Leases

6 Months Ended

Aug. 03, 2019

We determine if an arrangement contains a lease at inception of the agreement. Our leased property consists of our retail stores, our corporate office, and certain information technology, store security, and other office equipment. Certain of our store leases have rent escalations and/or have tenant allowances or other lease incentives, which are fixed in nature and included in our calculation of right-of-use assets. Certain of our store leases provide for contingent rents, which are recorded as variable costs and not included in our calculation of right-of-use assets. Many of our store leases obligate us to pay for our applicable portion of real estate taxes, CAM, and property insurance, which are recorded as variable costs and not included in our calculation of right-of-use assets, except for certain fixed CAM charges that are not variable. Many of our leases contain provisions for options to renew, extend the original term for additional periods, or terminate the lease if certain sales thresholds are not attained. We have assessed the reasonable certainty of these provisions to determine the appropriate lease term. Our lease agreements do not contain material residual value guarantees (excluding the synthetic lease arrangement discussed below), restrictions, or covenants.

In November 2017, we entered into a synthetic lease arrangement for a new distribution center in California. The term of this lease commenced in the second quarter of 2019 and will expire after five years. Under the prior accounting standard, this lease was accounted for as a capital lease due to certain construction period considerations; therefore, it was reflected in both our balance sheet and our future minimum lease obligations disclosure. As the lease commenced in the second quarter of 2019, we assessed the lease classification of the agreement and determined it was an operating lease under ASC 842; therefore, the lease is included in our operating lease right-of-use assets and operating lease liabilities in the below table as of August 3, 2019. The annual lease payments are approximately $7 million for the duration of the term. Additionally, this arrangement includes a residual value guarantee.

Leases were recorded in our consolidated balance sheets as follows:



Leases	Balance Sheet Location	August 3, 2019
Assets		(In thousands)
Operating	Operating lease right-of-use assets	$	1,208,349
Finance	Property and equipment - net	80,578
Total right-of-use assets		$	1,288,927
Liabilities
Current
Operating	Current operating lease liabilities	$	239,592
Finance	Accrued operating expenses	75,211
Noncurrent
Operating	Noncurrent operating lease liabilities	1,021,130
Finance	Other liabilities	6,631
Total lease liabilities		$	1,342,564

The components of lease costs were as follows:



	Statements of Operations and Comprehensive Income Location	Second Quarter		Year-to-date
Lease cost	Statements of Operations and Comprehensive Income Location	2019		2019
		(In thousands)
Operating lease cost	Selling and administrative expenses	$	73,863	$	143,049
Finance lease cost
Amortization of leased assets	Depreciation	988		1,976
Interest on lease liabilities	Interest expense	120		252
Short-term lease cost	Selling and administrative expenses	1,505		3,083
Variable lease cost	Selling and administrative expenses	87		219
Total lease cost		$	76,563	$	148,579

Maturity of our lease liabilities at August 3, 2019, was as follows:



Fiscal Year	Operating Leases			Finance Leases
2019 (excluding the first and second quarters of 2019)	$	146,028		$	5,436
2020	274,928			74,713
2021	239,318			3,338
2022	200,988			610
2023	166,300			117
Thereafter	415,526			71
Total lease payments	$	1,443,088		$	84,285
Less amount to discount to present value	$	(182,366	)	$	(2,443	)
Present value of lease liabilities	$	1,260,722		$	81,842

During the second quarter of 2019, we exercised our option to initiate the purchase of our corporate headquarters property, which we are currently leasing. This contract modification required us to reassess our lease classification, and the reassessment resulted in a determination that the lease classification changed from an operating lease to a financing lease, which drove the significant increase in our total finance lease payment in the table above. We are committed to completing the purchase of the property by the beginning of the second quarter of 2020. Additionally, we have begun marketing for sale our currently operating California distribution center, which is being replaced by our newly leased California distribution center. We anticipate a significant amount of proceeds from the sale of our currently operating California distribution center.

Lease term and discount rate, for our operating leases, at August 3, 2019 were as follows:



	August 3, 2019
Weighted average remaining lease term (years)	6.8
Weighted average discount rate	4.3	%

Our weighted average discount rate represents our estimated incremental borrowing rate, assuming a secured borrowing, based on the remaining lease term at the time of either adoption of the standard or the period in which the lease term expectation was modified. Our finance leases, and the associated remaining lease term and discount rate, are insignificant, excluding our corporate headquarters property discussed above.

Disclosures Related to Periods Prior to Adoption of ASC 842, Leases

Under ASC 840, Leases, future minimum rental commitments for leases, excluding closed store leases, real estate taxes, CAM, and property insurance, and scheduled payments for all capital leases at February 2, 2019, were as follows:



Fiscal Year	Operating Leases		Capital Leases
2019 (full 12 months)	$	279,844	$	9,050
2020	244,978		10,815
2021	204,362		9,725
2022	159,479		6,992
2023	120,023		6,512
Thereafter	310,474		127,864
Total lease payments	$	1,319,160	$	170,958
Less amount to discount to present value			$	(14,758	)
Present value of lease liabilities			$	156,200