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Income Taxes

12 Months Ended

Feb. 01, 2020

NOTE 13—INCOME TAXES

The United States enacted the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017, which had a significant impact to the Company’s provision for income taxes as of and for the years ended February 2, 2019 and February 3, 2018. The Tax Act included a number of changes to existing U.S. tax laws that impact the Company, including the reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017.

Reduction of the U.S. Corporate Income Tax Rate

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a provisional $6.1 million increase in income tax expense for the year ended February 3, 2018 and a corresponding provisional $6.1 million decrease in net deferred tax assets as of February 3, 2018. The Company completed the accounting for re-measurement of its deferred tax assets and liabilities as of February 2, 2019, and recorded $0.5 million to income tax expense and a corresponding $0.5 million decrease in net deferred tax assets as of February 2, 2019. The cumulative impact to the Company’s provision for income tax expense in fiscal 2017 and fiscal 2018 for the re-measurement of the Company’s deferred tax assets and liabilities as result of the Tax Act was $6.6 million.

Transition Tax on Foreign Earnings

The Company recognized a provisional income tax expense of $1.0 million for the year ended February 3, 2018 related to the one-time transition tax on indefinitely reinvested foreign earnings. The Company completed its

computation of transition tax liability in 2018 and did not recognize additional income tax expense or benefit for the year ended February 2, 2019. The cumulative impact to the Company’s provision for income tax expense for the one-time transition tax on indefinitely reinvested foreign earnings as result of the Tax Act was $1.0 million.

The following is a summary of the income before income taxes (in thousands):


	Year Ended
	February 1,		February 2,		February 3,
	2020		2019		2018
Domestic	$	267,538	$	157,827	$	21,241
Foreign		1,644		3,137		1,292
Total income before income taxes	$	269,182	$	160,964	$	22,533

The following is a summary of the income tax expense (benefit) (in thousands):


	Year Ended
	February 1,		February 2,		February 3,
	2020		2019		2018
Current
Federal	$	45,985	$	24,012	$	18,593
State		10,806		6,275		2,761
Foreign		403		1,270		933
Total current tax expense		57,194		31,557		22,287
Deferred
Federal		(7,173)		(4,428)		3,692
State		(1,477)		(2,049)		(844)
Foreign		263		153		(3)
Total deferred tax expense (benefit)		(8,387)		(6,324)		2,845
Total income tax expense	$	48,807	$	25,233	$	25,132

A reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:


	Year Ended
	February 1,		February 2,		February 3,
	2020		2019		2018
Provision at federal statutory tax rate	21.0	%	21.0	%	33.7	%
State income taxes—net of federal tax impact	2.5		1.7		4.7
Tax rate adjustments	0.2		0.1		(0.8)
Meals and entertainment	0.1		0.3		1.9
Aircraft expenses	0.1		0.1		4.8
Stock compensation—excess benefits	(6.6)		(9.9)		(27.9)
Goodwill impairment	—		1.8		23.9
Non-deductible stock-based compensation	—		—		35.7
Federal statutory tax rate change	—		—		27.4
Foreign income inclusion—transition tax	—		—		4.4
Net adjustments to tax accruals and other	—		—		1.9
Valuation allowance	—		0.3		1.5
Donation of appreciated property	—		—		(0.2)
Foreign income	—		—		(1.3)
Other permanent items	0.8		0.3		1.8
Effective tax rate	18.1	%	15.7	%	111.5	%

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):


	February 1,		February 2,
	2020		2019
Non-current deferred tax assets (liabilities)
Lease liabilities	$	249,243	$	253,826
Stock-based compensation		22,400		22,721
Accrued expenses		21,362		16,657
Merchandise inventories		8,028		14,735
Deferred lease credits		6,395		1,188
Deferred revenue		2,235		—
Net operating loss carryforwards		1,763		1,654
Convertible senior notes		717		—
Other		1,846		2,591
Non-current deferred tax assets		313,989		313,372
Valuation allowance		(1,007)		(1,623)
Net non-current deferred tax assets	$	312,982	$	311,749

Property and equipment	$	(137,448)	$	(137,240)
Lease right-of-use assets		(110,075)		(118,549)
Tradename, trademarks and intangibles		(13,026)		(12,386)
Prepaid expense and other		(4,882)		(4,209)
State benefit		(2,546)		(2,556)
Convertible senior notes		—		(1,054)
Deferred revenue		—		(152)
Non-current deferred tax liabilities		(267,977)		(276,146)
Total net non-current deferred tax assets	$	45,005	$	35,603

A reconciliation of the valuation allowance is as follows (in thousands):


	Year Ended
	February 1,		February 2,
	2020		2019
Balance at beginning of fiscal year	$	1,623	$	1,190
Net changes in deferred tax assets and liabilities		(616)		433
Balance at end of fiscal year	$	1,007	$	1,623

The Company has recorded deferred tax assets and liabilities based upon estimates of their realizable value, such estimates are based upon likely future tax consequences. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, the Company records a valuation allowance.

As of February 1, 2020 and February 2, 2019, the Company had $1.0 million and $1.6 million, respectively, in valuation allowances against deferred tax assets in certain state and foreign jurisdictions due to historical losses.

As of February 1, 2020, the Company had state net operating loss carryovers of $6.5 million and foreign net operating loss carryovers of $8.2 million. The state net operating loss carryovers will begin to expire in 2022, and the foreign net operating loss carryovers will begin to expire in 2023. Internal Revenue Code Section 382 and similar state rules place a limitation on the amount of taxable income which can be offset by net operating loss carryforwards after a change in ownership (generally greater than 50% change in ownership). The Company cannot give any assurances that it will not undergo an ownership change in the future resulting in further limitations on utilization of net operating losses.

A reconciliation of the exposures related to unrecognized tax benefits is as follows (in thousands):


	Year Ended
	February 1,		February 2,		February 3,
	2020		2019		2018
Balance at beginning of fiscal year	$	8,459	$	8,152	$	2,190
Gross increases (decreases)—prior period tax positions		(2)		239		5,491
Gross increases (decreases)—current period tax positions		438		375		471
Reductions based on the lapse of the applicable statutes of limitations		(381)		(307)		—
Balance at end of fiscal year	$	8,514	$	8,459	$	8,152

As of February 1, 2020, the Company has $8.5 million of unrecognized tax benefits, of which $7.8 million would reduce income tax expense and the effective tax rate, if recognized. The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized. In October 2017, the Company filed an amended federal tax return claiming a $5.4 million refund, however, no income tax benefit was recorded during fiscal 2019, fiscal 2018 or fiscal 2017 given the technical nature and amount of the refund claim. An income tax benefit related to this refund claim could be recorded in a future period upon settlement with the respective taxing authority. As of February 1, 2020, the Company has $6.3 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

The Company accounts for interest and penalties related to exposures as a component of income tax expense. The Company had interest accruals of $0.5 million associated with exposures as of both February 1, 2020 and February 2, 2019, respectively.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of February 1, 2020, the Company is subject to examination by the tax authorities for fiscal 2015 through fiscal 2018. With few exceptions, as of February 1, 2020, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before fiscal 2015.