LEASES

6 Months Ended

Jun. 29, 2019

NOTE 8. LEASES

The Company leases retail stores and other facilities, vehicles, and equipment under operating lease agreements. Facility leases typically are for a fixed non-cancellable term with one or more renewal options. In addition to rent payments, the Company is required to pay certain variable lease costs such as real estate taxes, insurance and common-area maintenance on most of the facility leases. For leases beginning in 2019, the Company accounts for lease components (e.g., fixed payments including rent) and non-lease components (e.g., real estate taxes, insurance costs and common-area maintenance costs) as a single lease component. Many lease agreements contain tenant improvement allowances, rent holidays, and/or rent escalation clauses. Certain leases contain provisions for additional rent to be paid if sales exceed a specified amount, though such payments have been immaterial during the periods presented. The Company subleases certain real estate to third parties, consisting mainly of operating leases for space within the retail stores.

The components of lease expense were as follows:

	Second Quarter			First Half
(In millions)	2019			2019
Finance lease cost:
Amortization of right-of-use assets	$	4		$	8
Interest on lease liabilities		1			2
Operating lease cost		109			220
Short-term lease cost		—			3
Variable lease cost		32			65
Sublease income		(1	)		(1	)
Total lease cost	$	145		$	297

Supplemental cash flow information related to leases was as follows:

	First Half
(In millions)	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	2
Operating cash flows from operating leases		246
Financing cash flows from finance leases		9
Right-of-use assets obtained in exchange for new finance lease liabilities		12
Right-of-use assets obtained in exchange for new operating lease liabilities		130

Supplemental balance sheet information related to leases was as follows:

	June 29,
(In millions, except lease term and discount rate)	2019
Property and equipment, net	$	48
Operating lease right-of-use assets		1,380
Accrued expenses and other current liabilities		378
Short-term borrowings and current maturities of long-term debt		17
Long-term debt, net of current maturities		57
Operating lease liabilities		1,183
Weighted-average remaining lease term – finance leases	5 years
Weighted-average remaining lease term – operating leases	5 years
Weighted-average discount rate – finance leases		6.6	%
Weighted-average discount rate – operating leases		7.0	%

Maturities of lease liabilities as of June 29, 2019 were as follows:

	June 29, 2019
	Operating			Finance
(In millions)	Leases⁽¹⁾			Leases⁽²⁾
2019 (excluding the first half of 2019)	$	237		$	12
2020		424			18
2021		340			17
2022		272			14
2023		207			12
Thereafter		416			15
		1,896			88
Less imputed interest		(335	)		(14	)
Total	$	1,561		$	74

Reported as of June 29, 2019
Accrued expenses and other current liabilities	$	378		$	—
Short-term borrowings and current maturities of long-term debt		—			17
Long-term debt, net of current maturities		—			57
Operating lease liabilities		1,183			—
Total	$	1,561		$	74

(1)

Operating lease payments include $140 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $3 million of legally binding lease payments for an additional operating lease signed but not yet commenced. This operating lease will commence in fiscal year 2020 with a lease term of 10 years.

(2)	Finance lease payments exclude $8 million of legally binding lease payments for an additional finance lease signed but not yet commenced. This finance lease will commence in fiscal year 2019 with a lease term of 3 years.

Adoption of the new lease accounting standard using the alternative transition method required the Company to provide relevant disclosures in accordance with ASC 840, Leases for all prior periods presented. The table below represents future minimum lease payments due under the non-cancelable portions of leases including facility leases that were accrued as store closure costs as of December 29, 2018. The table was updated from the version previously included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 within the Notes to Consolidated Financial Statements to adjust for certain inconsistencies that management identified in the first quarter of fiscal year 2019 during the implementation of ASC 842, Leases. Specifically, the Company corrected the schedule to include additional lease commitments for option periods at the time of execution as opposed to the original extension date.

	December 29,
(In millions)	2018
2019	$	466
2020		374
2021		285
2022		214
2023		144
Thereafter		235
		1,718
Less sublease income		(11	)
Total	$	1,707