Leases

6 Months Ended

Jul. 29, 2023

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 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.

We opened 194 full size Sephora at Kohl's shop-in-shops ("Sephora shops") in the second quarter of 2023 and now have 801 Sephora shops open as of the end of the second quarter of 2023. Due to the investments we are making in the Sephora 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, which are predominately store related, and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	July 29, 2023	January 28, 2023	July 30, 2022
Assets
Operating leases	Operating leases	$2,493	$2,304	$2,296
Finance leases	Property and equipment, net	1,950	2,033	2,114
Total operating and finance leases		$4,443	$4,337	$4,410
Liabilities
Current
Operating leases	Current portion of operating leases	93	111	108
Finance leases	Current portion of finance leases and financing obligations	75	76	78
Noncurrent
Operating leases	Operating leases	2,777	2,578	2,568
Finance leases	Finance leases and financing obligations	2,284	2,344	2,381
Total operating and finance leases		$5,229	$5,109	$5,135


Consolidated Statement of Operations		Three Months Ended		Six Months Ended
(Dollars in Millions)	Classification	July 29, 2023	July 30, 2022	July 29, 2023	July 30, 2022
Operating leases	Selling, general, and administrative	$67	$64	$134	$133
Finance leases
Amortization of leased assets	Depreciation and amortization	30	32	62	61
Interest on leased assets	Interest expense, net	36	36	72	68
Total operating and finance leases		$133	$132	$268	$262


Consolidated Statement of Cash Flows	Six Months Ended
(Dollars in Millions)	July 29, 2023	July 30, 2022
Cash paid for amounts included in the measurement of leased liabilities
Operating cash flows from operating leases	$136	$135
Operating cash flows from finance leases	70	65
Financing cash flows from finance leases	40	44

The following table summarizes future lease payments by fiscal year:


	July 29, 2023
(Dollars in Millions)	Operating Leases	Finance Leases	Total
2023	$124	$106	$230
2024	263	212	475
2025	257	206	463
2026	251	204	455
2027	252	205	457
After 2027	4,055	3,517	7,572
Total lease payments	$5,202	$4,450	$9,652
Amount representing interest	(2,332)	(2,091)	(4,423)
Lease liabilities	$2,870	$2,359	$5,229

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


	July 29, 2023	January 28, 2023
Weighted-average remaining term (years)
Operating leases	20	20
Finance leases	20	20
Weighted-average discount rate
Operating leases	6%	6%
Finance leases	6%	6%

Other lease information is as follows:


	Six Months Ended
(Dollars in Millions)	July 29, 2023	July 30, 2022
Property and equipment acquired (disposed) through exchange of:
Finance lease liabilities	$(26)	$730
Operating lease liabilities	222	114

Financing Obligations

The following tables summarize our financing obligations, which are all store related, and where they are presented in our Consolidated Financial Statements:


Consolidated Balance Sheets
(Dollars in Millions)	Classification	July 29, 2023	January 28, 2023	July 30, 2022
Assets
Financing obligations	Property and equipment, net	$46	$49	$52
Liabilities
Current	Current portion of finance leases and financing obligations	9	18	18
Noncurrent	Finance leases and financing obligations	446	442	449
Total financing obligations		$455	$460	$467


Consolidated Statement of Operations		Three Months Ended		Six Months Ended
(Dollars in Millions)	Classification	July 29, 2023	July 30, 2022	July 29, 2023	July 30, 2022
Amortization of financing obligation assets	Depreciation and amortization	1	2	3	4
Interest on financing obligations	Interest expense, net	17	15	33	27
Total financing obligations		$18	$17	$36	$31


Consolidated Statement of Cash Flows	Six Months Ended
(Dollars in Millions)	July 29, 2023	July 30, 2022
Cash paid for and proceeds from amounts included in the measurement of financing obligations
Operating cash flows from financing obligations	$32	$26
Financing cash flows from financing obligations	7	11
Proceeds from financing obligations	17	5

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


	July 29, 2023
(Dollars in Millions)	Financing Obligations
2023	$39
2024	79
2025	79
2026	79
2027	79
After 2027	1,253
Total lease payments	$1,608
Non-cash gain on future sale of property	115
Amount representing interest	(1,268)
Financing obligation liability	$455

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


	July 29, 2023	January 28, 2023
Weighted-average remaining term (years)	17	13
Weighted-average discount rate	16%	14%