Quarterly report pursuant to Section 13 or 15(d)

Leases (Notes)

v3.19.1
Leases (Notes)
3 Months Ended
May 04, 2019
Leases [Abstract]  
Leases of Lessee Disclosure [Text Block]
Leases

We conduct a major part of our operations from leased premises (building or land) that include retail stores, store distribution centers, warehouses, offices and other facilities. Almost all leases include renewal options where we can extend the lease term from one to 50 years or more. We also lease equipment under finance leases of primarily three to five year periods, and we rent or sublease certain real estate to third parties. Our lease contracts do not contain any purchase options or residual value guarantees.

Accounting Policy Applied in Fiscal 2019
At the lease commencement date, based on certain criteria, we determine if a lease is classified as an operating lease or finance lease and then recognize a right-of-use asset and a lease liability on the Consolidated Balance Sheets for all leases (with the exception of leases that have a term of twelve months or less). The lease liability is measured as the present value of unpaid lease payments measured based on the reasonably certain lease term and corresponding discount rate. The initial right-of-use asset is measured as the lease liability plus certain other costs and is reduced by any tenant allowances collected from the lessor.
Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate and termination penalties. Lease payments do not include variable lease payments other than those that depend on an index or rate or any payments not considered part of the lease (i.e. payment of the lessor’s real estate taxes and insurance). Payments not considered lease payments are expensed as incurred. Some leases require additional payments based on sales and the related contingent rent is recorded as rent expense when the payment is probable. As a policy election, we consider lease payments and all related other payments as one component of a lease.
The reasonably certain lease term includes the non-cancelable lease term and any renewal option periods where we have economically compelling reasons for future exercise.
The discount rate used in our present value calculations is the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate is estimated based on our secured borrowings and our credit risk relative to the time horizons of other publicly available data points that are consistent with the respective lease term.
Whether an operating lease or a finance lease, the lease liability is amortized over the lease term at a constant periodic interest rate. The right-of-use assets related to operating leases are amortized over the lease term on a basis that renders a straight-line amount of rent expense which encompasses the amortization and interest component of the lease. With the occurrence of certain events, the amortization pattern for an operating asset is adjusted to a straight-line basis over the remaining lease term. The right-of-use asset related to a finance lease is amortized on a straight-line basis over the lease term. Rent on short-term leases are expensed on a straight-line basis over the lease term. When a lease is modified or there is a change in lease term, we assess for any change in lease classification and remeasure the lease liability with a corresponding increase or decrease to the right-of-use asset.
Sale-leasebacks are transactions through which we sell assets and subsequently lease them back. The resulting leases that qualify for sale-leaseback accounting are evaluated and accounted for as an operating lease. A transaction that does not qualify for sale-leaseback accounting as a result of finance lease classification or the failure to meet certain revenue recognition criteria is accounted for as a financing transaction. For a financing transaction, we retain the "sold" assets within property and equipment and record a financing obligation equal to the amount of cash proceeds received. Rental payments under such transactions are recognized as a reduction of the financing obligation and as interest expense using an effective interest method.
Accounting Policy Applied in Fiscal 2018
Our lease accounting policies for lease contracts in fiscal 2018 and prior are disclosed in the 2018 Form 10-K.












Leases
($ in millions)
 
Classification
 
May 4, 2019
Assets
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
917

Finance lease assets
 
Property and equipment
 
1

Total leased assets
 
 
 
$
918

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current operating lease liabilities
 
$
84

Finance
 
Current portion of finance leases and note payable
 
1

Noncurrent
 
 
 
 
Operating
 
Noncurrent operating lease liabilities
 
1,082

Finance
 
Long-term finance leases and note payable
 
1

Total leased liabilities
 
 
 
$
1,168



Lease Cost
 
 
 
 
Three Months Ended
($ in millions)
 
Classification
 
May 4, 2019
Operating lease cost
 
Selling, general and administrative expense (SG&A)
 
$
48

Variable lease cost
 
Selling, general and administrative expense (SG&A)
 
32

Finance lease cost
 
 
 
 
Amortization of leased assets
 
Depreciation and amortization
 

Interest on lease liabilities
 
Net interest expense
 

Rental income
 
Real estate and other, net
 
2

Net lease cost
 
 
 
$
78



As of May 4, 2019, future lease payments were as follows:
($ in millions)
Operating Leases
 
Finance Leases
 
Total
2019
$
156

 
$
1

 
$
157

2020
195

 
1

 
196

2021
187

 

 
187

2022
173

 

 
173

2023
166

 

 
166

Thereafter
1,816

 
2

 
1,818

Total lease payments
2,693

 
4

 
2,697

Less: amounts representing interest
(1,527
)
 
(2
)
 
(1,529
)
Present value of lease liabilities
$
1,166

 
$
2

 
$
1,168










Lease term and discount rate are as follows:
 
May 4,
2019
Weighted-average remaining lease term (years)
 
Operating leases
16
Financing leases
1
Weighted-average discount rate
 
Operating leases
11
%
Financing leases
6
%


Other information:
 
Three Months Ended
($ in millions)
May 4,
2019
Cash paid for amounts included in the measurement of these liabilities
 
Operating cash flows from operating leases
51

Operating cash flows from finance leases
1

Financing cash flows from finance leases
1



As determined prior to the adoption of the new lease standard, the future minimum lease payments under operating leases in effect as of February 2, 2019 were as follows:
($ in millions)
 
2019
$
190

2020
178

2021
163

2022
148

2023
135

Thereafter
1,626

Less: sublease income
(43
)
Total minimum lease payments
$
2,397