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Note 6 - Leases | 6 Months Ended
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Dec. 31, 2019
Notes to Financial Statements |
Lessee, Leases [Text Block] |
( 6 ) | Leases
During the first quarter of fiscal 2020, we adopted ASU 2016 - 02 and all related amendments. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability. Lease Accounting Policy We have operating leases for many of our design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement. Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our design center real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. We have elected the short-term lease exemption, whereby leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term. Key Estimates and Judgments Key estimates and judgments in applying ASU 2016 - 02 include how the Company determines the discount rate to discount the unpaid lease payments to present value and the lease term. ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determined our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. As we do not have any outstanding public debt, we estimated the incremental borrowing rate based on our estimated credit rating and available market information. We used the incremental borrowing rates we determined as of July 1, 2019 for operating leases that commenced prior to that date. The incremental borrowing rate is subsequently reassessed upon a modification to the lease agreement. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Some of our leases contain variable lease payments based on a Consumer Price Index or percentage of sales, which are excluded from the measurement of the lease liability. The Company's lease terms and discount rates are as follows:
|  | December 31, 2019 |
Weighted-average remaining lease term (in years) |  |  |  |
Operating leases |  |  | 6.7 |
Financing leases |  |  | 1.9 |
Weighted-average discount rate |  |  |  |
Operating leases |  |  | 3.7 | %
Financing leases |  |  | 4.4 | %
The following table discloses the location and amount of our operating and financing lease costs within our consolidated statements of comprehensive income (in thousands):
| Statement of Comprehensive Income Location |  | Three months ended December 31, 2019 |  |  | Six months ended December 31, 2019 |
Operating lease cost | Selling, general and administrative (“SG&A”) |  | $ | 8,169 |  |  | $ | 16,191 |
Financing lease cost: |  |  |  |  |  |  |  |  |
Depreciation of property | SG&A |  |  | 146 |  |  |  | 293 |
Interest on lease liabilities | Interest income, net of interest (expense) |  |  | 8 |  |  |  | 17 |
Short-term lease cost | SG&A |  |  | 355 |  |  |  | 742 |
Variable lease cost (1) | SG&A |  |  | 2,373 |  |  |  | 4,836 |
Less: Sublease income | SG&A |  |  | (596 | ) |  |  | (1,102 | )
Total lease expense |  | $ | 10,455 |  |  | $ | 20,977 |
| ( 1 ) | Variable lease payments include index-based changes in rent, maintenance, real estate taxes, insurance and other charges included in the lease.
Operating lease rent expense during the three months ended December 31, 2018, as reported within SG&A, was $8.0 million, net of sublease rental income of $0.5 million. For the six months ended December 31, 2018, operating lease rent expense was $16.0 million, net of sublease rental income of $1.0 million. The following table discloses the operating and financing lease assets and liabilities recognized within our consolidated balance sheet as of December 31, 2019 ( in thousands):
| Consolidated Balance Sheet Location |  | December 31, 2019 |
Assets |  |  |  |  |
Operating leases | Operating lease right-of-use assets (non-current) |  | $ | 128,525 |
Financing leases | Property, plant and equipment, net |  |  | 891 |
Total lease assets |  | $ | 129,416 |
Liabilities |  |  |  |  |
Current: |  |  |  |  |
Operating leases | Current operating lease liabilities |  | $ | 32,809 |
Financing leases | Other current liabilities |  |  | 597 |
Noncurrent: |  |  |  |  |
Operating leases | Operating lease liabilities, long-term |  |  | 117,857 |
Financing leases | Other long-term liabilities |  |  | 278 |
Total lease liabilities |  | $ | 151,541 |
The ROU assets by segment are as follows as of December 31, 2019 ( in thousands):
Retail |  | $ | 128,587 |
Wholesale |  |  | 829 |
Total ROU assets |  | $ | 129,416 |
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of December 31, 2019 ( in thousands):
Fiscal Year |  | Operating Leases |  |  | Financing Leases |
2020 (remaining six months) |  | $ | 17,788 |  |  | $ | 303 |
2021 |  |  | 33,224 |  |  |  | 459 |
2022 |  |  | 28,909 |  |  |  | 78 |
2023 |  |  | 22,487 |  |  |  | 39 |
2024 |  |  | 17,397 |  |  |  | 19 |
Thereafter |  |  | 52,636 |  |  |  | 8 |
Total undiscounted future minimum lease payments |  |  | 172,441 |  |  |  | 906 |
Less: imputed interest |  |  | (21,775 | ) |  |  | (31 | )
Total present value of lease obligations |  | $ | 150,666 |  |  | $ | 875 |
As of December 31, 2019, we have entered into additional operating leases for design center relocations and openings, which have not yet commenced and are therefore not part of the table above nor included in the lease right-of-use assets and liabilities. These leases will commence when we obtain possession of the underlying leased asset which is expected to be during the third quarter of fiscal 2020. These leases are for a period ranging from five to ten years and have aggregated undiscounted future rent payments of $6.3 million. At December 31, 2019, we did not have any financing leases that had not commenced. Other information for our leases is as follows (in thousands):
|  | Six months ended December 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows from operating leases |  | $ | 16,037 |
Operating cash flows from financing leases |  | $ | 278 |
Operating lease assets obtained in exchange for new operating lease liabilities |  | $ | 13,641 |
At the beginning of fiscal 2020, we adopted ASU 2016 - 02, and as required, the following disclosure is provided for periods prior to adoption. As of June 30, 2019, future minimum payments under non-cancelable leases were as follows (in thousands):
Fiscal Year |  | Operating Leases |  |  | Financing Leases (1) |
2020 |  | $ | 33,761 |  |  | $ | 550 |
2021 |  |  | 30,534 |  |  |  | 437 |
2022 |  |  | 26,443 |  |  |  | 60 |
2023 |  |  | 20,276 |  |  |  | 19 |
2024 |  |  | 15,345 |  |  |  | - |
Thereafter |  |  | 43,500 |  |  |  | - |
Total |  | $ | 169,859 |  |  | $ | 1,066 |
( 1 ) | As of June 30, 2019, our capital lease obligations were $1.1 million of which the current and long-term portions were included within short-term debt and long-term debt, respectively, in the consolidated balance sheet. Monthly minimum lease payments were accounted for as principal and interest payments.

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