Property and Leases

9 Months Ended

Nov. 01, 2020

Leases [Abstract]

Property and Leases

PROPERTY AND LEASES

Net Property and Equipment

Net property and equipment includes accumulated depreciation and amortization of $23.5 billion as of November 1, 2020 and $22.1 billion as of February 2, 2020.

Leases

We lease certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. We consider various factors such as market conditions and the terms of any renewal options that may exist to determine whether we will renew or replace the lease. A substantial majority of our leases have remaining lease terms of one to 20 years, typically with the option to extend the leases for up to five years. Some of our leases may include the option to terminate in less than five years. In the event we are reasonably certain to exercise the option to extend or early terminate a lease at commencement, we will include the respective terms in the related lease assets and liabilities. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are generally our obligations under our lease agreements.

Certain of our property lease agreements contain residual value guarantees, which generally become due at the expiration of the lease term and are estimated as the greater of the fair value of the leased asset or a set minimum value. These residual value guarantees are primarily related to leases of facilities whose construction was funded by industrial revenue bonds.

Our lease agreements do not contain any material restrictive covenants. Further, certain lease agreements include rental payments based on an index or rate and others include rental payments based on a percentage of sales.

The Consolidated Balance Sheet location of assets and liabilities related to operating and finance leases follow:

in millions	Consolidated Balance Sheet Caption	November 1, 2020		February 2, 2020
Assets:
Operating lease assets	Operating lease right-of-use assets	$	5,433	$	5,595
Finance lease assets (1)	Net property and equipment	2,471		934
Total lease assets		$	7,904	$	6,529
Liabilities:
Current:
Operating lease liabilities	Current operating lease liabilities	$	842	$	828
Finance lease liabilities	Current installments of long-term debt	143		84
Long-term:
Operating lease liabilities	Long-term operating lease liabilities	4,880		5,066
Finance lease liabilities	Long-term debt, excluding current installments	2,590		1,081
Total lease liabilities		$	8,455	$	7,059

—————

(1) Finance lease assets are recorded net of accumulated amortization of $755 million as of November 1, 2020 and $644 million as of February 2, 2020.

The components of lease cost follow:

		Three Months Ended				Nine Months Ended
in millions	Consolidated Statement of Earnings Caption	November 1, 2020		November 3, 2019		November 1, 2020		November 3, 2019
Operating lease cost	Selling, general and administrative	$	198	$	211	$	586	$	626
Finance lease cost:
Amortization of leased assets	Depreciation and amortization	46		21		113		64
Interest on lease liabilities	Interest expense	29		23		81		69
Short-term lease cost	Selling, general and administrative	17		30		54		73
Variable lease cost	Selling, general and administrative	76		53		202		175
Sublease income	Selling, general and administrative	(2)		(3)		(9)		(10)
Net lease cost		$	364	$	335	$	1,027	$	997

The discount rate used to calculate the present value of lease payments is the rate implicit in the lease, when readily determinable. As the rate implicit in the lease is rarely readily determinable, we use a secured incremental borrowing rate as the discount rate for the present value of lease payments. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. Lease terms and discount rates follow:

	November 1, 2020		February 2, 2020
Weighted Average Remaining Lease Term (Years):
Operating leases	10		10
Finance leases	15		12
Weighted Average Discount Rate:
Operating leases	3.0	%	3.1	%
Finance leases	5.5	%	10.4	%

The approximate future minimum lease payments under operating and finance leases as of November 1, 2020 follow:

in millions	Operating Leases		Finance Leases
Fiscal 2020	$	243	$	62
Fiscal 2021	958		257
Fiscal 2022	855		259
Fiscal 2023	754		254
Fiscal 2024	647		253
Thereafter	3,200		2,518
Total lease payments	6,657		3,603
Less imputed interest	935		870
Present value of lease liabilities	$	5,722	$	2,733

—————

Note: Future minimum lease payments do not include approximately $900 million of leases (undiscounted basis) that have not yet commenced. These leases will commence primarily between the remainder of fiscal 2020 and fiscal 2021 with lease terms of up to 20 years.

Other lease information follows:

	Nine Months Ended
in millions	November 1, 2020		November 3, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases	$	761	$	750
Operating cash flows - finance leases	81		69
Financing cash flows - finance leases	87		46
Lease assets obtained in exchange for new operating lease liabilities	500		589
Lease assets obtained in exchange for new finance lease liabilities	1,662		101

Property and Leases

PROPERTY AND LEASES

Net Property and Equipment

Net property and equipment includes accumulated depreciation and amortization of $23.5 billion as of November 1, 2020 and $22.1 billion as of February 2, 2020.

Leases

We lease certain retail locations, office space, warehouse and distribution space, equipment, and vehicles. We consider various factors such as market conditions and the terms of any renewal options that may exist to determine whether we will renew or replace the lease. A substantial majority of our leases have remaining lease terms of one to 20 years, typically with the option to extend the leases for up to five years. Some of our leases may include the option to terminate in less than five years. In the event we are reasonably certain to exercise the option to extend or early terminate a lease at commencement, we will include the respective terms in the related lease assets and liabilities. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are generally our obligations under our lease agreements.

Certain of our property lease agreements contain residual value guarantees, which generally become due at the expiration of the lease term and are estimated as the greater of the fair value of the leased asset or a set minimum value. These residual value guarantees are primarily related to leases of facilities whose construction was funded by industrial revenue bonds.

Our lease agreements do not contain any material restrictive covenants. Further, certain lease agreements include rental payments based on an index or rate and others include rental payments based on a percentage of sales.

The Consolidated Balance Sheet location of assets and liabilities related to operating and finance leases follow:

in millions	Consolidated Balance Sheet Caption	November 1, 2020		February 2, 2020
Assets:
Operating lease assets	Operating lease right-of-use assets	$	5,433	$	5,595
Finance lease assets (1)	Net property and equipment	2,471		934
Total lease assets		$	7,904	$	6,529
Liabilities:
Current:
Operating lease liabilities	Current operating lease liabilities	$	842	$	828
Finance lease liabilities	Current installments of long-term debt	143		84
Long-term:
Operating lease liabilities	Long-term operating lease liabilities	4,880		5,066
Finance lease liabilities	Long-term debt, excluding current installments	2,590		1,081
Total lease liabilities		$	8,455	$	7,059

—————

(1) Finance lease assets are recorded net of accumulated amortization of $755 million as of November 1, 2020 and $644 million as of February 2, 2020.

The components of lease cost follow:

		Three Months Ended				Nine Months Ended
in millions	Consolidated Statement of Earnings Caption	November 1, 2020		November 3, 2019		November 1, 2020		November 3, 2019
Operating lease cost	Selling, general and administrative	$	198	$	211	$	586	$	626
Finance lease cost:
Amortization of leased assets	Depreciation and amortization	46		21		113		64
Interest on lease liabilities	Interest expense	29		23		81		69
Short-term lease cost	Selling, general and administrative	17		30		54		73
Variable lease cost	Selling, general and administrative	76		53		202		175
Sublease income	Selling, general and administrative	(2)		(3)		(9)		(10)
Net lease cost		$	364	$	335	$	1,027	$	997

The discount rate used to calculate the present value of lease payments is the rate implicit in the lease, when readily determinable. As the rate implicit in the lease is rarely readily determinable, we use a secured incremental borrowing rate as the discount rate for the present value of lease payments. We determine a secured rate on a quarterly basis and update the weighted average discount rate accordingly. Lease terms and discount rates follow:

	November 1, 2020		February 2, 2020
Weighted Average Remaining Lease Term (Years):
Operating leases	10		10
Finance leases	15		12
Weighted Average Discount Rate:
Operating leases	3.0	%	3.1	%
Finance leases	5.5	%	10.4	%

The approximate future minimum lease payments under operating and finance leases as of November 1, 2020 follow:

in millions	Operating Leases		Finance Leases
Fiscal 2020	$	243	$	62
Fiscal 2021	958		257
Fiscal 2022	855		259
Fiscal 2023	754		254
Fiscal 2024	647		253
Thereafter	3,200		2,518
Total lease payments	6,657		3,603
Less imputed interest	935		870
Present value of lease liabilities	$	5,722	$	2,733

—————

Note: Future minimum lease payments do not include approximately $900 million of leases (undiscounted basis) that have not yet commenced. These leases will commence primarily between the remainder of fiscal 2020 and fiscal 2021 with lease terms of up to 20 years.

Other lease information follows:

	Nine Months Ended
in millions	November 1, 2020		November 3, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases	$	761	$	750
Operating cash flows - finance leases	81		69
Financing cash flows - finance leases	87		46
Lease assets obtained in exchange for new operating lease liabilities	500		589
Lease assets obtained in exchange for new finance lease liabilities	1,662		101