LEASES

6 Months Ended

Jul. 03, 2021

Leases [Abstract]

LEASES

LEASES

We determine if an arrangement with contractual terms longer than twelve months is or contains a lease at contract inception and determine its classification as an operating or finance lease at lease commencement. We lease certain retail locations, office space, distribution facilities, manufacturing space, and machinery and equipment. While the substantial majority of these leases are operating leases, certain machinery and equipment agreements are finance leases, which are those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under operating leases and finance leases are recorded in Operating lease right-of use assets and Property and equipment, net, respectively. As of July 3, 2021, the initial lease terms of the various leases range from one to 20 years.

Lease 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. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. To determine the present value of the future lease payments, we use our collateralized incremental borrowing rate based on the information available at commencement date, including lease term. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components, with the exception of our distribution facility asset class. Operating lease assets include prepaid lease payments and initial direct costs and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations.

Costs associated with operating lease assets are recognized on a straight-line basis from the commencement date to the end of the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.

The following table presents the assets and liabilities related to operating and finance leases (in thousands):

	Balance Sheet Location	July 3, 2021
Assets:
Operating lease assets	Operating lease right-of-use assets	$	51,672
Finance lease assets	Property and equipment	10,311
Total lease assets		$	61,983
Liabilities:
Current
Operating lease liabilities	Operating lease liabilities	$	11,142
Finance lease liabilities	Current maturities of long-term debt	1,978
Non-current
Operating lease liabilities	Operating lease liabilities, non-current	50,881
Finance lease liabilities	Long-term debt, net of current portion	8,392
Total lease liabilities		$	72,393

The following table presents the components of lease costs (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Operating lease costs	$	2,612	$	2,314	$	5,076	$	4,611
Finance lease cost - amortization of right-of-use assets	62		53		115		106
Finance lease cost - interest on lease liabilities	15		17		29		34
Short-term lease cost	97		49		155		104
Variable lease cost	1,116		816		1,848		1,654
Sublease income	(185)		(185)		(371)		(371)
Total lease cost	$	3,717	$	3,064	$	6,852	$	6,138

The following table presents lease terms and discount rates:

	July 3, 2021		June 27, 2020
Weighted average remaining lease term:
Operating leases	5.70 years		6.63 years
Finance leases	4.84 years		4.18 years
Weighted average discount rate:
Operating leases	5.04	%	6.62	%
Finance leases	2.25	%	6.24	%

Minimum lease payments have not been reduced by minimum sublease rentals of $2.7 million due in the future under non-cancelable subleases. We received $0.2 million in sublease income for both the three months ended July 3, 2021 and June 27, 2020, and $0.4 million in sublease income for both the six months ended July 3, 2021 and June 27, 2020. The following table presents the minimum lease payment obligations of operating and finance lease liabilities (leases with terms in excess of one year) for the next five years and thereafter as of July 3, 2021 (in thousands):

	Operating Leases		Finance Leases		Total
2021	$	7,517	$	1,122	$	8,639
2022	12,022		2,244		14,266
2023	11,995		2,078		14,073
2024	12,058		2,325		14,383
2025	11,339		1,995		13,334
Thereafter	16,832		1,164		17,996
Total lease payments	71,763		10,928		82,691
Less: Effect of discounting to net present value	9,740		558		10,298
Present value of lease liabilities	$	62,023	$	10,370	$	72,393

The following table presents supplemental cash flow information related to our leases (in thousands):

	Six Months Ended July 3, 2021		Six Months Ended June 27, 2020
Cash paid for amounts included in measurement of liabilities:
Operating cash flows used in operating leases	$	5,439	$	5,100
Operating cash flows used in finance leases	29		34
Financing cash flows used in finance leases	95		91
Right-of-use assets obtained in exchange for new lease liabilities:
Finance leases	$	9,517	$	—
Operating leases	21,246		231

To support the continued growth of our business, we entered into a service agreement with a third-party logistics provider to operate a new distribution facility in Memphis, Tennessee with approximately 970 thousand square feet. The service agreement commenced at the end of the second quarter of 2021. The initial term of the agreement is 5 years. As of July 3, 2021, we recognized an operating lease right-of-use asset and a finance lease with corresponding operating and finance lease liabilities, respectively, for this distribution facility.

LEASES

LEASES

We determine if an arrangement with contractual terms longer than twelve months is or contains a lease at contract inception and determine its classification as an operating or finance lease at lease commencement. We lease certain retail locations, office space, distribution facilities, manufacturing space, and machinery and equipment. While the substantial majority of these leases are operating leases, certain machinery and equipment agreements are finance leases, which are those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under operating leases and finance leases are recorded in Operating lease right-of use assets and Property and equipment, net, respectively. As of July 3, 2021, the initial lease terms of the various leases range from one to 20 years.

Lease 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. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. To determine the present value of the future lease payments, we use our collateralized incremental borrowing rate based on the information available at commencement date, including lease term. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components, with the exception of our distribution facility asset class. Operating lease assets include prepaid lease payments and initial direct costs and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations.

Costs associated with operating lease assets are recognized on a straight-line basis from the commencement date to the end of the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.

The following table presents the assets and liabilities related to operating and finance leases (in thousands):

	Balance Sheet Location	July 3, 2021
Assets:
Operating lease assets	Operating lease right-of-use assets	$	51,672
Finance lease assets	Property and equipment	10,311
Total lease assets		$	61,983
Liabilities:
Current
Operating lease liabilities	Operating lease liabilities	$	11,142
Finance lease liabilities	Current maturities of long-term debt	1,978
Non-current
Operating lease liabilities	Operating lease liabilities, non-current	50,881
Finance lease liabilities	Long-term debt, net of current portion	8,392
Total lease liabilities		$	72,393

The following table presents the components of lease costs (in thousands):

	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Operating lease costs	$	2,612	$	2,314	$	5,076	$	4,611
Finance lease cost - amortization of right-of-use assets	62		53		115		106
Finance lease cost - interest on lease liabilities	15		17		29		34
Short-term lease cost	97		49		155		104
Variable lease cost	1,116		816		1,848		1,654
Sublease income	(185)		(185)		(371)		(371)
Total lease cost	$	3,717	$	3,064	$	6,852	$	6,138

The following table presents lease terms and discount rates:

	July 3, 2021		June 27, 2020
Weighted average remaining lease term:
Operating leases	5.70 years		6.63 years
Finance leases	4.84 years		4.18 years
Weighted average discount rate:
Operating leases	5.04	%	6.62	%
Finance leases	2.25	%	6.24	%

Minimum lease payments have not been reduced by minimum sublease rentals of $2.7 million due in the future under non-cancelable subleases. We received $0.2 million in sublease income for both the three months ended July 3, 2021 and June 27, 2020, and $0.4 million in sublease income for both the six months ended July 3, 2021 and June 27, 2020. The following table presents the minimum lease payment obligations of operating and finance lease liabilities (leases with terms in excess of one year) for the next five years and thereafter as of July 3, 2021 (in thousands):

	Operating Leases		Finance Leases		Total
2021	$	7,517	$	1,122	$	8,639
2022	12,022		2,244		14,266
2023	11,995		2,078		14,073
2024	12,058		2,325		14,383
2025	11,339		1,995		13,334
Thereafter	16,832		1,164		17,996
Total lease payments	71,763		10,928		82,691
Less: Effect of discounting to net present value	9,740		558		10,298
Present value of lease liabilities	$	62,023	$	10,370	$	72,393

The following table presents supplemental cash flow information related to our leases (in thousands):

	Six Months Ended July 3, 2021		Six Months Ended June 27, 2020
Cash paid for amounts included in measurement of liabilities:
Operating cash flows used in operating leases	$	5,439	$	5,100
Operating cash flows used in finance leases	29		34
Financing cash flows used in finance leases	95		91
Right-of-use assets obtained in exchange for new lease liabilities:
Finance leases	$	9,517	$	—
Operating leases	21,246		231

To support the continued growth of our business, we entered into a service agreement with a third-party logistics provider to operate a new distribution facility in Memphis, Tennessee with approximately 970 thousand square feet. The service agreement commenced at the end of the second quarter of 2021. The initial term of the agreement is 5 years. As of July 3, 2021, we recognized an operating lease right-of-use asset and a finance lease with corresponding operating and finance lease liabilities, respectively, for this distribution facility.