Leases

12 Months Ended

Dec. 31, 2022

The Company leases its retail, office and manufacturing space under operating leases which, in addition to the minimum lease payments, may require payment of a proportionate share of the real estate taxes and certain building operating expenses. While the Company’s local market development approach generally results in long-term participation in given markets, its retail store leases generally provide for an initial lease term of five to 10 years. Sleep Number’s office and manufacturing leases provide for an initial lease term of up to 15 years. In addition, its mall-based retail store leases may require payment of variable rent based on net sales in excess of certain thresholds. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s sole discretion. Lease options are included in the lease term only if exercise is reasonably certain at lease commencement. The Company lease agreements do not contain any material residual value guarantees. The Company also leases vehicles and certain equipment under operating leases with an initial lease term of three to six years.

The Company’s operating lease costs include facility, vehicle and equipment lease costs, but exclude variable lease costs. Operating lease costs are recognized on a straight-line basis over the lease term, after consideration of rent escalations and rent holidays. The lease term for purposes of the calculation begins on the earlier of the lease commencement date or the date the Company takes possession of the property. During lease renewal negotiations that extend beyond the original lease term, the Company estimates straight-line rent expense based on current market conditions. Variable lease costs are recorded when it is probable the cost has been incurred and the amount can be

reasonably estimated. Future payments for real estate taxes and certain building operating expenses for which the Company is obligated are not included in operating lease costs.

At December 31, 2022, the Company’s finance lease right-of-use assets and lease liabilities were not significant.

Lease costs were as follows (in thousands):


	2022		2021		2020
Operating lease costs(1)	$	109,766	$	99,474	$	90,311
Variable lease costs	$	877	$	2,205	$	1,147

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(1)Includes short-term lease costs which are not significant.

The maturities of operating lease liabilities as of December 31, 2022, were as follows(1) (in thousands):


2023	$	103,935
2024	93,430
2025	82,375
2026	70,542
2027	55,494
Thereafter	118,529
Total operating lease payments(2)	524,305
Less: Interest	87,893
Present value of operating lease liabilities	$	436,412

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(1)Total operating lease payments exclude $80 million of legally binding minimum lease payments for leases signed but not yet commenced.

(2)Includes the current portion of $80 million for operating lease liabilities.

Other information related to operating leases was as follows:


	December 31, 2022		January 1, 2022
Weighted-average remaining lease term (years)	6.2		6.4
Weighted-average discount rate	6.2	%	6.1	%


(in thousands)	2022		2021		2020
Cash paid for amounts included in present value of operating lease liabilities	$	99,819	$	90,198	$	85,497
Right-of-use assets obtained in exchange for operating lease liabilities	$	82,117	$	109,000	$	43,860