7. Leases

The Company leases most of its stores, a bulk food repackaging facility and distribution center, and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from 10 to 25 years, with scheduled increases in minimum rent payments.

Operating and finance lease liabilities represent the present value of lease payments not yet paid. Operating and finance lease assets represent the Company’s right to use an underlying asset and are based upon the operating and finance lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating and finance lease assets.

Most leases include one or more options to renew, with renewal terms normally expressed in periods of five to ten-year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.

Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.

Because the rate implicit in the Company’s lease agreements is typically not readily determinable, the Company uses an estimated incremental borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. The Company uses other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.

Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 months or less (short-term leases) are not presented on the balance sheet. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining sublease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.

The Company has four operating leases with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 13). The leases began at various times with the earliest commencing in November 1999, continue for various terms through May 2042 and include various options to renew. The terms and rental rates of these leases have been approved by our audit committee in accordance with our related party transaction policy. As of June 30, 2026, these leases accounted for $9.6 million of operating lease assets and $9.8 million of operating lease liabilities, of which $0.8 million was current, and are included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for each of the three months ended June 30, 2026 and 2025 and $1.0 million and $0.9 million for the nine months ended June 30, 2026 and 2025, respectively.

The components of total lease cost for the three and nine months ended June 30, 2026 and 2025 were as follows, dollars in thousands:

⁽¹⁾ Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

Additional information related to the Company’s leases for the three and nine months ended June 30, 2026 and 2025 was as follows, dollars in thousands:

Additional information related to the Company’s leases as of June 30, 2026 and 2025 was as follows:

During the nine months ended June 30, 2026, the Company purchased a store’s previously leased land and building. This resulted in reductions of $0.5 million and $1.1 million in operating and finance lease liabilities with the offset to their related lease assets, respectively, and the reclassification of less than $(0.1) million and $(0.3) million of operating and finance lease assets, as adjusted by the reduction of their related liabilities, respectively, to property and equipment. During the nine months ended June 30, 2025, the Company early terminated a lease due to a store relocation, and, as a result, the Company wrote off operating lease assets and liabilities of less than $0.1 million each and recorded a gain of less than $0.1 million. In addition, during the nine months ended June 30, 2025, the Company recorded impairment charges related to operating lease assets of $0.1 million, associated with store closures and an early store relocation.

Future lease payments under non-cancellable leases as of June 30, 2026 were as follows, dollars in thousands:

The table above excludes $6.0 million of legally binding minimum lease payments for leases that had been executed as of June 30, 2026 but whose terms had not yet commenced.

The Company rents certain portions of owned real estate to third parties. The rentals have all been classified as either operating leases or short-term rental arrangements. Certain of the operating leases have remaining lease terms that extend through fiscal year 2031. Some of the operating leases provide for renewal options, with the exercise of the lease renewal option at the sole discretion of the tenant. The Company recognizes the fixed operating lease rents on a straight-line basis and the variable rental income, such as short-term rental income and reimbursed landlord expenses, when earned. The Company has elected to account for the lease and non-lease components as a single lease component.

The total rental income for the three and nine months ended June 30, 2026 and 2025 was as follows, dollars in thousands:

The future undiscounted lease collections as of June 30, 2026 were as follows, dollars in thousands: