Leases

12 Months Ended

Jan. 28, 2023

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 incremental 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 406 full size Sephora shop-in-shops within our Kohl's stores during 2022 and now have 606 open as of the end of the fiscal year. We plan on opening at least 250 more full size shops in 2023. 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 28, 2023	January 29, 2022
Assets
Operating leases	Operating leases	$2,304	$2,248
Finance leases	Property and equipment, net	2,033	1,442
Total operating and finance leases		4,337	3,690
Liabilities
Current
Operating leases	Current portion of operating leases	111	145
Finance leases	Current portion of finance leases and financing obligations	76	87
Noncurrent
Operating leases	Operating leases	2,578	2,479
Finance leases	Finance leases and financing obligations	2,344	1,688
Total operating and finance leases		$5,109	$4,399


Consolidated Statement of Operations
(Dollars in Millions)	Classification	2022	2021	2020
Operating leases	Selling, general, and administrative	$264	$298	$314
Finance Leases
Amortization of leased assets	Depreciation and amortization	126	98	79
Interest on leased assets	Interest expense, net	140	111	102
Total operating and finance leases		$530	$507	$495


Consolidated Statement of Cash Flows
(Dollars in Millions)	2022	2021	2020
Cash paid for amounts included in measurement of leased liabilities
Operating cash flows from operating leases	$266	$311	$305
Operating cash flows from finance leases	133	105	102
Financing cash flows from finance leases	86	93	69

The following table summarizes future lease payments by fiscal year:


	January 28, 2023
(Dollars in millions)	Operating Leases	Finance Leases	Total
2023	$257	$214	$471
2024	243	208	451
2025	235	204	439
2026	229	203	432
2027	227	204	431
After 2027	3,501	3,505	7,006
Total lease payments	$4,692	$4,538	$9,230
Amount representing interest	(2,003)	(2,118)	(4,121)
Lease liabilities	$2,689	$2,420	$5,109

Total lease payments include $1.9 billion related to options to extend operating lease terms that are reasonably certain of being exercised, $3.2 billion related to options to extend finance lease terms that are reasonably certain of being exercised, and excludes $36 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 28, 2023	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:


(Dollars in Millions)	2022	2021	2020
Property and equipment acquired through exchange of:
Finance lease liabilities	714	841	128
Operating lease liabilities	179	2	165

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 28, 2023	January 29, 2022
Assets
Financing obligations	Property and equipment, net	$49	$55
Liabilities
Current	Current portion of finance leases and financing obligations	18	31
Noncurrent	Finance leases and financing obligations	442	445
Total financing obligations		$460	$476


Consolidated Statement of Operations
(Dollars in millions)	Classification	2022	2021	2020
Amortization of financing obligation assets	Depreciation and amortization	$7	$10	$11
Interest on financing obligations	Interest expense, net	58	41	36
Total financing obligations		$65	$51	$47


Consolidated Statement of Cash Flows
(Dollars in millions)	2022	2021	2020
Cash paid for amounts included in measurement of financing obligations
Operating cash flows from financing obligations	$56	$40	$36
Financing cash flows from financing obligations	20	32	36
Proceeds from financing obligations	11	15	9

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


	January 28, 2023
(Dollars in millions)	Financing Obligations
2023	$77
2024	77
2025	76
2026	74
2027	71
After 2027	904
Total lease payments	$1,279
Non-cash gain on future sale of property	166
Amount representing interest	(985)
Financing obligation liability	$460

Total payments exclude $6 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 28, 2023	January 29, 2022
Weighted-average remaining term (years)	13	10
Weighted-average discount rate	14%	9%

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)	2022	2021	2020
Operating cash flows from operating leases	$266	$311	$305
Operating cash flows from finance leases	133	105	102
Financing cash flows from finance leases	86	93	69
Operating cash flows from financing obligations	56	40	36
Financing cash flows from financing obligations	20	32	36
Total cash rent	$561	$581	$548