Leases

3 Months Ended

Apr. 30, 2022

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 an additional 48 Sephora shop-in-shops within our Kohl's stores during the first quarter of 2022, bringing the total number of Sephora shop-in-shops to 248. We plan to open an additional 352 shop-in-shops during the remainder of 2022, as well as 250 more in 2023. Due to the investments we are making 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	April 30, 2022	January 29, 2022	May 1, 2021
Assets
Operating leases	Operating leases	$2,224	$2,248	$2,392
Finance leases	Property and equipment, net	1,883	1,442	792
Total operating and finance leases		4,107	3,690	3,184
Liabilities
Current
Operating leases	Current portion of operating leases	127	145	159
Finance leases	Current portion of finance leases and financing obligations	82	87	74
Noncurrent
Operating leases	Operating leases	2,474	2,479	2,620
Finance leases	Finance leases and financing obligations	2,140	1,688	1,019
Total operating and finance leases		$4,823	$4,399	$3,872


Consolidated Statement of Operations		Quarter Ended
(Dollars in Millions)	Classification	April 30, 2022	May 1, 2021
Operating leases	Selling, general, and administrative	$69	$77
Finance leases
Amortization of leased assets	Depreciation and amortization	29	20
Interest on leased assets	Interest expense, net	32	25
Total operating and finance leases		$130	$122


Consolidated Statement of Cash Flows	Quarter Ended
(Dollars in Millions)	April 30, 2022	May 1, 2021
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$70	$84
Operating cash flows from finance leases	30	25
Financing cash flows from finance leases	22	24

The following table summarizes future lease payments by fiscal year:


	April 30, 2022
(Dollars in millions)	Operating Leases	Finance Leases	Total
2022	$195	$146	$341
2023	260	204	464
2024	235	195	430
2025	226	189	415
2026	219	188	407
After 2026	3,384	3,309	6,693
Total lease payments	$4,519	$4,231	$8,750
Amount representing interest	(1,918)	(2,009)	(3,927)
Lease liabilities	$2,601	$2,222	$4,823

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


	April 30, 2022	January 29, 2022
Weighted-average remaining term (years)
Operating leases	20	20
Finance leases	20	20
Weighted-average discount rate
Operating leases	6%	6%
Finance leases	6%	7%

Other lease information is as follows:


	Quarter Ended
(Dollars in Millions)	April 30, 2022	May 1, 2021
Property and equipment acquired through exchange of:
Finance lease liabilities	$472	$106
Operating lease liabilities	11	30

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	April 30, 2022	January 29, 2022	May 1, 2021
Assets
Financing obligations	Property and equipment, net	$53	$55	$62
Liabilities
Current	Current portion of finance leases and financing obligations	26	31	38
Noncurrent	Finance leases and financing obligations	444	445	454
Total financing obligations		$470	$476	$492


Consolidated Statement of Operations		Quarter Ended
(Dollars in Millions)	Classification	April 30, 2022	May 1, 2021
Amortization of financing obligation assets	Depreciation and amortization	2	2
Interest on financing obligations	Interest expense, net	12	9
Total financing obligations		$14	$11


Consolidated Statement of Cash Flows	Quarter Ended
(Dollars in Millions)	April 30, 2022	May 1, 2021
Cash paid for amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$12	$9
Financing cash flows from financing obligations	7	9
Proceeds from financing obligations	4	—

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


	April 30, 2022
(Dollars in millions)	Financing Obligations
2022	$55
2023	73
2024	69
2025	64
2026	60
After 2026	648
Total lease payments	$969
Non-cash gain on future sale of property	185
Amount representing interest	(684)
Financing obligation liability	$470

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


	April 30, 2022	January 29, 2022
Weighted-average remaining term (years)	12	10
Weighted-average discount rate	11%	9%