Leases

9 Months Ended

Sep. 28, 2019

Leases:

The Company leases the majority of its retail store locations, two distribution sites, its Merchandise Innovation Center, and certain equipment under various non-cancellable operating leases. The leases have varying terms and expire at various dates through 2037. Store leases typically have initial terms of between 10 and 15 years, with two to four optional renewal periods of five years each. The exercise of lease renewal options is at our sole discretion. The Company has included lease renewal options in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes, and insurance costs) together with nonlease components (e.g., fixed payment common-area maintenance) as a single component. Certain lease agreements require variable payments based upon actual costs of common-area maintenance, real estate taxes, and insurance. Further, certain lease agreements require variable payments based upon store sales above agreed-upon sales levels for the year and others require payments adjusted periodically for inflation. As substantially all of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement or modification date in determining the present value of lease payments.

In addition to the operating lease right-of-use assets presented on the Condensed Consolidated Balance Sheets, assets, net of accumulated amortization, under finance leases of $29.7 million are recorded within the Property and equipment, net line on the Condensed Consolidated Balance Sheets as of September 28, 2019.

The following table summarizes the Company’s classification of lease cost (in thousands):



		Fiscal Three Months Ended		Fiscal Nine Months Ended
	Statement of Income Location	September 28, 2019		September 28, 2019
Finance lease cost:
Amortization of lease assets	Depreciation and amortization	$	1,075	$	3,165
Interest on lease liabilities	Interest expense, net	407		1,207
Operating lease cost	Selling, general and administrative expenses	88,820		262,838
Variable lease cost	Selling, general and administrative expenses	18,394		55,545
Net lease cost		$	108,696	$	322,755

The following table summarizes the future maturities of the Company’s lease liabilities (in thousands):



	Operating Leases ^(a)			Finance Leases			Total
2019 ^(b)	$	92,364		$	1,364		$	93,728
2020	358,275			5,471			363,746
2021	337,373			5,531			342,904
2022	313,814			4,409			318,223
2023	289,207			3,217			292,424
After 2023	1,348,926			23,000			1,371,926
Total lease payments	2,739,959			42,992			2,782,951
Less: Interest	(503,558		)	(9,934		)	(513,492		)
Present value of lease liabilities	$	2,236,401		$	33,058		$	2,269,459

(a) Operating lease payments exclude $168.6 million of legally binding minimum lease payments for leases signed, but not yet commenced.

(b) Excluding the nine-month period ended September 28, 2019.

The following table summarizes the Company’s lease term and discount rate:



	September 28, 2019
Weighted-average remaining lease term (years):
Finance leases	9.8
Operating leases	8.9
Weighted-average discount rate:
Finance leases	5.2	%
Operating leases	4.4	%

The following table summarizes the other information related to the Company’s lease liabilities (in thousands):



	Fiscal Three Months Ended		Fiscal Nine Months Ended
	September 28, 2019		September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases	$	936	$	2,741
Operating cash flows from finance leases	388		1,188
Operating cash flows from operating leases	88,820		251,800

The Company adopted new lease accounting guidance in the first quarter of fiscal 2019, as discussed in Note 1 and Note 13 to the Condensed Consolidated Financial Statements, and as required, the following disclosure is provided for periods prior to adoption. As of December 29, 2018 future minimum payments, by year and in the aggregate, under leases with initial or remaining terms of one year or more consisted of the following (in thousands):



	Capital Leases			Operating Leases
2019	$	5,215		$	344,836
2020	5,234			328,589
2021	5,294			306,572
2022	4,172			284,327
2023	2,980			260,518
Thereafter	20,169			1,175,972
Total minimum lease payments	43,064			$	2,700,814
Amount representing interest	(10,148		)
Present value of minimum lease payments	32,916
Less: current portion	(3,646		)
Long-term capital lease obligations	$	29,270