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 fiscal 2017 provision for income taxes. The Tax Act includes 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% effective January 1, 2018. The Tax Act also provides for a one-time transition tax on accumulated foreign earnings and the acceleration of depreciation for certain assets, as well as prospective changes beginning in 2018, including limitations on the deductibility of executive compensation and interest, the elimination of certain domestic deductions and credits, the elimination of the Alternative Minimum Tax regime, and modifications to the deductibility and carryforward period of net operating losses. The Tax Act transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which may have the effect of subjecting certain earnings of the Company’s foreign subsidiaries to U.S. taxation. The Company’s fiscal 2017 provision for income taxes included $7.0 million of income tax expense as a result of the Tax Act, including $6.0 million for the provisional re-measurement of the Company’s net deferred tax assets for the reduction in the U.S. corporate income tax rate from 35% to 21% and a $1.0 million charge for Company’s provisional estimate of the transition tax.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118—Income Tax Accounting Implications of the TCJA (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of fiscal 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, the Company considers the accounting of the transition tax, deferred tax re-measurements and other items to be incomplete due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

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

	Year Ended
	February 3,		January 28,		January 30,
	2018		2017		2016
Domestic	$	28,859	$	8,370	$	148,756
Foreign		1,292		184		1,128
Total income before income taxes	$	30,151	$	8,554	$	149,884

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

	Year Ended
	February 3,			January 28,			January 30,
	2018			2017			2016
Current
Federal	$	18,593		$	751		$	55,676
State		2,761			2,410			9,112
Foreign		933			694			227
Total current tax expense		22,287			3,855			65,015
Deferred
Federal		6,042			2,109			(5,691	)
State		(355	)		(2,414	)		(648	)
Foreign		(3	)		(397	)		105
Total deferred tax expense (benefit)		5,684			(702	)		(6,234	)
Total income tax expense	$	27,971		$	3,153		$	58,781

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

	Year Ended
	February 3,			January 28,			January 30,
	2018			2017			2016
Provision at federal statutory tax rate		33.7	%		35.0	%		35.0	%
Non-deductible stock-based compensation		26.7			—			—
Federal statutory tax rate change		20.1			—			—
Goodwill impairment		17.9			—			—
State income taxes—net of federal tax impact		4.8			4.8			3.7
Aircraft expenses		3.6			3.3			0.1
Foreign income inclusion—transition tax		3.3			—			—
Meals and entertainment		1.5			5.0			0.2
Net adjustments to tax accruals and other		1.4			1.2			0.1
Other permanent items		1.3			2.8			0.1
Valuation allowance		1.1			0.9			—
Transaction costs		—			2.6			—
Stock compensation—excess benefits		(20.9	)		—			—
Foreign income		(0.9	)		(4.2	)		(0.1	)
Tax rate adjustments		(0.6	)		(5.8	)		0.1
Donation of appreciated property		(0.2	)		(8.7	)		—
Effective tax rate		92.8	%		36.9	%		39.2	%

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

	February 3,			January 28,
	2018			2017
Non-current deferred tax assets (liabilities)
Stock-based compensation	$	25,047		$	37,804
Deferred lease credits		18,355			25,457
Inventory		16,132			37,198
Accrued expense		10,488			18,024
Deferred revenue		3,313			1,887
Net operating loss carryforwards		1,584			1,044
U.S. impact of Canadian transfer pricing		1,089			1,404
Charitable contributions		106			1,877
Property and equipment		(21,869	)		(32,396	)
Trademarks and intangibles		(14,991	)		(28,345	)
Prepaid expense and other		(12,379	)		(28,387	)
State tax benefit		(2,394	)		(4,143	)
Convertible senior notes		(1,890	)		(3,867	)
Other		1,910			1,669
Non-current deferred tax assets		24,501			29,226
Valuation allowance		(1,190	)		(760	)
Net non-current deferred tax assets	$	23,311		$	28,466

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

	Year Ended
	February 3,		January 28,		January 30,
	2018		2017		2016
Balance at beginning of fiscal year	$	760	$	158	$	176
Net changes in deferred tax assets and liabilities		430		602		(18	)
Balance at end of fiscal year	$	1,190	$	760	$	158

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 3, 2018 and January 28, 2017, the Company had $1.2 million and $0.8 million, respectively, in valuation allowances against deferred tax assets in certain foreign jurisdictions due to historical losses.

As of February 3, 2018, the Company had state net operating loss carryovers of $2.4 million and foreign net operating loss carryovers of $7.1 million. The state net operating loss carryovers will begin to expire in 2022, and the foreign net operating loss carryovers have an indefinite carryforward. 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 3,		January 28,		January 30,
	2018		2017		2016
Balance at beginning of fiscal year	$	2,190	$	921	$	940
Gross increases (decreases)—prior period tax positions		5,491		53		(88	)
Gross increases—current period tax positions		471		1,216		69
Balance at end of fiscal year	$	8,152	$	2,190	$	921

As of February 3, 2018, the Company has $8.2 million of unrecognized tax benefits, of which $6.5 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 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 3, 2018, the Company has $0.4 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 and $0.3 million associated with exposures as of February 3, 2018, and January 28, 2017, respectively.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of February 3, 2018, the Company is subject to examination by the tax authorities for fiscal 2014, fiscal 2015 and fiscal 2016. With few exceptions, as of February 3, 2018, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before fiscal 2014.