Leases

6 Months Ended

Aug. 01, 2020

LEASES

We lease retail stores, a limited amount of office space and certain equipment under operating leases expiring in various years through the fiscal year ending 2030. All of our leases have been classified as operating leases and are recognized and measured as such.

Certain operating leases provide for renewal options that are at a pre-determined period and rental value. Furthermore, certain leases provide that we may cancel the lease if our retail sales at that location fall below an established level. Within the first few years of the initial lease term, a majority of our store operating leases contain cancellation clauses that allow the leases to be terminated at our discretion, if certain minimum sales levels are not met. In the normal course of business, operating leases are typically renewed or replaced by other leases.

Escalation of operating lease payments of certain leases depend on an existing index or rate, such as the consumer price index or the market interest rate. These are considered variable lease payments and are included in lease payments when the escalation is known.

The Company deferred substantially all rent payments due in the months of April, May and June 2020 and made reduced rent payments in July 2020. The Company has not recorded any provision for interest or penalties which may arise as a result of these deferrals, as management does not believe payment for any potential amounts to be probable. In April 2020, the FASB granted a practical expedient permitting an entity to choose to forgo the evaluation of the enforceable rights and obligations of the original lease contract, specifically in situations where rent concessions have been agreed to with landlords as a result of the pandemic. Instead, the entity may account for pandemic-related rent concessions, whatever their form (e.g. rent deferral, abatement or other) either: a) as if they were part of the enforceable rights and obligations of the parties under the existing lease contract; or b) as lease modifications. The Company has elected to account for the concessions agreed to by landlords that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee as though enforceable rights and obligations for those concessions existed in the original lease agreements and the Company has elected to not remeasure the related lease liabilities and right-of-use assets. During the thirteen and twenty-six weeks ended August 1, 2020, we have received concessions from certain landlords in the form of rent deferrals and other lease or rent modifications. Where the lease concessions negotiated did not substantially increase the rights of the lessor or the obligations of the Company under the lease, we have elected to account for these rent concessions as though enforceable rights and obligations for those concessions existed in the original lease agreements and have recorded a non-interest bearing payable for the deferred rent payments. Executed leases amendments that extended the lease term were treated as modifications under ASC 842, Leases. The recognition of rent concessions that were not in the form of lease extensions did not have a material impact on our unaudited condensed consolidated statement of loss for the thirteen and twenty-six weeks ended August 1, 2020. In addition, the Company has continued recording lease expense during the deferral period in accordance with its existing policies.

Operating lease expense was as follows:



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	August 1, 2020		August 3, 2019		August 1, 2020		August 3, 2019
Operating lease cost ⁽¹⁾	$	59,558	$	62,341	$	120,562	$	127,243

⁽¹⁾For the thirteen and twenty-six weeks ended August 1, 2020, includes approximately $7.7 million and $16.1 million, respectively, in variable lease costs. For the thirteen and twenty-six weeks ended August 3, 2019, includes approximately $5.0 million and $13.0 million, respectively, in variable lease costs.

Supplemental balance sheet information related to operating leases was as follows:



	August 1, 2020			February 1, 2020			August 3, 2019
Right of use assets ⁽¹⁾	$	571,992		$	648,397		$	697,332

Current lease liabilities	$	218,691		$	157,043		$	158,866
Long-term lease liabilities	482,380			555,922			611,308
Total operating lease liabilities	$	701,071		$	712,965		$	770,174

Weighted Average Remaining Lease Term (years)	4.6			4.8			5.0

Weighted Average Discount Rate ⁽²⁾	5.5		%	5.6		%	5.7		%

⁽¹⁾ During the thirteen and twenty-six weeks ended August 1, 2020, we completed an evaluation of our operating lease assets for indicators of impairment as a result of the impact of the pandemic, and consequently, recorded pre-tax impairment charges of approximately $0.8 million and $3.2 million, respectively, which is included in cost of goods sold, pre-tax, in the accompanying unaudited condensed consolidated statements of loss.

⁽²⁾ The incremental borrowing rate used by the Company is based on the rate at which the Company could borrow funds using its credit rating for a collateralized loan of similar term to the lease. The weighted average discount rate represents a weighted average of the incremental borrowing rate for each lease weighted based on the remaining fixed lease obligations.

Supplemental cash flow information related to operating leases was as follows:



	Twenty-Six Weeks Ended
	August 1, 2020			August 3, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows	$	38,673	⁽¹⁾	$	114,186
Right of use assets obtained in exchange for lease obligations, non-cash	12,775			15,465

⁽¹⁾The Company deferred substantially all rent payments due in the months of April, May and June 2020, and made reduced rent payments in July 2020. We are in active discussions with landlords to find a mutually beneficial and agreeable path forward.

Maturities of operating lease liabilities as of August 1, 2020 were as follows:



Fiscal Year Ending:
January 30, 2021	$	156,617
January 29, 2022	190,630
January 28, 2023	153,349
February 4, 2024	106,104
February 1, 2025	77,695
Thereafter	108,998
Total future minimum lease payments	$	793,393
Less imputed interest	(92,322		)
Total	$	701,071

Accounting Policies

Beginning on February 3, 2019, the Company accounts for leases pursuant to ASC 842, Leases, as established by ASU 2016-02, Leases. We determine if an arrangement is a lease at inception. Operating leases are included in ROU assets, current lease liabilities and long-term lease liabilities in our unaudited condensed consolidated balance sheets. The Company does not have finance leases in the periods presented.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. The operating lease ROU asset represents the net present value of fixed payments required under the lease, discounted at the Company's incremental borrowing rate, offset by impairments and lease incentives such as tenant improvements and deferred rent balances.

Our leases do not provide an implicit rate. Accordingly, we use the Company's incremental borrowing rate at commencement date in determining the present value of lease payments over the lease term. Furthermore, we elected to apply a portfolio approach, using the same discount rate applied to a portfolio of leases for similar asset types with a similar lease term.

Our lease terms may include options to extend or terminate the lease. When it is reasonably certain that we will exercise an option to extend or terminate a lease, the Company will adjust its ROU asset and lease liability. For leases with no impairment of the ROU asset, lease expense is recognized on a straight-line basis over the lease term. For stores with impairment of the ROU asset, lease expense consists of straight-line amortization of the ROU asset and the implicit interest expense on the lease liability.

We have lease agreements with lease and non-lease components. We have made a policy election to treat both lease and non-lease components as a single component and account for the full consideration as a single lease component. This policy election is applied to all asset classes for which the Company is a lessee.

We lease retail stores and a limited amount of office space under operating leases. The majority of our lease agreements provide for tenant improvement allowances, rent escalation clauses and/or contingent rent provisions. Tenant improvement allowances, fixed rent escalation clauses and impairments are included in the ROU asset computation.

Certain leases provide for contingent rents based on defined criteria, such as gross sales in excess of a specified level. We record a contingent rent liability in accrued liabilities on the consolidated balance sheets and the corresponding rent expense when the criteria has been achieved or is probable.

Additionally, we have a nominal number of leases that meet the standard's definition of a "short-term lease" (a lease that, at the commencement date, has a lease term of twelve months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). We have made a policy election to recognize these leases as incurred and have not recognized a ROU asset or corresponding lease liability for them. The Company's short-term leases are not material.