Leases

9 Months Ended

Oct. 30, 2021

4. Leases

We lease certain property and equipment used in our operations. Some of our store leases include additional rental payments based on a percentage of sales over contractual levels or which are adjusted periodically for inflation. Our typical store lease has an initial term of 20 to 25 years and four to eight five-year renewal options.

Lease assets represent our right to use an underlying asset for the lease term. Lease assets are recognized at commencement date based on the value of the lease liability and are adjusted for any lease payments made to the lessor at or before commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee.

Lease liabilities represent our contractual obligation to make lease payments. At the commencement date, the lease liabilities equal the present value of minimum lease payments over the lease term. As the implicit interest rate is not readily identifiable in our leases, we estimate our collateralized borrowing rate to calculate the present value of lease payments.

Leases with a term of 12 months or less are excluded from the balance; we recognize lease expense for these leases on a straight-line basis over the lease term. We combine lease and non-lease components for new and modified leases.

We opened 200 Sephora shop-in-shops within our Kohl's stores in the fall of 2021. Due to the investments we made in the shop-in-shops, we reassessed our lease term when construction began as these assets will have significant economic value to us when the lease term becomes exercisable. The impact of these assessments resulted in additional lease term, additional lease assets and liabilities, and, in some cases, changes to the classification.

The following tables summarize our operating and finance leases and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	October 30, 2021	January 30, 2021
Assets
Operating leases	Operating leases	$2,293	$2,398
Finance leases	Property & equipment, net	1,389	708
Total operating & finance leases		3,682	3,106
Liabilities
Current
Operating leases	Current portion of operating leases	142	161
Finance leases	Current portion of finance leases & financing obligations	86	76
Noncurrent
Operating leases	Operating leases	2,537	2,625
Finance leases	Finance leases & financing obligations	1,620	926
Total operating & finance leases		$4,385	$3,788


Consolidated Statement of Operations		Three Months Ended	Nine Months Ended
(Dollars in Millions)	Classification	October 30, 2021	October 30, 2021
Operating leases	Selling, general, and administrative	$71	$227
Finance Leases
Amortization of leased assets	Depreciation and amortization	27	70
Interest on leased assets	Interest expense, net	29	81
Total operating & finance leases		$127	$378


Consolidated Statement of Cash Flows	Nine Months Ended
(Dollars in Millions)	October 30, 2021
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$236
Operating cash flows from finance leases	81
Financing cash flows from finance leases	71

The following table summarizes future lease payments by fiscal year:


	October 30, 2021
(Dollars in millions)	Operating Leases	Finance Leases	Total
2021	$69	$50	$119
2022	289	193	482
2023	278	176	454
2024	247	161	408
2025	234	155	389
After 2025	3,541	2,685	6,226
Total lease payments	$4,658	$3,420	$8,078
Amount representing interest	(1,979)	(1,714)	(3,693)
Lease liabilities	$2,679	$1,706	$4,385

The following table summarizes weighted-average remaining lease term and discount rate:


	October 30, 2021	January 30, 2021
Weighted-average remaining term (years)
Operating leases	20	19
Finance leases	20	18
Weighted-average discount rate
Operating leases	6%	6%
Finance leases	7%	10%

Other lease information is as follows:


	Nine Months Ended	Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020
Property and equipment acquired through:
Finance lease liabilities	$755	$118
Operating lease liabilities	8	140

Financing Obligations

The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in millions)	Classification	October 30, 2021	January 30, 2021
Assets
Financing obligations	Property & equipment, net	$57	$65
Liabilities
Current	Current portion of finance leases & financing obligations	31	39
Noncurrent	Finance leases & financing obligations	452	461
Total financing obligations		$483	$500


Consolidated Statement of Operations		Three Months Ended	Nine Months Ended
(Dollars in Millions)	Classification	October 30, 2021	October 30, 2021
Amortization of financing obligation assets	Depreciation and amortization	2	7
Interest on financing obligations	Interest expense, net	11	30
Total financing obligations		$13	$37


Consolidated Statement of Cash Flows	Nine Months Ended
(Dollars in Millions)	October 30, 2021
Cash paid for amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$30
Financing cash flows from financing obligations	25
Proceeds from financing obligations	8

The following table summarizes future financing obligation payments by fiscal year:


	October 30, 2021
(Dollars in millions)	Financing Obligations
2021	$16
2022	73
2023	71
2024	67
2025	58
After 2025	486
Total lease payments	$771
Non-cash gain on future sale of property	207
Amount representing interest	(495)
Financing obligation liability	$483

The following table summarizes the weighted-average remaining term and discount rate for financing obligations:


	October 30, 2021	January 30, 2021
Weighted-average remaining term (years)	10	8
Weighted-average discount rate	9%	7%