RIGHT OF USE ASSET AND LEASE LIABILITIES

3 Months Ended

Sep. 30, 2019

Leases [Abstract]

RIGHT OF USE ASSET AND LEASE LIABILITIES

RIGHT OF USE ASSET AND LEASE LIABILITIES

At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for additional 5 to 10 year terms at the option of the Company. The Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent expense includes the following:

	For the three months ended
	September 30,
	2019		2018
	(dollars in thousands)
Minimum rent	$	19,561	$	29,915
Percentage rent based on sales	1,298		1,052
Real estate taxes and other expenses	3,405		5,011
	$	24,264	$	35,978

The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees. Upon adopting Topic 842 the Company now records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense in the Condensed Consolidated Statement of Operations. For the three months ended September 30, 2019 franchise rental income and franchise rent expense was $31.4 million.

For company-owned and franchise salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. The right of use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Generally, the non-lease components such as real estate taxes and other occupancy expenses are separate from rent expense within the lease and not allocated to the lease liability.

The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company used the portfolio approach in applying the discount rate based on original lease term. The weighted average remaining lease term was 6.87 years and the weighted-average discount rate was 3.95 percent for all salon operating leases as of September 30, 2019.

As of September 30, 2019, future operating lease commitments to be paid and received by the Company were as follows:

Fiscal Year	Leases for Franchise Salons		Leases for Company-Owned Salons		Corporate Leases		Total Operating Leases Payments		Sublease Income To Be Received From Franchisees			Net Rent Commitments
Remainder of 2020	$	56,059	$	91,328	$	1,368	$	148,755	$	(56,059	)	$	92,696
2021	67,285		111,002		1,294		179,581		(67,285		)	112,296
2022	59,388		99,345		172		158,905		(59,388		)	99,517
2023	53,293		88,686		177		142,156		(53,293		)	88,863
2024	48,224		79,070		183		127,477		(48,224		)	79,253
Thereafter	125,524		194,746		821		321,091		(125,524		)	195,567
Total future obligations	$	409,773	$	664,177	$	4,015	$	1,077,965	$	(409,773	)	$	668,192
Less amount representing interest	31,329		103,420		675		135,424
Present value of lease liabilities	378,444		560,757		3,340		942,541
Less: current lease liabilities	68,725		91,414		1,268		161,407
Long-term lease liabilities	$	309,719	$	469,343	$	2,072	$	781,134

As of September 30, 2019, the Company had executed the lease for its new corporate headquarters which commences on October 1, 2019. The total expected lease payments of $13.5 million are not reflected in the tables above. The lease term is 10.75 years.

RIGHT OF USE ASSET AND LEASE LIABILITIES

RIGHT OF USE ASSET AND LEASE LIABILITIES

At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for additional 5 to 10 year terms at the option of the Company. The Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent expense includes the following:

	For the three months ended
	September 30,
	2019		2018
	(dollars in thousands)
Minimum rent	$	19,561	$	29,915
Percentage rent based on sales	1,298		1,052
Real estate taxes and other expenses	3,405		5,011
	$	24,264	$	35,978

The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees. Upon adopting Topic 842 the Company now records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense in the Condensed Consolidated Statement of Operations. For the three months ended September 30, 2019 franchise rental income and franchise rent expense was $31.4 million.

For company-owned and franchise salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. The right of use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Generally, the non-lease components such as real estate taxes and other occupancy expenses are separate from rent expense within the lease and not allocated to the lease liability.

The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company used the portfolio approach in applying the discount rate based on original lease term. The weighted average remaining lease term was 6.87 years and the weighted-average discount rate was 3.95 percent for all salon operating leases as of September 30, 2019.

As of September 30, 2019, future operating lease commitments to be paid and received by the Company were as follows:

Fiscal Year	Leases for Franchise Salons		Leases for Company-Owned Salons		Corporate Leases		Total Operating Leases Payments		Sublease Income To Be Received From Franchisees			Net Rent Commitments
Remainder of 2020	$	56,059	$	91,328	$	1,368	$	148,755	$	(56,059	)	$	92,696
2021	67,285		111,002		1,294		179,581		(67,285		)	112,296
2022	59,388		99,345		172		158,905		(59,388		)	99,517
2023	53,293		88,686		177		142,156		(53,293		)	88,863
2024	48,224		79,070		183		127,477		(48,224		)	79,253
Thereafter	125,524		194,746		821		321,091		(125,524		)	195,567
Total future obligations	$	409,773	$	664,177	$	4,015	$	1,077,965	$	(409,773	)	$	668,192
Less amount representing interest	31,329		103,420		675		135,424
Present value of lease liabilities	378,444		560,757		3,340		942,541
Less: current lease liabilities	68,725		91,414		1,268		161,407
Long-term lease liabilities	$	309,719	$	469,343	$	2,072	$	781,134

As of September 30, 2019, the Company had executed the lease for its new corporate headquarters which commences on October 1, 2019. The total expected lease payments of $13.5 million are not reflected in the tables above. The lease term is 10.75 years.