NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1 - Basis of Presentation
In our opinion, the accompanying Unaudited Condensed Consolidated Financial Statements and notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and contain all normal recurring adjustments necessary to present fairly our financial position and the results of our operations and our cash flows for the periods presented. Certain information and disclosures normally included in the notes to Condensed Consolidated Financial Statements have been condensed or omitted according to the rules and regulations of the SEC, although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
Note 2 - Net Income Per Share
The following tables set forth the computation of basic and diluted earnings per share as shown on the face of the accompanying Condensed Consolidated Statements of Income:
|
|
Thirteen Weeks Ended
|
|
|
|
May 4, 2019
|
|
|
May 5, 2018
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share:
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Net income
|
|
$
|
13,873
|
|
|
|
|
|
|
|
|
|
|
$
|
12,955
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating securities
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
Net income available for basic common shares and
basic earnings per share
|
|
$
|
13,829
|
|
|
|
14,612
|
|
|
$
|
0.95
|
|
|
$
|
12,890
|
|
|
|
15,526
|
|
|
$
|
0.83
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,873
|
|
|
|
|
|
|
|
|
|
|
$
|
12,955
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating securities
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
Adjustment for dilutive potential common shares
|
|
|
1
|
|
|
|
580
|
|
|
|
|
|
|
|
0
|
|
|
|
2
|
|
|
|
|
|
Net income available for diluted common shares and
diluted earnings per share
|
|
$
|
13,830
|
|
|
|
15,192
|
|
|
$
|
0.91
|
|
|
$
|
12,890
|
|
|
|
15,528
|
|
|
$
|
0.83
|
|
Our basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities. During periods of undistributed losses, however, no effect is given to our participating securities since they do not share in the losses. Per share amounts are computed by dividing net income available to common shareholders by the weighted average shares outstanding during each period. No options to purchase shares of common stock were excluded in the computation of diluted shares for the periods presented.
Note 3 - Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which replaced most existing lease accounting guidance. This guidance requires an entity to recognize leased assets and the rights and obligations created by those leased assets on the balance sheet and to disclose key information about the entity's leasing arrangements. This guidance became effective for us on February 3, 2019 and includes interim periods in fiscal 2019. We adopted the new guidance using the effective date as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance. All of our retail store locations and our distribution center are subject to operating lease accounting under the new guidance. As a result, the adoption of this guidance had a material impact on our condensed consolidated balance sheets but did not have a material impact on our condensed consolidated statements of income or our condensed consolidated statements of cash flow. We also updated our lease administration software for the implementation of the guidance and developed and mapped new and existing controls in our control environment. The adoption of the guidance resulted in the initial recognition of operating lease liabilities of $251.7 million as of February 3, 2019. This amount was based on the present value of fixed lease payments using our incremental borrowing rate. We recorded corresponding operating lease right-of-use assets based on the operating lease liabilities, reduced by net accrued rent, unamortized deferred lease incentives and prepaid rent totaling $25.8 million upon adoption. Under the new guidance, companies may
7
elect certain
optional
practical expedients. We elected the practical expedient that permits us not to recognize right-of-use assets and related lia
bilities that arise from short-term leases (i.e., leases with terms of twelve months or less). We did not elect the transition practical expedients that permit companies to use hindsight when determining lease term and impairment of right-of-use assets or
that permit companies to account for lease and non-lease components as a single lease component. We also did not elect the transition package of practical expedients that is permitted by the guidance
;
therefore,
we were required to reassess previous accounting conclusions regarding whether existing arrangements are or contain leases, the classification of existing leases and the treatment of initial direct costs.
A
s of the adoption date, we recorded $2.6 million
of lease
-
related capitalized costs to beginning retained earnings, net of tax, that did not meet the definition of initial direct costs in accordance with the guidance. See Note 7
for additional disclosures required as a result of the adoption of this
gu
idance
.
In August 2018, the FASB issued guidance that adds, removes, and modifies the disclosure requirements related to fair value measurements. This accounting update is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. We are evaluating the impact of this new guidance and believe the adoption will not have a material impact on our condensed consolidated financial statements.
Note 4 - Fair Value Measurements
The accounting guidance related to fair value measurements defines fair value and provides a consistent framework for measuring fair value under the authoritative literature. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. This guidance only applies when other guidance requires or permits the fair value measurement of assets and liabilities. The guidance does not expand the use of fair value measurements. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels:
•
|
Level 1 –Quoted prices in active markets for identical assets or liabilities;
|
•
|
Level 2 –Observable market-based inputs or unobservable inputs that are corroborated by market data; and
|
•
|
Level 3 –Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, and are based on the best information available, including our own data. Fair values of our long-lived assets are estimated using an income-based approach and are classified within Level 3 of the valuation hierarchy.
|
The following table presents assets that are measured at fair value on a recurring basis at May 4, 2019, February 2, 2019 and May 5, 2018. We have no material liabilities measured at fair value on a recurring or non-recurring basis.
|
|
Fair Value Measurements
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of May 4, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - money market mutual funds
|
|
$
|
28,779
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
28,779
|
|
As of February 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - money market mutual funds
|
|
$
|
68,500
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
68,500
|
|
As of May 5, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - money market mutual funds
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.
From time to time, we measure certain assets at fair value on a non-recurring basis, specifically long-lived assets evaluated for impairment. These are typically store-specific assets, which include property and equipment and operating right-of-use assets, which are reviewed for impairment whenever events or changes in circumstances indicate that recoverability of their carrying value is questionable. If the expected undiscounted future cash flows related to a store’s assets are less than their carrying value, an impairment loss would be recognized for the difference between estimated fair value and carrying value and recorded in selling, general and administrative expenses. We estimate the fair value of store property and equipment using an income-based approach considering the cash flows expected over the remaining lease term for each location. These projections are primarily based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future performance. External factors, such as the local environment in which the store resides, including strip-mall traffic and competition, are evaluated in terms of their effect on sales trends. Changes in sales and operating income assumptions or unfavorable changes in external factors can significantly impact the estimated future cash flows. An increase or decrease in the projected cash flow can significantly decrease or increase the fair value of these assets, which would have an effect on the impairment recorded. We estimate the fair value of operating right-of-use assets using the market value of rents applicable to the leased asset, discounted using the remaining lease term. If the operating right-of-use asset is impaired, we would amortize the remaining right-of-use asset in accordance with the subsequent-measurement guidance that applies to finance leases — typically, on a
8
straight-line basis
over the remaining lease term.
Thus, the
leased asset
would no longer qualify for the straight-line treatment of lease expense.
However, in periods after the impairment, we w
ould continue to present the right-of-use
asset reduction and interest accretion
related to the
operating
lease liability in
selling, general and administrative expenses
on the income statement.
See Note 7 for additional information on
our
accounting treatment for leases.
During the thirteen weeks ended May 4, 2019, we recorded an impairment charge of $40,000 on property and equipment related to one store, which was included in selling, general and administrative expenses for the period. Subsequent to this impairment, these long-lived assets had a remaining unamortized basis of $3,000. There were no impairments of operating right-of-use assets recorded during the thirteen weeks ended May 4, 2019. There were no impairments of long-lived assets recorded during the thirteen weeks ended May 5, 2018.
Note 5 - Stock-Based Compensation
At our 2017 annual meeting of shareholders held on June 13, 2017, our shareholders approved a new equity incentive plan, the Shoe Carnival, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which replaced our 2000 Stock Option and Incentive Plan, as amended (the “2000 Plan”). We may issue stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to eligible participants under the 2017 Plan. According to the terms of the 2017 Plan, upon approval of the 2017 Plan by our shareholders, no further awards may be made under the 2000 Plan. A maximum of 1,000,000 shares of our common stock are available for issuance and sale under the 2017 Plan. In addition, any shares of our common stock subject to an award granted under the 2017 Plan, or to an award granted under the 2000 Plan that was outstanding on the date our shareholders approved the 2017 Plan, that expires, is cancelled or forfeited, or is settled for cash will, to the extent of such cancellation, forfeiture, expiration or cash settlement, automatically become available for future awards under the 2017 Plan.
Stock-based compensation includes stock options, cash-settled stock appreciation rights, restricted stock awards, restricted stock units and performance stock units.
Additionally, we recognize stock-based compensation expense for the discount on shares sold to employees through our employee stock purchase plan. Stock-based compensation expense for the employee stock purchase plan was $11,000 before the income tax benefit of $1,000 and $11,000 before the income tax benefit of $3,000 for the thirteen weeks ended May 4, 2019, and May 5, 2018, respectively.
Restricted Stock
The following table summarizes transactions for our restricted stock awards pursuant to our stock-based compensation plans:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Restricted stock at February 2, 2019
|
|
|
825,281
|
|
|
$
|
23.94
|
|
Vested
|
|
|
(708,367
|
)
|
|
|
23.88
|
|
Forfeited or expired
|
|
|
(40,859
|
)
|
|
|
24.26
|
|
Restricted stock at May 4, 2019
|
|
|
76,055
|
|
|
$
|
24.27
|
|
There were no restricted stock awards granted during the thirteen-week periods ended May 4, 2019 or May 5, 2018. The total fair value at grant date of restricted stock awards that vested during the first quarter of fiscal 2019 was $16.9 million. The total fair value at grant date of restricted stock awards that vested during the first quarter of fiscal 2018 was $887,000.
As of May 4, 2019, approximately $460,000 of unrecognized compensation expense remained related to both our performance-based and service-based restricted stock awards. The cost is expected to be recognized over a weighted average period of approximately 0.9 years.
The following table summarizes transactions for our restricted stock units and performance stock units pursuant to the 2017 Plan:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Restricted stock units and performance stock units at February 2, 2019
|
|
|
202,667
|
|
|
$
|
24.98
|
|
Granted
|
|
|
181,300
|
|
|
|
31.36
|
|
Vested
|
|
|
(86,093
|
)
|
|
$
|
23.27
|
|
Forfeited
|
|
|
(2,376
|
)
|
|
|
23.27
|
|
Restricted stock units and performance stock units at May 4, 2019
|
|
|
295,498
|
|
|
$
|
29.41
|
|
9
As of
May 4, 2019
, approximately $
7.2
million
of unrecognized compensation expense remained related to both our
restricted stock units and
performance
stock units
. The cost is expected to be recognized over a weighted average period of approximately
1.4
years.
The following table summarizes information regarding stock-based compensation expense recognized for restricted stock awards, restricted stock units and performance stock units:
(In thousands)
|
|
Thirteen Weeks
Ended May 4,
2019
|
|
|
Thirteen Weeks
Ended May 5,
2018
|
|
Stock-based compensation expense before the recognized
income tax benefit
|
|
$
|
1,938
|
|
|
$
|
1,115
|
|
Income tax benefit
|
|
$
|
247
|
|
|
$
|
279
|
|
Cash-Settled Stock Appreciation Rights
Our cash-settled stock appreciation rights (“SARs”) were granted during the first quarter of fiscal 2019 to certain non-executive employees and will vest and become fully exercisable on March 31, 2020. Any unexercised SARs will expire on March 31, 2022. Each SAR entitles the holder, upon exercise of their vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price, with a maximum amount of gain defined. The SARs granted during the first quarter of fiscal 2019 were issued with a defined maximum gain of $10.00 over the exercise price of $34.95.
During the first quarter of fiscal 2015, SARs were granted to certain non-executive employees, such that one-third of the shares underlying the SARs vested and became fully exercisable on each of the first three anniversaries of the date of the grant and were assigned a five-year term from the date of grant, after which any unexercised SARs would expire. Each SAR entitled the holder, upon exercise of their vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price, with a defined maximum gain of $10.00 over the exercise price of $24.26. During the second quarter of fiscal 2018, all remaining SARs granted during the first quarter of fiscal 2015 were exercised.
The following table summarizes the SARs activity:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual Term (Years)
|
|
Outstanding at February 2, 2019
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
Granted
|
|
|
43,900
|
|
|
|
34.95
|
|
|
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
Outstanding at May 4, 2019
|
|
|
43,900
|
|
|
$
|
34.95
|
|
|
|
0.9
|
|
The fair value of these liability awards will be remeasured, using a trinomial lattice model, at each reporting period until the date of settlement. Increases or decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. The weighted-average fair value of outstanding, non-vested SAR awards as of May 4, 2019 was $5.55.
The fair value was estimated using a trinomial lattice model with the following assumptions:
|
|
May 4, 2019
|
|
|
May 5, 2018
|
|
Risk free interest rate yield curve
|
|
2.30% - 2.42%
|
|
|
1.67% -
2.78%
|
|
Expected dividend yield
|
|
0.9%
|
|
|
1.3%
|
|
Expected volatility
|
|
47.95%
|
|
|
39.74%
|
|
Maximum life
|
|
2.9 Years
|
|
|
1.9 Years
|
|
Exercise multiple
|
|
|
1.29
|
|
|
|
1.34
|
|
Maximum payout
|
|
$
|
10.00
|
|
|
$
|
10.00
|
|
Employee exit rate
|
|
2.2% - 9.0%
|
|
|
2.2% - 9.0%
|
|
The risk free interest rate was based on the U.S. Treasury yield curve in effect at the end of the reporting period. The expected dividend yield was based on our historical quarterly cash dividends, with the assumption that quarterly dividends would continue at that rate. Expected volatility was based on the historical volatility of our common stock. The exercise multiple and employee exit rate were based on historical option data.
10
The following table summarizes information regarding stock-based compensation expense recognized for SARs:
(In thousands)
|
|
Thirteen Weeks
Ended May 4,
2019
|
|
|
Thirteen Weeks
Ended May 5,
2018
|
|
Stock-based compensation expense before the recognized
income tax benefit
|
|
$
|
8
|
|
|
$
|
65
|
|
Income tax benefit
|
|
$
|
1
|
|
|
$
|
16
|
|
Note 6 – Revenue
Policy and Performance Obligations
We operate as a multi-channel, family footwear retailer and provide the convenience of shopping at our brick-and-mortar stores or shopping online through our e-commerce and mobile platforms. As part of our multi-channel strategy, we offer Shoes 2U, a program that enables us to ship product to a customer’s home or selected store if the product is not in stock. We also offer “buy online, pick up in store” services for our customers. “Buy online, pick up in store” provides the convenience of local pickup for our customers.
Substantially all of our revenue is for a single performance obligation and is recognized when control passes to customers. We consider control to have transferred when we have a present right to payment, the customer has title to the product, physical possession of the product has been transferred and the risks and rewards of the product that we retain are minimal. For our brick-and-mortar stores, we satisfy our performance obligation and control is transferred at the point of sale when the customer takes possession of the products. This also includes the “buy online, pick up in store” scenario described above and includes Shoes 2U if the customer chooses the option of picking up their goods in-store. For sales made through our e-commerce site or mobile app in which the customer chooses home delivery, we transfer control and recognize revenue when the product is shipped from our stores or distribution center. This also includes Shoes 2U if the customer chooses the option of having goods delivered to their home.
The redemption of loyalty points under our Shoe Perks loyalty rewards program (“Shoe Perks”) and redemptions of gift cards may be part of any transaction. These situations represent separate performance obligations that are embedded in the contract.
Transaction Price and Payment Terms
The transaction price is the amount of consideration we expect to receive from our customers and is reduced by any stated promotional discounts at the time of purchase. The transaction price may be variable due to terms that permit customers to exchange or return products for a refund within a limited period of time. The implicit contract with the customer reflected in the transaction receipt states the final terms of the sale, including the description, quantity, and price of each product purchased. The customer agrees to a stated price in the contract that does not vary over the term of the contract. Taxes imposed by governmental authorities such as sales taxes are excluded from net sales.
Our brick-and-mortar stores accept various forms of payment from customers at the point of sale. These include cash, checks, credit/debit cards and gift cards. Our e-commerce and mobile platforms accept credit/debit cards, PayPal and gift cards as forms of payment. Payments made for products are generally collected when control passes to the customer, either at the point of sale or at the time the customer order is shipped. For Shoes 2U transactions, customers may order the product at the point of sale. For these transactions, customers pay in advance and unearned revenue is recorded as a contract liability. We recognize the related revenue when control has been transferred to the customer (i.e., when the product is picked up by the customer or shipped to the customer). Unearned revenue related to Shoes 2U was not material to our condensed consolidated financial statements at May 4, 2019.
Returns and Refunds
It is our policy to allow brick and mortar and online customers to exchange or return products for a refund within a limited period of time. We have established a returns allowance based upon historical experience in order to estimate these transactions. This allowance is recorded as a reduction in sales with a corresponding refund liability recorded in accrued and other liabilities. The estimated cost of merchandise inventory is recorded as a reduction to cost of sales and an increase in merchandise inventories. At each of May 4, 2019 and February 2, 2019, approximately $600,000 of refund liabilities and $410,000 of right of return assets associated with estimated product returns were recorded in our condensed consolidated balance sheets.
Contract Liabilities
We sell gift cards in our brick-and-mortar stores and through our e-commerce and mobile platforms. Gift card purchases are recorded as an increase to contract liabilities at the time of purchase and a decrease to contract liabilities when a customer redeems a gift card. Estimated breakage is determined based on historical breakage percentages and recognized as revenue based on expected gift card usage. We do not record breakage revenue when escheat liability to relevant jurisdictions exists.
At May 4, 2019 and February 2, 2019,
11
approximately $
1.3
million
and $1.6 million, respectively,
of contract liabiliti
es associated with unredeemed gift cards were recorded in our condensed consolidated balance sheet
s
.
We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions within two years.
We offer our customers the opportunity to enroll in our Shoe Perks program, which accrues points and provides customers with the opportunity to earn rewards. Points under Shoe Perks are earned primarily by making purchases either in-store or through our online platform. Once a certain threshold of accumulated points is reached, the customer earns a reward certificate, which is redeemable at any of our stores or online. When a Shoe Perks customer makes a purchase, we allocate the transaction price between the goods and the loyalty reward points based on the relative standalone selling price. The portion allocated to the material right is recorded as a contract liability for rewards that are expected to be redeemed. We then recognize revenue based on an estimate of when customers exercise their rights to redeem the rewards, which incorporates an estimate of points expected to expire using historical rates.
At May 4, 2019 and February 2, 2019, approximately $293,000 and $245,000, respectively, of contract liabilities associated with loyalty rewards were recorded in our condensed consolidated balance sheets. We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions in less than one year.
We are a multi-channel retailer that provides our customers with the convenience of home delivery. Our customers may choose this delivery method when purchasing products online, through our mobile app or via Shoes 2U. These products are picked up at our stores or distribution center and delivered by third-party freight companies. We transfer control and recognize revenue when the product is shipped from our stores or distribution center.
Disaggregation of Revenue by Product Category
Revenue is disaggregated by product category below. Net sales and percentage of net sales for the thirteen weeks ended May 4, 2019 and May 5, 2018 were as follows:
(In thousands)
|
|
Thirteen Weeks
Ended May 4, 2019
|
|
|
Thirteen Weeks
Ended May 5, 2018
|
|
Non-Athletics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women’s
|
|
$
|
60,431
|
|
|
|
24
|
%
|
|
$
|
60,642
|
|
|
|
24
|
%
|
Men’s
|
|
|
35,863
|
|
|
|
14
|
|
|
|
33,949
|
|
|
|
13
|
|
Children’s
|
|
|
12,368
|
|
|
|
5
|
|
|
|
11,803
|
|
|
|
5
|
|
Total
|
|
|
108,662
|
|
|
|
43
|
|
|
|
106,394
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Athletics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women’s
|
|
|
49,687
|
|
|
|
20
|
|
|
|
52,350
|
|
|
|
20
|
|
Men’s
|
|
|
53,304
|
|
|
|
21
|
|
|
|
55,621
|
|
|
|
22
|
|
Children’s
|
|
|
30,818
|
|
|
|
12
|
|
|
|
32,038
|
|
|
|
12
|
|
Total
|
|
|
133,809
|
|
|
|
53
|
|
|
|
140,009
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accessories
|
|
|
10,543
|
|
|
|
4
|
|
|
|
10,357
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
796
|
|
|
|
0
|
|
|
|
685
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
253,810
|
|
|
|
100
|
%
|
|
$
|
257,445
|
|
|
|
100
|
%
|
Note 7 – Leases
Effective February 3, 2019, we adopted Accounting Standards Codification Topic No. 842 –
Leases
. This guidance requires us to recognize leased assets and the rights and obligations created by those leased assets on the balance sheet as operating right-of-use (“ROU”) assets and operating lease liabilities. ROU assets and operating lease liabilities are calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or our incremental borrowing rate (“IBR”). As the rate implicit in the lease is not readily determinable for our leases, we utilized our IBR, which was determined through the development of a synthetic credit rating and was based on the information available at the adoption date. Adoption of the guidance resulted in the initial recognition of operating lease liabilities of $251.7 million as of February 3, 2019. We recorded corresponding operating lease right-of-use assets based on the operating lease liabilities, reduced by net accrued rent, unamortized deferred lease incentives and prepaid rent totaling $25.8 million. Moreover, as of the adoption date, we recorded $2.6 million of lease-related capitalized costs to beginning retained earnings, net of tax, that did not meet the definition of initial direct costs in accordance with the new guidance.
12
Operating lease liabilities are increased by interest and reduced by payments
each period, and ROU assets are amortized over the lease term. Interest on operating lease liabilities and the amortization of ROU assets results in straight-line rent expense over the lease term.
We record variable lease expense primarily associated wi
th contingent rent and reduced rent due to co-tenancy violations when incurred.
For new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms. These estimates and assumptions can impact: (1) lease classification and the related accounting treatment; (2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense; (3) the term over which leasehold improvements for each store are amortized; and (4) the values and lives of adjustments to initial ROU assets. The amount of depreciation and amortization, interest and rent expense would vary if different estimates and assumptions were used.
We lease all of our retail stores and our single distribution center, which has a current lease term of 15 years, expiring in 2034. We also enter into leases of equipment, copiers and billboards. All of our leases are operating leases. Leases with terms of twelve months or less are immaterial and are expensed as incurred, and we did not have any leases with related parties as of May 4, 2019.
Our leases typically provide for fixed minimum rental payments and certain leases provide for contingent rental payments based upon various specified percentages of sales above minimum levels. In addition to rental payments, we are required to pay certain non-lease components, such as real estate taxes, insurance and common area maintenance, on most of our real estate leases. We account for lease components (e.g., fixed payments including rent) separately from non-lease components. Certain real estate leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes.
Our real estate leases typically include one or more options to renew, with renewal terms that typically extend the lease term for five years or more. The exercise of lease renewal options is at our sole discretion. When determining the lease term, we include option periods that are reasonably certain to be exercised. Many of our leases also contain “co-tenancy” provisions, including the required presence and continued operation of certain anchor tenants in the adjoining retail space. If a co-tenancy provision is triggered, we could have the right to terminate the lease early or to a reduction of rent. In addition to co-tenancy provisions, certain leases contain “go-dark” provisions that allow us to cease operations while continuing to pay rent through the end of the lease term.
Quantitative Disclosures
During the thirteen weeks ended May 4, 2019, our operating lease cost was $14.0 million, our variable lease cost was $234,000 and expense associated with non-lease components totaled $5.2 million. During the thirteen weeks ended May 4, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $14.8 million and ROU assets obtained in exchange for new (or remeasured for existing) operating lease liabilities were $9.7 million (excluding ROU assets recorded for existing leases at the adoption date). As of May 4, 2019, the weighted-average remaining lease term for operating leases was 6.4 years and the weighted-average discount rate for operating leases was 5.4%.
The following table reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities on the consolidated balance sheet as of May 4, 2019:
(In thousands)
|
|
Operating
Leases
|
|
2019 (excluding the first three fiscal months)
|
|
$
|
45,805
|
|
2020
|
|
|
52,872
|
|
2021
|
|
|
51,945
|
|
2022
|
|
|
44,138
|
|
2023
|
|
|
36,587
|
|
Thereafter to 2034
|
|
|
75,833
|
|
Total undiscounted lease payments
|
|
|
307,180
|
|
Less: Imputed interest
|
|
|
57,574
|
|
Total operating lease liabilities
|
|
|
249,606
|
|
Less: Current portion of operating lease liabilities
|
|
|
47,089
|
|
Long-term portion of operating lease liabilities
|
|
$
|
202,517
|
|
13
Our
future minimum lease payments for operating leases as of February 2, 2019, in accordance with legacy lease accounting
guidance
, were as follows:
(In thousands)
|
|
Operating
Leases
|
|
2019
|
|
$
|
60,807
|
|
2020
|
|
|
51,937
|
|
2021
|
|
|
50,687
|
|
2022
|
|
|
41,536
|
|
2023
|
|
|
34,035
|
|
Thereafter to 2031
|
|
|
56,437
|
|
Total
|
|
$
|
295,439
|
|
14