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Leases

3 Months Ended

Mar. 28, 2020

We lease our stores, laboratories, distribution centers, and corporate offices. These leases generally have noncancelable lease terms of between five and 10 years, with an option to renew for additional terms of one to 10 years or more. The lease term includes renewal option periods when the renewal is deemed reasonably certain after considering the value of the leasehold improvements at the end of the noncancelable lease period. Most leases for our stores provide for a minimum rent and typically include escalating rent over time with the exception of Military for which lease payments are variable and based on a percentage of sales. For Vista Optical locations in Fred Meyer stores, we pay fixed rent plus a percentage of sales after certain minimum thresholds are achieved. The Company’s leases generally require us to pay insurance, real estate taxes and common area maintenance expenses, substantially all of which are variable and not included in the measurement of the lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. With respect to lease accounting guidance, the Company’s management & services agreement with its legacy partner does not contain a lease arrangement.

Our lease arrangements include Tenant Improvement Allowances (“TIAs”), which are contractual amounts received from a lessor for improvements made to leased properties by the Company. For operating leases, TIAs are treated as a reduction of the lease payments used to measure the ROU assets in the accompanying consolidated balance sheets, and are amortized as a reduction in rental expense over the life of the respective leases.

We rent or sublease certain parts of our stores to third parties. Our sublease portfolio consists mainly of operating leases with our ophthalmologists and optometrists within our stores.



In thousands		As of March 28, 2020		As of December 28, 2019
Type	Classification
	ASSETS
Finance	Property and equipment, net ^(a)	$	26,716	$	28,128
Operating	Right of use assets^(b)	343,731		348,090
	Total leased assets	370,447		376,218
	LIABILITIES
	Current Liabilities:
Finance	Current maturities of long-term debt and finance lease obligations	$	3,531	$	3,259
Operating	Current operating lease obligations ^(c)	60,014		51,937
	Other non-current liabilities:
Finance	Long-term debt and finance lease obligations, less current portion and debt discount	30,364		30,037
Operating	Non-current operating lease obligations	331,234		331,769
	Total lease liabilities	$	425,143	$	417,002
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the net present value of minimum lease payments. We used the incremental borrowing rate on December 30, 2018, for operating leases that commenced prior to that date.

_________

(a) Finance lease assets are recorded net of accumulated amortization of $9.4 million and $8.3 million as of March 28, 2020 and December 28, 2019, respectively.

(b) TIA of $35.5 million and $35.2 million are treated as reductions of lease payments used to measure ROU assets as of March 28, 2020 and December 28, 2019, respectively. Deferred rent of $15.7 million and $15.0 million are treated as reductions of lease payments used to measure ROU assets as of March 28, 2020 and December 28, 2019, respectively.

(c) Current operating lease liabilities are measured net of TIA receivables of $4.6 million and $5.9 million as of March 28, 2020 and December 28, 2019, respectively.



In thousands	As of March 28, 2020			As of March 30, 2019
Operating lease cost
Fixed lease cost ^(a)	$	19,312		$	18,163
Variable lease cost ^(b)	6,810			6,466
Sublease income^(c)	(591		)	(962		)

Finance lease cost
Amortization of finance lease assets	1,156			978

Interest expense, net:
Interest on finance lease liabilities	872			890

Net lease cost	$	27,559		$	25,535
(a) Includes short-term leases, which are immaterial.
(b) Includes costs for insurance, real estate taxes and common area maintenance expenses, which are variable as well as lease costs above minimum thresholds for Fred Meyer stores and lease costs for Military stores.
(c) Income from sub-leasing of stores includes rental income from operating lease properties to ophthalmologists and optometrists who are independent contractors.



Lease Term and Discount Rate	As of March 28, 2020		As of December 28, 2019
Weighted average remaining lease term (months)
Operating leases	81		82
Finance leases	87		88
Weighted average discount rate ^(a)
Operating leases	4.6	%	4.6	%
Finance leases ^(b)	12.7	%	13.1	%
(a) The discount rate used to determine the lease assets and lease liabilities was derived upon considering (i) incremental borrowing rates on our long-term debt; (ii) fixed rates we pay on our interest rate swaps; (iii) LIBOR margins for issuers of similar credit rating; and (iv) effect of collateralization. As a majority of our leases are five-year and 10-year leases, we determined a lease discount rate for such tenors and determined this discount rate is reasonable for leases that were entered into during the period.
(b) The discount rate on finance leases is higher than operating leases because the present value of minimum lease payments was higher than the fair value of leased properties for certain leases entered into prior to adoption of ASC 842. The discount rate differential for those leases is not material to our results of operations.



In thousands	As of March 28, 2020		As of March 30, 2019
Other Information	As of March 28, 2020		As of March 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows - operating leases	$	15,269	$	18,146

The following table summarizes the maturity of our lease liabilities as of March 28, 2020:



In thousands	Operating Leases ^(a)		Finance Leases^(b)
Fiscal Year	Operating Leases ^(a)		Finance Leases^(b)
2020	$	56,224	$	5,319
2021	77,307		7,280
2022	69,631		7,215
2023	62,360		6,241
2024	55,206		4,673
Thereafter	138,152		16,460
Total lease liabilities	458,880		47,188
Less: Interest	67,632		13,293
Present value of lease liabilities^(c)	$	391,248	$	33,895
(a) Operating lease payments include $69.8 million related to options to extend lease terms that are reasonably certain of being exercised.
(b) Finance lease payments include $1.7 million related to options to extend lease terms that are reasonably certain of being exercised.
(c) The present value of lease liabilities excludes $21.0 million of legally binding minimum lease payments for leases signed but not yet commenced.

Leases

We rent or sublease certain parts of our stores to third parties. Our sublease portfolio consists mainly of operating leases with our ophthalmologists and optometrists within our stores.



In thousands		As of March 28, 2020		As of December 28, 2019
Type	Classification
	ASSETS
Finance	Property and equipment, net ^(a)	$	26,716	$	28,128
Operating	Right of use assets^(b)	343,731		348,090
	Total leased assets	370,447		376,218
	LIABILITIES
	Current Liabilities:
Finance	Current maturities of long-term debt and finance lease obligations	$	3,531	$	3,259
Operating	Current operating lease obligations ^(c)	60,014		51,937
	Other non-current liabilities:
Finance	Long-term debt and finance lease obligations, less current portion and debt discount	30,364		30,037
Operating	Non-current operating lease obligations	331,234		331,769
	Total lease liabilities	$	425,143	$	417,002
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the net present value of minimum lease payments. We used the incremental borrowing rate on December 30, 2018, for operating leases that commenced prior to that date.

_________

(a) Finance lease assets are recorded net of accumulated amortization of $9.4 million and $8.3 million as of March 28, 2020 and December 28, 2019, respectively.

(c) Current operating lease liabilities are measured net of TIA receivables of $4.6 million and $5.9 million as of March 28, 2020 and December 28, 2019, respectively.



In thousands	As of March 28, 2020			As of March 30, 2019
Operating lease cost
Fixed lease cost ^(a)	$	19,312		$	18,163
Variable lease cost ^(b)	6,810			6,466
Sublease income^(c)	(591		)	(962		)

Finance lease cost
Amortization of finance lease assets	1,156			978

Interest expense, net:
Interest on finance lease liabilities	872			890

Net lease cost	$	27,559		$	25,535
(a) Includes short-term leases, which are immaterial.
(b) Includes costs for insurance, real estate taxes and common area maintenance expenses, which are variable as well as lease costs above minimum thresholds for Fred Meyer stores and lease costs for Military stores.
(c) Income from sub-leasing of stores includes rental income from operating lease properties to ophthalmologists and optometrists who are independent contractors.



Lease Term and Discount Rate	As of March 28, 2020		As of December 28, 2019
Weighted average remaining lease term (months)
Operating leases	81		82
Finance leases	87		88
Weighted average discount rate ^(a)
Operating leases	4.6	%	4.6	%
Finance leases ^(b)	12.7	%	13.1	%
(a) The discount rate used to determine the lease assets and lease liabilities was derived upon considering (i) incremental borrowing rates on our long-term debt; (ii) fixed rates we pay on our interest rate swaps; (iii) LIBOR margins for issuers of similar credit rating; and (iv) effect of collateralization. As a majority of our leases are five-year and 10-year leases, we determined a lease discount rate for such tenors and determined this discount rate is reasonable for leases that were entered into during the period.
(b) The discount rate on finance leases is higher than operating leases because the present value of minimum lease payments was higher than the fair value of leased properties for certain leases entered into prior to adoption of ASC 842. The discount rate differential for those leases is not material to our results of operations.



In thousands	As of March 28, 2020		As of March 30, 2019
Other Information	As of March 28, 2020		As of March 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows - operating leases	$	15,269	$	18,146

The following table summarizes the maturity of our lease liabilities as of March 28, 2020:



In thousands	Operating Leases ^(a)		Finance Leases^(b)
Fiscal Year	Operating Leases ^(a)		Finance Leases^(b)
2020	$	56,224	$	5,319
2021	77,307		7,280
2022	69,631		7,215
2023	62,360		6,241
2024	55,206		4,673
Thereafter	138,152		16,460
Total lease liabilities	458,880		47,188
Less: Interest	67,632		13,293
Present value of lease liabilities^(c)	$	391,248	$	33,895
(a) Operating lease payments include $69.8 million related to options to extend lease terms that are reasonably certain of being exercised.
(b) Finance lease payments include $1.7 million related to options to extend lease terms that are reasonably certain of being exercised.
(c) The present value of lease liabilities excludes $21.0 million of legally binding minimum lease payments for leases signed but not yet commenced.