Leases

6 Months Ended

Jul. 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.

During the first half of 2022, we opened 340 Sephora shop-in-shops within our Kohl's stores and now have a total of 540 open as of the end of the second quarter. We plan to open an additional 60 shop-in-shops during the remainder

of 2022, as well as at least 250 more shops in 2023. We are also working with Sephora to have a Sephora presence in the remaining approximately 300 stores. 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	July 30, 2022	January 29, 2022	July 31, 2021
Assets
Operating leases	Operating leases	$2,296	$2,248	$2,301
Finance leases	Property and equipment, net	2,114	1,442	1,226
Total operating and finance leases		4,410	3,690	3,527
Liabilities
Current
Operating leases	Current portion of operating leases	108	145	143
Finance leases	Current portion of finance leases and financing obligations	78	87	83
Noncurrent
Operating leases	Operating leases	2,568	2,479	2,532
Finance leases	Finance leases and financing obligations	2,381	1,688	1,457
Total operating and finance leases		$5,135	$4,399	$4,215


Consolidated Statement of Operations		Three Months Ended		Six Months Ended
(Dollars in Millions)	Classification	July 30, 2022	July 31, 2021	July 30, 2022	July 31, 2021
Operating leases	Selling, general, and administrative	$64	$79	$133	$156
Finance leases
Amortization of leased assets	Depreciation and amortization	32	23	61	43
Interest on leased assets	Interest expense, net	36	27	68	52
Total operating and finance leases		$132	$129	$262	$251


Consolidated Statement of Cash Flows	Six Months Ended
(Dollars in Millions)	July 30, 2022	July 31, 2021
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$135	$165
Operating cash flows from finance leases	65	52
Financing cash flows from finance leases	44	47

The following table summarizes future lease payments by fiscal year:


	July 30, 2022
(Dollars in millions)	Operating Leases	Finance Leases	Total
2022	$124	$94	$218
2023	251	218	469
2024	233	210	443
2025	227	205	432
2026	223	205	428
After 2026	3,617	3,722	7,339
Total lease payments	$4,675	$4,654	$9,329
Amount representing interest	(1,999)	(2,195)	(4,194)
Lease liabilities	$2,676	$2,459	$5,135

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


	July 30, 2022	January 29, 2022
Weighted-average remaining term (years)
Operating leases	20	20
Finance leases	21	20
Weighted-average discount rate
Operating leases	6%	6%
Finance leases	6%	7%

Other lease information is as follows:


	Six Months Ended
(Dollars in Millions)	July 30, 2022	July 31, 2021
Property and equipment acquired (disposed) through exchange of:
Finance lease liabilities	$730	$569
Operating lease liabilities	114	(29)

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	July 30, 2022	January 29, 2022	July 31, 2021
Assets
Financing obligations	Property and equipment, net	$52	$55	$60
Liabilities
Current	Current portion of finance leases and financing obligations	18	31	34
Noncurrent	Finance leases and financing obligations	449	445	449
Total financing obligations		$467	$476	$483


Consolidated Statement of Operations		Three Months Ended		Six Months Ended
(Dollars in Millions)	Classification	July 30, 2022	July 31, 2021	July 30, 2022	July 31, 2021
Amortization of financing obligation assets	Depreciation and amortization	2	3	4	5
Interest on financing obligations	Interest expense, net	15	10	27	19
Total financing obligations		$17	$13	$31	$24


Consolidated Statement of Cash Flows	Six Months Ended
(Dollars in Millions)	July 30, 2022	July 31, 2021
Cash paid for amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$26	$19
Financing cash flows from financing obligations	11	18
Proceeds from financing obligations	5	4

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


	July 30, 2022
(Dollars in millions)	Financing Obligations
2022	$37
2023	78
2024	77
2025	75
2026	74
After 2026	957
Total lease payments	$1,298
Non-cash gain on future sale of property	167
Amount representing interest	(998)
Financing obligation liability	$467

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


	July 30, 2022	January 29, 2022
Weighted-average remaining term (years)	14	10
Weighted-average discount rate	13%	9%