Dollar Tree, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

9 Months Ended

Nov. 02, 2019

The Company’s lease portfolio primarily consists of leases for its retail store locations and it also leases vehicles and trailers, as well as distribution center space and equipment. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets; the Company recognizes expense for these leases on a straight-line basis over the lease term. For leases with an initial term in excess of 12 months, operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the committed lease term at the lease commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate in determining the present value of future lease payments. Inputs to the calculation of the Company’s incremental borrowing rate include the valuations and yields of its outstanding senior notes and their credit spread over comparable U.S. Treasury rates, adjusted to a collateralized basis by estimating the credit spread improvement that would result from an upgrade of one ratings classification. Most leases include one or more options to renew and the exercise of renewal options is at the Company’s sole discretion. The Company does not include renewal options in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The operating lease right-of-use asset is reduced by lease incentives, which has the effect of lowering the operating lease expense. Operating lease right-of-use assets are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, “Property, Plant, and Equipment - Overall,” to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize.

Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. In addition, the Company’s real estate leases generally require payment of real estate taxes, common area maintenance and insurance, which are generally variable and based on actual costs incurred by the lessor. These variable payments are expensed as incurred as variable lease costs. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive financial covenants.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as trailers, the Company accounts for the lease and non-lease components as a single lease component.

The lease cost for operating leases that was recognized in the accompanying unaudited condensed consolidated income statements was as follows:



	13 Weeks Ended		39 Weeks Ended
(in millions)	November 2, 2019		November 2, 2019
Operating lease cost	$	378.2	$	1,139.8
Variable lease cost	94.7		272.2
Total lease cost*	$	472.9	$	1,412.0

*Excludes short-term lease cost and sublease income, which are immaterial

As of November 2, 2019, maturities of lease liabilities were as follows:



	(in millions)
Remainder of 2019	$	249.0
2020	1,376.2
2021	1,190.9
2022	990.6
2023	771.9
Thereafter	2,215.4
Total undiscounted lease payments	6,794.0
Less interest	955.4
Present value of lease liabilities	$	5,838.6

The future minimum lease payments above exclude $260.9 million of legally binding minimum lease payments for leases signed but not yet commenced as of November 2, 2019.

Information regarding the weighted-average remaining lease term and the weighted-average discount rate for operating leases as of November 2, 2019 is as follows:



Weighted-average remaining lease term (years)	6.5
Weighted-average discount rate	4.4	%

The following represents supplemental information pertaining to the Company’s operating lease arrangements for the 13 and 39 weeks ended November 2, 2019:



	13 Weeks Ended		39 Weeks Ended
(in millions)	November 2, 2019		November 2, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	367.5	$	1,099.1
Right-of-use assets obtained in exchange for new operating lease liabilities	163.9		593.2

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019 and in accordance with ASC 840, future minimum lease payments under non-cancellable operating leases were as follows as of February 2, 2019:



	(in millions)
2019	$	1,435.9
2020	1,176.7
2021	1,100.0
2022	899.6
2023	729.1
Thereafter	1,966.3
Total minimum lease payments	$	7,307.6

The above future minimum lease payments include amounts for leases that were signed prior to February 2, 2019 for stores that were not open as of February 2, 2019 and exclude contingent rentals that may be paid under certain store leases based on a percentage of sales in excess of stipulated amounts. As of February 2, 2019, future minimum lease payments have not been reduced by expected future minimum sublease rentals of $1.2 million under operating leases.