
(in thousands)	May 2, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	166,441
Operating cash flows from finance leases	6,181
Financing cash flows from finance leases	17,183
Leased assets obtained in exchange for new finance lease liabilities	92,843
Leased assets obtained in exchange for new operating lease liabilities	154,888

On February 24, 2020, the Company executed a purchase option to acquire the real property of a distribution center facility. Upon execution of the purchase option, the previously constructed facility accounted for as an operating lease has been re-classified as a finance lease.