Leases

12 Months Ended

Jan. 29, 2022

The Company adopted ASC 842 as of February 3, 2019, using the modified retrospective method and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

In accordance with ASC 842, the Company determines if an arrangement is a lease at inception or modification of a contract and classifies each lease as either an operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. The Company has operating and finance leases for the Company’s clubs, and operating leases for the Company’s distribution centers, home office, and stand-alone gas stations. Operating leases, net of accumulated amortization, are included in operating lease ROU assets, and current and non-current operating lease liabilities, on the Consolidated Balance Sheets. Finance leases are included in property and equipment, accrued expenses and other current liabilities, and other non-current liabilities on the Consolidated Balance Sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of the ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term, which amortizes the ROU assets by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU assets that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in SG&A on the Consolidated Statement of Operations and Comprehensive Income. Leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets.

The Company is generally obligated for the cost of property taxes, insurance, and maintenance relating to its leases, which are often variable lease payments. Such costs are presented as occupancy costs for finance and operating leases included in SG&A on the Consolidated Statement of Operations and Comprehensive Income.

Certain of the Company’s lease agreements provide for lease payments based on future sales volumes at the leased location, or include rental payments adjusted periodically for inflation or based on an index, which are not measurable at the inception of the lease. The Company expenses such variable amounts in the period incurred, which is the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Where the Company’s leases do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate ("IBR") to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis at the measurement date, and that the Company adjusts quarterly with a yield curve that approximates the Company’s market risk profile.

In calculating the present value of the lease payments, the Company has elected to utilize its estimated IBR based on the original lease term and not the remaining lease term. The initial primary term of the Company’s operating leases ranges from 5 to 44 years, with most of these leases having an initial term of 20 years. The initial primary term of the Company’s three finance leases are 20 years.

The following table summarizes the Company’s finance and operating lease liabilities and ROU assets as of January 29, 2022 and January 30, 2021 (in thousands):


	January 29, 2022		January 30, 2021
Finance Leases:
ROU assets recorded	$	19,283	$	19,283
Accumulated amortization	11,706		10,578
Lease liability	16,082		15,230
Operating Leases:
ROU assets recorded	2,599,460		2,363,437
Accumulated amortization	467,473		304,674

There were no impairments of ROU assets in fiscal year 2021 or fiscal year 2020. In fiscal year 2019, the Company recorded an ROU asset impairment charge of $9.6 million.

The following table is a summary of the components of net lease costs for the years ended January 29, 2022, January 30, 2021 and February 1, 2020 (in thousands):


	January 29, 2022		January 30, 2021		February 1, 2020
Operating lease cost	$	336,094	$	327,325	$	322,346
Finance lease cost:
Amortization of right-of-use assets	1,128		564		1,128
Interest on lease liabilities	4,022		3,965		2,503
Total finance lease costs	5,150		4,529		3,631
Sublease income	(980)		(251)		—
Variable lease costs	85		230		98
Net lease costs	$	340,349	$	331,833	$	326,075

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases as of January 29, 2022 were as follows:


	Operating Leases		Finance Leases
Weighted-average remaining lease term (in years)	8.9		11.2
Weighted-average discount rate	7.8	%	7.7	%

Cash paid for amounts included in the measurement of lease liabilities were as follows (in thousands):


	January 29, 2022		January 30, 2021		February 1, 2020
Operating cash flows paid for operating leases	$	325,941	$	317,997	$	311,971
Operating cash flows paid for interest portion of finance leases	4,022		3,965		2,503
Financing cash flows paid for principal portion of finance leases	1,112		984		612

Future lease commitments to be paid by the Company as of January 29, 2022 were as follows (in thousands):


Fiscal Year	Operating Leases		Finance Leases
2022	$	337,452	$	3,601
2023	335,268		3,601
2024	317,742		3,601
2025	302,356		3,928
2026	287,180		3,970
Thereafter	1,860,343		11,947
Total future minimum lease payments	3,440,341		30,648
Less: imputed interest	(1,239,128)		(14,566)
Present value of lease liabilities	$	2,201,213	$	16,082

As of January 29, 2022, the Company had certain executed real estate and gas station leases that have not yet commenced and therefore are not reflected in the tables above. These leases are expected to commence in fiscal year 2022 with lease terms ranging from 6 years to 20 years.