Leases

9 Months Ended

Sep. 30, 2021

NOTE H – Leases

We have operating leases for retail stores, offices, warehouses, and certain equipment. Our leases have remaining lease terms of 1 year to 14 years, some of which include options to extend the leases for up to 20 years. We determine if an arrangement is or contains a lease at lease inception. Our leases do not have any residual value guarantees or any restrictions or covenants imposed by lessors. We have lease agreements for real estate with lease and non-lease components, which are accounted for separately.

Certain of our lease agreements for retail stores include variable lease payments, generally based on sales volume. The variable portion of payments are not included in the initial measurement of the right-of-use asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. Certain of our equipment lease agreements include variable lease costs, generally based on usage of the underlying asset (mileage, fuel, etc.). The variable portion of payments are not included in the initial measurement of the right-of-use asset or lease liability due to uncertainty of the payment amount and are recorded in the period incurred.

As of September 30, 2021, we had entered into one lease for an additional retail location which had not yet commenced and was under construction.

Lease expense is charged to selling, general and administrative expenses. Components of lease expense were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating lease cost	$	11,440	$	11,596	$	35,140	$	33,111
Variable lease cost		1,739		1,627		4,856		3,825
Total lease expense	$	13,179	$	13,223	$	39,996	$	36,936

In June 2021, we renewed the lease covering ten retail locations. This increased our right-of-use assets approximately $17.6 million and lease liability $20.6 million, and we recorded $3.0 million in tenant incentives. In August 2021, we purchased a distribution center which was part of the sale and leaseback transaction which occurred in May 2020 and which is described below. We also purchased a retail location at the end of its lease term. These purchases decreased our right of use assets and lease liabilities approximately $5.3 million.

Supplemental cash flow information related to leases is as follows (in thousands):

	Nine Months Ended September 30,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	35,428	$	25,099
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	24,213	$	83,550

Sale and Leaseback Transaction

On May 18, 2020, we completed a sale and leaseback transaction of three of our distribution facilities. The total purchase price for the three properties, excluding costs and taxes, was $70.0 million and the net book value was $37.9 million. We recorded a gain of $31.6 million in May 2020 which is included in other income.

The three properties were leased back to us under 15-year operating lease agreements with renewal options.