The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that an asset group has a carrying value that may not be recoverable. The individual operating store is the lowest level for which cash flows are identifiable. As such, the Company evaluates individual stores for recoverability of assets. To determine if a store needs to be tested for recoverability, the Company considers items such as decreases in market prices, changes in the manner in which the store is being used or physical condition, changes in legal factors or business climate, an accumulation of losses significantly in excess of budget, a current period operating or cash flow loss

combined with a history of operating or cash flow losses or a projection of continuing losses, or an expectation that the store will be closed or sold.

The Company monitors new and recently relocated stores against operational projections and other strategic factors such as regional economics, new competitive entries and other local market considerations to determine if an impairment evaluation is required. For other stores, it performs a recoverability analysis if it has experienced current-period and historical cash flow losses.

In performing the recoverability test, the Company compares the expected future cash flows of a store to the carrying amount of its assets. Significant judgment is used to estimate future cash flows. Major assumptions that contribute to its future cash flow projections include expected sales, gross profit and distribution expenses; expected costs such as payroll, occupancy costs and advertising expenses; and estimates for other significant selling, general and administrative expenses. Many long-term macroeconomic and industry factors are considered, both quantitatively and qualitatively, in the future cash flow assumptions. In addition to current and expected economic conditions such as inflation, interest and unemployment rates that affect customer shopping patterns, the Company considers that it operates in a highly competitive industry which includes the actions of other national and regional drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, dollar stores and internet pharmacies. Additionally, the Company takes into consideration that certain operating stores are executing specific improvement plans which are monitored quarterly to recoup recent capital investments, such as an acquisition of an independent pharmacy, which it has made to respond to specific competitive or local market conditions, or have specific programs tailored towards a specific geography or market.

The Company recorded impairment charges of $137,075 in fiscal 2023, $150,788 in fiscal 2022 and $46,287 in fiscal 2021. The Company recorded impairment charges of $59,573 in the fourth quarter of fiscal 2023, $99,416 in the fourth quarter of fiscal 2022 and $31,057 in the fourth quarter of fiscal 2021. The Company’s methodology for recording impairment charges has been consistently applied in the periods presented.

As of March 4, 2023, $717.2 million of the Company’s long-lived assets, including intangible assets, were associated with 2,309 active operating stores. Additionally, we have approximately $2.3 billion of operating lease right-of-use assets associated with the active stores.

If an operating store’s estimated future undiscounted cash flows are not sufficient to cover its carrying value, its carrying value is reduced to fair value. Fair value is its estimated future discounted cash flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset. Operating lease right-of-use assets are included within the stores’ asset groups. The Company obtains fair values of these right-of-use assets based on real estate market data.

An impairment charge is recorded in the period that the store does not meet its original return on investment and/or has an operating loss for the last two years and its projected cash flows do not exceed its current asset carrying value. The amount of the impairment charge is the entire difference between the current asset carrying value and its fair value which is the estimated future discounted cash flows.

The Company recorded impairment charges for active stores of $13,544 in fiscal 2023, $56,182 in fiscal 2022 and $29,745 in fiscal 2021.

The Company reviews key performance results for active stores on a quarterly basis and approves certain stores for closure. Impairment for closed stores, if any (many stores are closed on lease expiration), are recorded in the quarter the closure decision is approved. Closure decisions are made on an individual store or regional basis considering all of the macroeconomic, industry and other factors, in addition to the active store’s individual operating results. The Company recorded impairment charges for closed facilities of $123,531 in fiscal 2023, $94,606 in fiscal 2022 and $16,542 in fiscal 2021.

The following table summarizes the impairment charges and number of locations, segregated by closed facilities and active stores that have been recorded in fiscal 2023, 2022 and 2021:

(1)

These charges are related to stores that were impaired for the first time in prior periods. In an effort to improve the operating results or to meet geographical competition, the Company will often make additional capital additions in stores that were impaired in prior periods. These additions will be impaired in future periods if they are deemed to be unrecoverable. The fiscal 2023 impairment charge includes $3,087 of impairment relating to the ROU and $1,779 of capital additions. The fiscal 2022 impairment charge includes $5,434 of impairment relating to the ROU and $6,905 of capital additions. The fiscal 2021 impairment charge includes $15,459 of impairment relating to the ROU and $5,913 of capital additions.

(2)

These charges are related to new stores (open at least three years) and relocated stores (relocated in the last two years) and significant strategic remodels (remodeled in the last year) that did not meet their recoverability test during the current period. These stores have not met their original return on investment projections and have a historical loss of at least two years. Their future cash flow projections do not recover their current carrying value. The fiscal 2023 impairment charge includes $1,765 of impairment relating to the ROU and $2,875 of capital additions. The fiscal 2022 impairment charge includes $0 of impairment relating to the ROU and $538 of capital additions. The fiscal 2021 impairment charge includes $347 of impairment relating to the ROU and $1,172 of capital additions.

(3)

These charges are related to the remaining active stores that did not meet the recoverability test during the current period. These stores have a historical loss of at least two years. Their future cash flow projections do not recover their current carrying value. The fiscal 2023 impairment charge includes $1,765 of impairment relating to the ROU and $2,273 of capital additions. The fiscal 2022 impairment charge includes $26,130 of impairment relating to the ROU and $17,175 of capital additions. The fiscal 2021 impairment charge includes $3,177 of impairment relating to the ROU and $3,677 of capital additions.

The primary drivers of its impairment charges are each store’s current and historical operating performance and the assumptions that the Company makes about each store’s operating performance in future periods. Projected cash flows are updated based on the next year’s operating budget which includes the qualitative factors noted above. The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

●

Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

●

Level 2—Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

●

Level 3—Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

Long-lived non-financial assets are measured at fair value on a non-recurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes.

The table below sets forth by level within the fair value hierarchy the long-lived assets, which include right-of-use assets, as of the impairment measurement date for which an impairment assessment was performed and total losses as of March 4, 2023 and February 26, 2022:


							Fair Values		Total
							as of		Charges
	Level 1		Level 2		Level 3		Impairment Date		March 4, 2023
Long-lived assets held for use	$	—	$	22,959	$	42,717	$	65,676	$	(132,243)
Long-lived assets held for sale	$	—	$	5,115	$	—	$	5,115	$	(4,832)
Total	$	—	$	28,074	$	42,717	$	70,791	$	(137,075)


							Fair Values		Total
							as of		Charges
	Level 1		Level 2		Level 3		Impairment Date		February 26, 2022
Long-lived assets held for use	$	—	$	240,176	$	23,594	$	263,770	$	(150,064)
Long-lived assets held for sale	$	—	$	2,371	$	—	$	2,371	$	(724)
Total	$	—	$	242,547	$	23,594	$	266,141	$	(150,788)

The above assets reflected in the caption ‘Long-lived assets held for sale’ have not been reclassified to assets held for sale due to their immateriality.

Lease Termination and Facility Exit Charges

The Company calculates the liability for closed stores on a store-by-store basis. The calculation for stores where the remaining lease term exceeds one year, includes the ancillary costs from the date of closure to the end of the remaining lease term. The Company evaluates these assumptions each quarter and adjusts the liability accordingly.

In fiscal 2023, 2022 and 2021, the Company recorded facility exit charges of $74,310, $29,402 and $12,116, respectively.

The Company assesses stores and distribution centers for potential closure or relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease exit costs and inventory liquidation charges, as well as impairment of assets at these locations. When a store or distribution center is closed, the Company records an expense for unrecoverable costs and accrues a liability equal to the present value at current credit adjusted risk-free interest rates of any anticipated executory costs which are not included within the store or distribution center's respective lease liability under Topic 842. Other store or distribution center closing and liquidation costs are expensed when incurred.

The following table reflects the closed store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:


	Year Ended
	March 4,		February 26,		February 27,
	2023		2022		2021
	(53 Weeks)		(52 Weeks)		(52 Weeks)
Balance—beginning of period	$	18,688	$	3,443	$	2,253
Provision for present value of executory costs for leases exited		43,449		16,995		1,643
Changes in assumptions and other adjustments		325		4,296		(73)
Interest accretion		863		72		27
Cash payments		(13,553)		(6,118)		(407)
Balance—end of period	$	49,772	$	18,688	$	3,443

The Company’s revenues and income before income taxes for fiscal 2023, 2022 and 2021 included results from stores that have been closed or are approved for closure as of March 4, 2023. The revenue, operating expenses and income before income taxes of these stores for the periods are presented as follows:


	Year Ended
	March 4,		February 26,		February 27,
	2023		2022		2021
Revenues	$	178,030	$	586,056	$	639,471
Operating expenses		192,357		640,996		699,662
Gain from sale of assets		(46,125)		(13,670)		(7,954)
Other expenses		25,396		52,999		13,057
Income (loss) before income taxes		6,402		(94,269)		(65,294)
Included in these stores’ income (loss) before income taxes are:
Depreciation and amortization		934		3,499		4,535
Inventory liquidation charges		(6,369)		(1,646)		(1,528)

The above results are not necessarily indicative of the impact that these closures will have on revenues and operating results of the Company in the future, as the Company often transfers the business of a closed store to another Company store, thereby retaining a portion of these revenues and operating expenses.