Income Taxes

6 Months Ended

Jun. 26, 2011

Income Taxes [Abstract]

Income Taxes

5. Income Taxes

The Company established a $59.5 million valuation allowance in 2008 against its then existing net deferred tax assets and credits as it was deemed the negative evidence outweighed the positive evidence and therefore the deferred tax assets would not likely be realized in future periods.

During the thirteen weeks ended June 26, 2011, the Company determined that it is more likely than not that its existing net deferred tax assets and tax credits will be realized after considering all positive and negative evidence. Positive evidence included cumulative profitability, future tax deductions and credits and a forecast of future taxable income sufficient to realize its existing net deferred tax assets prior to the expiration of existing net operating loss and credit carryforwards. Accordingly, the Company recorded a $57.2 million income tax benefit related to the reduction of the valuation allowance against net deferred income tax assets. As of June 26, 2011, the Company continues to carry a $2.8 million valuation allowance against net deferred tax assets. The Company anticipates that the valuation allowance will be reduced over the remainder of fiscal 2011, as the related net deferred tax assets are deemed to be realizable. The Company’s conclusion that it is more likely than not that such deferred tax assets will be realized is strongly influenced by its forecast of future taxable income. The Company believes its forecast of future taxable income is reasonable; however, forecasts of future taxable income are inherently uncertain. Therefore, if the Company realizes materially less future taxable income than forecasted or has material unforeseen losses, then its ability to generate sufficient income necessary to realize its existing deferred tax assets may be reduced. In addition, the Company will continue to assess the assumptions used to determine the amount of the tax valuation allowance and may adjust the tax valuation allowance in future periods based on changes in assumptions of forecasted future taxable income and other factors, which may result in an additional charge to increase the valuation allowance.

The Company recorded a net income tax benefit of $57.0 million and $56.9 million for the thirteen and twenty-six weeks ended June 26, 2011, respectively. The income tax benefit recorded for the thirteen and twenty-six weeks ended June 26, 2011, relates to a $57.2 million reduction of the deferred tax valuation allowance. The tax benefit was offset by income tax expense of $0.2 million and $0.3 million for the thirteen and twenty-six weeks ended June 26, 2011, respectively. The income tax expense recorded for the thirteen and twenty-six weeks ended June 26, 2011, respectively, primarily related to income tax in certain state and local jurisdictions based on the Company’s forecasted pre-tax income for the year.

The income tax benefit recorded for the respective periods presented differs from the expected income tax expense or benefit that would be calculated by applying the federal statutory rate to the Company’s income before income taxes primarily due to the reduction in the valuation allowance for deferred tax assets, the utilization of net operating losses and outstanding tax credits.