INCOME TAXES

12 Months Ended

Jan. 30, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Impact of valuation allowances and other tax charges during Fiscal 2020

The Company’s effective tax rate for Fiscal 2020 was impacted by $101.4 million of adverse tax impacts, ultimately giving rise to income tax expense on a consolidated pre-tax loss. Further details regarding these adverse tax impacts are as follows:

•Due to the significant adverse impacts of COVID-19, the Company did not recognize income tax benefits on $203.4 million of pre-tax losses during Fiscal 2020, resulting in an adverse tax impact of $39.5 million.

•The Company recognized charges of $61.9 million related to the establishment of valuation allowances and other tax charges in certain jurisdictions during Fiscal 2020, including, but not limited to, the U.S., Switzerland, Germany and Japan, principally as a result of the significant adverse impacts of COVID-19.

Global legislation in response to COVID-19

In March 2020, the CARES Act was enacted into U.S. law, intended to provide economic relief to those impacted by COVID-19 and enhance business’ liquidity. The CARES Act did not have a material impact on the Company’s U.S. income taxes in Fiscal 2020 and based on information currently available, the Company does not currently expect that these provisions will have a material impact on its income taxes in the future.

The Company is still assessing the applicability of other recently passed and proposed global legislation, including the potential income tax measures offered in international jurisdictions where the Company’s operations have also been impacted by COVID-19.

Swiss Tax Reform

In May 2019, Switzerland voted to approve the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), effective at the federal level beginning January 2020, which resulted in the abolishment of preferential tax regimes by the cantons. In addition to the abolishment of the preferential tax regimes, the cantons needed to implement new, mandatory tax provisions in their cantonal tax law which were subject to a referendum process as well.  As a result of these changes and actions taken by the Company, both of which occurred in the third quarter of Fiscal 2019, the Company increased its deferred income tax assets and liabilities, which are recorded on the Consolidated Balance Sheets within other assets and other liabilities, respectively, by $38.0 million during the third quarter of Fiscal 2019. In the fourth quarter of Fiscal 2019, the canton of Ticino formally enacted the tax reform effective January 1, 2020.  As a result, the tax reform went into effect on January 1, 2020. The Company decreased its deferred income tax assets and liabilities by $13.1 million during the fourth quarter of Fiscal 2019 for a net increase of deferred income tax assets and liabilities during Fiscal 2019 of $24.9 million as a result of Swiss Tax Reform. In addition, the Company incurred tax benefits in Fiscal 2019 of $2.9 million as a result of Swiss Tax Reform. Swiss Tax Reform did not have a material impact to the Consolidated Statements of Operations and Comprehensive (Loss) Income or the Company’s cash flows during Fiscal 2020 or Fiscal 2019.

Tax Cuts and Jobs Act of 2017

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law and made broad and significantly complex changes to the U.S. corporate income tax system. Given the significant changes resulting from and complexities associated with the Act, the estimated financial impacts related to the enactment of the Act, for Fiscal 2017 and up to one year from the enactment of the Act, were provisional and subject to further analysis, interpretation and clarification of the Act. The Company updated its interpretations and assumptions, which resulted in net benefits of $3.5 million recognized in Fiscal 2018 during the

measurement period, primarily due to regulatory guidance issued by the U.S. Internal Revenue Service (the “IRS”). The Company completed its accounting related to the Act in the fourth quarter of Fiscal 2018.

Components of income taxes

(Loss) income before income taxes consisted of:

(in thousands)	Fiscal 2020		Fiscal 2019		Fiscal 2018
Domestic (1)	$	(33,417)	$	17,590	$	53,858
Foreign	(15,326)		44,741		62,509
(Loss) income before income taxes	$	(48,743)	$	62,331	$	116,367

(1)    Includes intercompany charges to foreign affiliates for management fees, cost-sharing, royalties and interest and excludes a portion of foreign income that is currently includable on the U.S. federal income tax return.

Income tax expense consisted of:

(in thousands)	Fiscal 2020		Fiscal 2019		Fiscal 2018
Current:
Federal	$	9,434	$	(2,193)	$	7,460
State	3,751		1,893		3,645
Foreign	23,041		8,521		20,508
Total current	$	36,226	$	8,221	$	31,613
Deferred:
Federal (1)	$	(73,104)	$	29,012	$	5,319
State	8,828		(107)		1,183
Foreign (1)	88,261		(19,755)		(556)
Total deferred	23,985		9,150		5,946
Income tax expense	$	60,211	$	17,371	$	37,559

(1)    As a result of COVID-19, Fiscal 2020 includes federal deferred tax benefit of $79.0 million and foreign deferred tax expense of $88.6 million due to the establishment of an additional valuation allowance in Switzerland. As a result of Swiss Tax Reform, Fiscal 2019 federal deferred tax expense included charges of $24.9 million and foreign deferred tax expense included benefits of $24.9 million.

The Company’s earnings and profits from its foreign subsidiaries could be repatriated to the U.S., without incurring additional federal income tax. The Company determined that the balance of the Company’s undistributed earnings and profits from its foreign subsidiaries as of February 2, 2019 are considered indefinitely reinvested outside of the U.S., and if these funds were to be repatriated to the U.S., the Company would expect to incur an insignificant amount of state income taxes and foreign withholding taxes. The Company accrues for both state income taxes and foreign withholding taxes with respect to earnings and profits earned after February 2, 2019, in such a manner that these funds could be repatriated without incurring additional tax expense.

Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:

	Fiscal 2020		Fiscal 2019		Fiscal 2018
U.S. federal corporate income tax rate	21.0	%	21.0	%	21.0	%
Net change in valuation allowances	(177.2)		8.2		0.7
Foreign taxation of non-U.S. operations (1)	32.7		5.5		(0.9)
Write-off of stock basis in subsidiary	—		3.2		—
Internal Revenue Code Section 162(m)	(5.5)		2.2		1.0
State income tax, net of U.S. federal income tax effect	2.6		1.9		3.6
Audit and other adjustments to prior years’ accruals, net	2.6		0.8		(0.1)
Permanent items	—		0.3		0.2
Statutory tax rate and law changes due to Swiss Tax Reform	—		(4.6)		—
Credit for increasing research activities	2.6		(3.6)		(1.7)
Net income attributable to noncontrolling interests	2.2		(1.9)		(0.8)
Additional U.S. taxation of non-U.S. operations	(0.2)		(1.4)		5.1
Trust-owned life insurance policies (at cash surrender value)	0.7		(1.1)		(0.6)
Other statutory tax rate and law changes	2.3		(0.9)		(0.1)
Tax (benefit) expense recognized on share-based compensation (2)	(7.5)		(0.9)		8.3
Credit items	0.2		(0.8)		(0.6)
Tax Cuts and Jobs Act of 2017	—		—		(3.0)
Other items, net	—		—		0.2
Total	(123.5)	%	27.9	%	32.3	%

(1)    Prior to 2019, U.S. branch operations in Canada and Puerto Rico were subject to tax at the full U.S. tax rates. As a result, income from these operations do not create reconciling items. Effective in 2019, only Puerto Rico continues to be a branch of the U.S.

(2)    Refer to Note 14, “SHARE-BASED COMPENSATION,” for details on discrete income tax benefits and charges related to share-based compensation awards during Fiscal 2020, Fiscal 2019, and Fiscal 2018.

The impact of various tax items on the Company's effective tax rate were amplified on a percentage basis at lower levels of consolidated pre-tax income (loss) in absolute dollars. The effective tax rate remains dependent on jurisdictional mix. The taxation of non-U.S. operations line items in the table above excludes items related to the Company's non-U.S. operations reported separately in the appropriate corresponding line items.

For Fiscal 2020, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was related to the Company's jurisdictional mix driven primarily by the Company’s operations within Switzerland.

For Fiscal 2019, the impact of taxation of non-U.S. operations on the Company's effective income tax rate was primarily related to the Company's Japan subsidiary, along with the Company’s NCI. For Fiscal 2019, the Company’s Japan subsidiary earned pre-tax income of $12.0 million with a jurisdictional effective tax rate of 35.1%. With respect to the NCI, the subsidiary incurred pre-tax income of $5.6 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above.

For Fiscal 2018, the impact of foreign taxation of non-U.S. operations on the Company’s effective income tax rate was primarily related to the Company’s Swiss subsidiary, along with the Company’s NCI. For Fiscal 2018, the Company’s Swiss subsidiary earned pre-tax income of $24.9 million with a jurisdictional effective tax rate of 12.9%. With respect to the NCI, the subsidiaries incurred pre-tax income of $4.3 million with no jurisdictional tax effect. The Swiss earnings are subject to U.S. tax and the effect is included in the U.S. taxation of non-U.S. operations above.

Components of deferred income tax assets and deferred income tax liabilities

The effect of temporary differences which gives rise to deferred income tax assets (liabilities) were as follows:

(in thousands)	January 30, 2021		February 1, 2020
Deferred income tax assets:
Operating lease liabilities	$	311,286	$	370,068
Intangibles, foreign step-up in basis (1)	81,357		77,565
Deferred compensation	16,294		19,849
Accrued expenses and reserves	32,649		13,571
Net operating losses (NOL), tax credit and other carryforwards	56,341		13,204
Rent	530		2,727
Prepaid expenses	—		1,246
Other	2,171		3,613
Valuation allowances	(174,302)		(8,916)
Total deferred income tax assets	$	326,326	$	492,927
Deferred income tax liabilities:
Operating lease right-of-use assets	$	(253,417)	$	(319,005)
U.S. offset to foreign step-up in basis (1)	—		(77,565)
Property, equipment and intangibles	(15,328)		(17,236)
Inventory	(1,499)		(3,537)
Store supplies	(2,042)		(2,843)
U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis (2)	(183)		(1,654)
Prepaid expenses	(387)		—
Undistributed profits of non-U.S. subsidiaries	(318)		(587)
Other	(3,499)		(488)
Total deferred income tax liabilities	$	(276,673)	$	(422,915)
Net deferred income tax assets (2)	$	49,653	$	70,012

(1)    The deferred tax asset relates to a step-up in basis associated with the intra-entity transfer of intangible assets to Switzerland which are being amortized for Swiss local tax purposes. As this subsidiary’s income is also taxable in the U.S., a corresponding U.S. deferred tax liability was recognized to reflect lower resulting foreign tax credit due to the amortization of the Swiss step-up in basis. Included in the liability section is the remaining portion of deferred tax liabilities which are properly categorized in the table above. In Fiscal 2020, a full valuation allowance was established in Switzerland and the corresponding US deferred tax liability was released.

(2)    This table does not reflect deferred taxes classified within AOCL. As of January 30, 2021, AOCL included deferred tax assets of $0.9 million. As of February 1, 2020, AOCL included an insignificant amount of deferred tax assets.

As of January 30, 2021, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $55.2 million and $1.1 million, respectively, that could be utilized to reduce future years’ tax liabilities. If not utilized, a portion of the foreign NOL carryforwards will begin to expire in 2024 and a portion of state NOL carryforwards will begin to expire in 2023. Some foreign NOLs have an indefinite carryforward period. As of January 30, 2021, the Company did not have any deferred tax assets related to federal NOL and credit carryforwards that could be utilized to reduce future years’ tax liabilities.

As of January 30, 2021, valuation allowances of $174.3 million have been established against deferred tax assets. All valuation allowances have been reflected through the Consolidated Statements of Operations and Comprehensive (Loss) Income. The valuation allowances will remain until there is sufficient positive evidence to release them, such as positive income within the jurisdiction. In such case, the Company will recognize an adjustment in the period in which a determination is made.

The Company continues to review the need for valuation allowances on a quarterly basis and it is reasonably possible, if business conditions improve, that there could be material adjustments over the next 12 months to the total amount of valuation allowances as circumstances may be such that sufficient evidence would exist to indicate that some or all of the deferred taxes currently subject to a valuation allowance will be utilized. The Company does not expect that sufficient evidence to release the valuation allowance is likely to exist at any time prior to the fourth quarter of Fiscal 2021, and there is no guarantee that such evidence will exist or that deferred taxes will be utilized.

Share-based compensation

Refer to Note 14, “SHARE-BASED COMPENSATION,” for details on income tax benefits and charges related to share-based compensation awards during Fiscal 2020, Fiscal 2019 and Fiscal 2018.

Other

The amount of uncertain tax positions as of January 30, 2021, February 1, 2020 and February 2, 2019, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions, excluding accrued interest and penalties, are as follows:

(in thousands)	Fiscal 2020		Fiscal 2019		Fiscal 2018
Uncertain tax positions, beginning of the year	$	1,794	$	478	$	1,113
Gross addition for tax positions of the current year	235		131		151
Gross addition (reduction) for tax positions of prior years	395		1,349		(3)
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	(48)		(151)		(218)
Settlements during the period	(1,381)		(13)		(16)
Changes in judgment / excess reserve	—		—		(549)
Uncertain tax positions, end of year	$	995	$	1,794	$	478

The IRS is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2020 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2019 and prior years have been completed. State and foreign returns are generally subject to examination for a period of three to five years after the filing of the respective return. The Company typically has various state and foreign income tax returns in the process of examination, administrative appeals or litigation. The outcome of the examinations is not expected to have a material impact on the Company’s financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that it is reasonably possible the amount of uncertain income tax positions, including interest, may change by an immaterial amount due to settlement of audits and expiration of statues of limitations.

The Company does not expect material adjustments to the total amount of uncertain tax positions within the next 12 months, but the outcome of tax matters is uncertain and unforeseen results can occur.

Refer to Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Income taxes,” for discussion regarding significant accounting policies related to the Company’s income taxes.