Leases

12 Months Ended

Jan. 29, 2022

3. 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 payments that 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. The majority of our lease assets and liabilities are for stores that are leased locations.

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 an increase in the accounting 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	January 29, 2022	January 30, 2021
Assets
Operating leases	Operating leases	$2,248	$2,398
Finance leases	Property and equipment, net	1,442	708
Total operating and finance leases		3,690	3,106
Liabilities
Current
Operating leases	Current portion of operating leases	145	161
Finance leases	Current portion of finance leases and financing obligations	87	76
Noncurrent
Operating leases	Operating leases	2,479	2,625
Finance leases	Finance leases and financing obligations	1,688	926
Total operating and finance leases		$4,399	$3,788


Consolidated Statement of Operations
(Dollars in Millions)	Classification	2021	2020	2019
Operating leases	Selling, general, and administrative	$298	$314	$314
Finance Leases
Amortization of leased assets	Depreciation and amortization	98	79	72
Interest on leased assets	Interest expense, net	111	102	98
Total operating and finance leases		$507	$495	$484


Consolidated Statement of Cash Flows
(Dollars in Millions)	2021	2020	2019
Cash paid for amounts included in measurement of leased liabilities
Operating cash flows from operating leases	$311	$305	$320
Operating cash flows from finance leases	105	102	98
Financing cash flows from finance leases	93	69	76

The following table summarizes future lease payments by fiscal year:


	January 29, 2022
(Dollars in millions)	Operating Leases	Finance Leases	Total
2022	$283	$198	$481
2023	277	181	458
2024	246	166	412
2025	233	160	393
2026	224	159	383
After 2026	3,275	2,636	5,911
Total lease payments	$4,538	$3,500	$8,038
Amount representing interest	(1,914)	(1,725)	(3,639)
Lease liabilities	$2,624	$1,775	$4,399

Total lease payments include $2.9 billion related to options to extend operating lease terms that are reasonably certain of being exercised, $2.5 billion related to options to extend finance lease terms that are reasonably certain of being exercised, and excludes $50 million of legally binding lease payments for leases signed but not yet commenced.

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


	January 29, 2022	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:


(Dollars in Millions)	2021	2020	2019
Property and equipment acquired through:
Finance lease liabilities	841	128	236
Operating lease liabilities	2	165	106

Financing Obligations

Historical failed sale-leasebacks that did not qualify for sale-leaseback accounting upon adoption of ASC 842 continue to be accounted for as 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	January 29, 2022	January 30, 2021
Assets
Financing obligations	Property and equipment, net	$55	$65
Liabilities
Current	Current portion of finance leases and financing obligations	31	39
Noncurrent	Finance leases and financing obligations	445	461
Total financing obligations		$476	$500


Consolidated Statement of Operations
(Dollars in millions)	Classification	2021	2020	2019
Amortization of financing obligation assets	Depreciation and amortization	$10	$11	$11
Interest on financing obligations	Interest expense, net	41	36	37
Total financing obligations		$51	$47	$48


Consolidated Statement of Cash Flows
(Dollars in millions)	2021	2020	2019
Cash paid for amounts included in measurement of financing obligations
Operating cash flows from financing obligations	$40	$36	$37
Financing cash flows from financing obligations	32	36	37
Proceeds from financing obligations	15	9	11
(Gain) on extinguishment of debt	—	—	(9)

In 2019, we purchased leased equipment that was accounted for as a financing obligation resulting in recognition of a $9 million gain on extinguishment of debt.

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


	January 29, 2022
(Dollars in millions)	Financing Obligations
2022	$72
2023	72
2024	67
2025	59
2026	52
After 2026	445
Total lease payments	$767
Non-cash gain on future sale of property	206
Amount representing interest	(497)
Financing obligation liability	$476

Total payments exclude $8 million of legally binding payments for contracts signed, but not yet commenced.

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


	January 29, 2022	January 30, 2021
Weighted-average remaining term (years)	10	8
Weighted-average discount rate	9%	7%

The following table shows the cash rent out flows for the operating leases, finance leases, and financing obligations:


Consolidated Statement of Cash Flows
(Dollars in millions)	2021	2020	2019
Operating cash flows from operating leases	$311	$305	$320
Operating cash flows from finance leases	105	102	98
Financing cash flows from finance leases	93	69	76
Operating cash flows from financing obligations	40	36	37
Financing cash flows from financing obligations	32	36	37
Total cash rent	581	548	568