INCOME TAXES

12 Months Ended

Jan. 29, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Impact of valuation allowances and other tax charges

During Fiscal 2021, as a result of the improvement seen in business conditions, the Company recognized $42.5 million of tax benefits due to the release of valuation allowances, primarily in the U.S. and Germany, and a discrete tax benefit of $3.9 million due to a rate change in the United Kingdom The Company did not recognize income tax benefits on $25.3 million of pre-tax losses generated in Fiscal 2021, primarily in Switzerland, resulting in adverse tax impacts of $4.6 million.

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.

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 Income (Loss) or the Company’s cash flows during Fiscal 2021, Fiscal 2020 or Fiscal 2019.

Components of income taxes

Income (loss) before income taxes consisted of:

(in thousands)	Fiscal 2021		Fiscal 2020		Fiscal 2019
Domestic (1)	$	283,793	$	(33,417)	$	17,590
Foreign	25,181		(15,326)		44,741
Income (loss) before income taxes	$	308,974	$	(48,743)	$	62,331

(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 (benefit) consisted of:

(in thousands)	Fiscal 2021		Fiscal 2020		Fiscal 2019
Current:
Federal	$	51,321	$	9,434	$	(2,193)
State	14,061		3,751		1,893
Foreign	5,448		23,041		8,521
Total current	$	70,830	$	36,226	$	8,221
Deferred:
Federal (1)	$	(15,401)	$	(73,104)	$	29,012
State	(8,995)		8,828		(107)
Foreign (1)	(7,526)		88,261		(19,755)
Total deferred	(31,922)		23,985		9,150
Income tax expense	$	38,908	$	60,211	$	17,371

(1)    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. Fiscal 2019 federal deferred tax expense included charges of $24.9 million and foreign deferred tax expense included benefits of $24.9 million as a result of Swiss Tax Reform.

The Company’s earnings and profits from its foreign subsidiaries may be repatriated to the U.S., without incurring additional U.S. 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 may be repatriated without incurring additional tax expense.

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

	Fiscal 2021		Fiscal 2020		Fiscal 2019
U.S. federal corporate income tax rate	21.0	%	21.0	%	21.0	%
Audit and other adjustments to prior years’ accruals, net	4.7		2.6		0.8
State income tax, net of U.S. federal income tax effect	4.4		2.6		1.9
Foreign taxation of non-U.S. operations (1)	3.5		32.7		5.5
Internal Revenue Code Section 162(m)	1.6		(5.5)		2.2
Additional U.S. taxation of non-U.S. operations	0.6		(0.2)		(1.4)
Permanent items	0.2		—		0.3
Net change in valuation allowances	(19.7)		(177.2)		8.2
Tax (benefit) expense recognized on share-based compensation (2)	(1.3)		(7.5)		(0.9)
Other statutory tax rate and law changes	(1.2)		2.3		(0.9)
Credit for increasing research activities	(0.6)		2.6		(3.6)
Net income attributable to noncontrolling interests	(0.5)		2.2		(1.9)
Trust-owned life insurance policies (at cash surrender value)	(0.1)		0.7		(1.1)
Credit items	—		0.2		(0.8)
Write-off of stock basis in subsidiary	—		—		3.2
Statutory tax rate and law changes due to Swiss Tax Reform	—		—		(4.6)
Total	12.6	%	(123.5)	%	27.9	%

(1)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 2021, Fiscal 2020, and Fiscal 2019.

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 both Fiscal 2021 and 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.

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 29, 2022		January 30, 2021
Deferred income tax assets:
Operating lease liabilities	$	242,290	$	311,286
Intangibles, foreign step-up in basis (1)	64,281		81,357
Net operating losses (NOL), tax credit and other carryforwards	52,970		56,341
Accrued expenses and reserves	30,026		32,649
Deferred compensation	16,050		16,294
Inventory	3,578		—
Rent	—		530
Other	45		2,171
Valuation allowances	(110,057)		(174,302)
Total deferred income tax assets	$	299,183	$	326,326
Deferred income tax liabilities:
Operating lease right-of-use assets	$	(202,916)	$	(253,417)
Property and equipment and intangibles	(10,150)		(15,328)
Prepaid expenses	(2,451)		(387)
Store supplies	(1,811)		(2,042)
Undistributed profits of non-U.S. subsidiaries	(1,082)		(318)
Rent	(360)		—
Inventory	—		(1,499)
U.S. offset to foreign deferred tax assets, excluding intangibles, foreign step-up in basis (2)	—		(183)
Other	(30)		(3,499)
Total deferred income tax liabilities	$	(218,800)	$	(276,673)
Net deferred income tax assets (2)	$	80,383	$	49,653

(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. During Fiscal 2021 an agreement was reached with the Swiss taxing authorities to decrease the basis step up to be amortized in the future thus decreasing the deferred asset by $14.8 million. Because of the valuation allowance, there is no impact on consolidated tax expense for this agreement.

(2)This table does not reflect deferred taxes classified within AOCL. As of January 29, 2022 and January 30, 2021, AOCL included deferred tax liabilities of $1.1 million and deferred tax assets of $0.9 million, respectively.

As of January 29, 2022, the Company had deferred tax assets related to foreign and state NOL and credit carryforwards of $52.5 million and $0.4 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 2025 and a portion of state NOL carryforwards will begin to expire in 2023. Some foreign NOLs have an indefinite carryforward period. As of January 29, 2022, 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 29, 2022, valuation allowances of $110.1 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 positive evidence would include having positive income within the jurisdiction. In such case, the Company will record 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.

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 2021, Fiscal 2020 and Fiscal 2019.

Other

The amount of uncertain tax positions as of January 29, 2022, January 30, 2021 and February 1, 2020, 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 2021		Fiscal 2020		Fiscal 2019
Uncertain tax positions, beginning of the year	$	995	$	1,794	$	478
Gross addition for tax positions of the current year	490		235		131
Gross (reduction) addition for tax positions of prior years	(136)		395		1,349
Reductions of tax positions of prior years for:
Lapses of applicable statutes of limitations	(81)		(48)		(151)
Settlements during the period	(154)		(1,381)		(13)
Uncertain tax positions, end of year	$	1,114	$	995	$	1,794

The IRS is currently conducting an examination of the Company’s U.S. federal income tax return for Fiscal 2021 as part of the IRS’ Compliance Assurance Process program. The IRS examinations for Fiscal 2020 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.